Bloomberg Wall Street Week - December 9th, 2022

Sam's l Sharman, and founder of Equatic Group Investment. In Bloomberg Wall Street Week with David Weston from Bloomberg Radio, China blinks, Russia threatens, and Democrats sealed the deal in Georgia. This is Bloomberg Wall Street Week. I'm David Weston. This week special contributor Larry Summers on the search for growth in China and in the United States. But we're going to be seeing probably the biggest set of policy experiments

that we've seen in China in decades. And Jeff blau related on why the market for upscale office space is hot. You look at new modern buildings with the right features, the right amenities, and the demand for those buildings is tremendous. Global Wall Street saw a week of confrontation as Democrat Raphael Warnex facedown Republican herschel Walker and yet another runoff election in Georgia and came out the winner. It is out of the four most powerful words ever spoken in

a democracy, The people have spoken. Ukraine continued it's bloody confrontation with Russia using drones to strike bases inside of Russia. A third air field has come under attack by drones. State run Task news service purported that an oil shortage tank caught fire attacks where the furthest penetration yet on Russian soil since the invasion began, provoking Russian President Putin

to raise once again the specter of nuclear war. Putin, however, I think has used this nuclear card an awful lot during the last few months of the war, and what he found out from President she of China is a warning not to do that. And China took a hard look at the pushback from citizens over its zero COVID policy and decided to back down at least a bit. It includes measures such as allowing people who get sick

to quarantine at home instead of a government facility. They're easing up on testing to get into public spaces, for example. So it's a whole series of micro measures that are being interpreted as another step away from COVID zero by the authorities. Though it may have been encouraged by the dismal trade numbers, even as the United States kept up the pressure on semiconductors by breaking ground for a new plant in Phoenix. These investments happen. It's built on strengthen

the supply chain here in America. I want to be clear. As we build a stronger supply chain, our allies and partners are building alongside us as well. I'm not sure whether it was all that conflict and confrontation. It may

just have been growing concerns over a session. But the markets were not in a risky mood this week, as the SMP five hundred lost three point four percent over the week and the NASTAC was off almost four percent, while the yield yield on the tenure dipped under three point five in the middle of a week, but ended up at three point five eight percent at the end

of the week. Let's bring in now Lazen Saunders, chief Investment Strategies for Charles Swab for her view on what we saw this week, Lisen, great to have you here in New York with us. I am so thrilled to be here, first time back in studio in a couple of YEARSS A real treat for So give us your take on what we saw this week, because, as I say, there were some indications the markets were getting a little nervous about risk. So I think the economic data was

at least on the margin weeker than expected. P p I obviously came out a bit hotter than expected, and I think that there's just more realization that the path from here is too slower growth. Whether we ultimately find it's declared an official recession, as you and I have talked about, I think we're in already a form of recession.

It's just of a rolling variety. We've seen the hit areas like housing to certain segments within the good side of the economy, the areas that had the big surge in the early stage of the pandemic that was also the breeding ground for the inflation problem we're still dealing with.

That then went into recession type conditions. Disinflation in the good side of the economy housing related, but we've got the offsetting lift on the services side which services is a larger employer, so that has kept the labor market

to flow. But I think we're going to continue to see weakness roll through the economy, and I think whether it's ultimately declared an official recession is almost an academic exercise at this point, and looking back on it, I think it's fair to say we had asset inflation before we had real price inflation for consumers. Has the FED been successful in pricking the bubble on some of the station you mentioned housing? For example, we have cryptocurrency certainly

taken a hit. For that matter, big tech has come down. Are we starting to see some of those asset bubbles at least deflate a bit? Crypto specs and f T s um certain, if not most pockets of the housing market. To your point, big tech, other narrative driven, speculation driven areas like heavily shorted stocks, nonprofitable, All of those what what we've been calling micro bubbles undoubtedly have gotten not just pricked, but they sort of popped in spectacular fashion.

You know. The good news is is a lot of that speculative excess, even when we were in the heights of those bubbles, had not fully filtered over into the traditional market areas. And that's what we were always saying was very distinct from the current ironment or the most the recent environment and where the speculative excess was concentrated in the major averages. It's been just a little bit outside that mainstream, say for some of the the big

cap tech names. And I think it's just evaluation compression that was necessary in in large part due to the inflation backdrop. And we are joined now by Peter Crests of Aperture Investors. Welcome Peter. Great to have you here with us, could be here. So once again we're seeing rachel ries, although not full points every three weeks, but still they're going up, probably going to go up and again next week. What does that mean in a broader sense for an investor, I mean, this is a different

world than we've seen for several years now. Yeah. Well, look, I think for if you look at the longer time period, think of it from a strategic point of view, investors have been investing really inequities and very little and fixed income for fifteen years, and people have moved away from negative interest rates. They've blood private credit, they've bloy private assets, they've blood equities, you know, assuming that that's where return

was going to be. So now you have a paradigm shift, and you know you can't say, well, this is what I'm gonna do with my money tomorrow. But over the next eighteen months you're going to see significant shifts of capital into the fixed income complex. That will include longer duration securities, that will include high yield securities, that will include invest in grade securities, which for the first time will actually be attractive, and will include the short duration

complex as well. I also think interesting enough, emerging markets has got to be a place where you look, and emerging markets are down. The MBI's down twenty percent, maybe sixteenth,

and it's probably got a yield of eight percent. Uh. And you know, next year, if everybody's predictions are wrong and the Fed doesn't rage rage by much, everybody thinks fight you're gonna go down, then more than likely you're gonna see some recovery and emerging market debt and that could yield eight percent plus some price appreciation see ten. So frankly, you know, that's a place where I don't think people are looking, and I think probably there are

some If you take what Peter said Lausanne. Ultimately does that end up in cash because that's the shortest term investment. You can move that around quickly, and maybe you have to get ready for a bounce back in eighteen months. So I think it depends on who the investor is. I think for investors that are much less risk tolerant, that if there and I'm talking from the respect of an individual investors, if they're older, if they're in retirement, they were forced way out the risk spectrum in a

zero interest rate environment. And for anybody that doesn't have a high risk tolerance, that have those liquidity needs, that have the need to live off of income getting a real yield on a cash like or a very short term security, that's the first time they've experienced that in in quite some time. But I also agree with with Peter.

I think there are paradigm shifts that happen when you go through cycles, particularly when you go through a full cycle where you have an economic contraction and you go from a bull market to a bear market into a new bull market. There's always that recency bias. There's always that obsession with looking at what had been the leadership and feeling that there's not going to be momentum and asset class. One should go back to that leadership, leadership changes.

I think there is opportunity in fixing. There is opportunity international. We've got to look through the windshield, not the review Marreor. It's interesting. I just saw a note from Rock Creek outside in Best Losses note that said something I hadn't focused on, which is actually one of the winners this year has been Latin America. The Latin America has done surprisingly well. I've not been paying any attention to Latin American at all. I must say mostly commodity driven, oil driven.

You know that that's what's driving that. But look, I I don't think that we're saying don't invest in equities. I just think that the when you look at the where your money is allocated, you're going to start to allocate more money to the fixed income complex and pretty much you're gonna go through a period of volatility here where private assets are probably going to have some challenges. Uh, you won't be able to get any liquidity. They're just

gonna have to hold them. So you're gonna have opportunity losses there. You've seen some that already in these large pools of private assets that have cash with rows or cash requirements, and I think you're going to continue to see that as people try to take their liquidity and get eight to nine percent, which they haven't seen for fifteen years. Thank you so much to Peter Cross of Apature Investors and liz Ane Saunders of Charles Schwapp for

being with us on Wall Street Week. Coming up, we're gonna take a look at the mood on Wall Street as we head into a bumpy patch. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Real Estate. It's the investment people turned to in times of inflation. The real estate market is probably the best major markets investing right now. Inflation in general is good for real estate

and rock creeks. Asani Beschelis says, they are seeing portfolios shift to real estate as investors turned to private investments in an uncertain time. The big thing that is happening in the ports and as we're looking at is obviously a lot of investors, institution investors have been also investing in venture, private equity, real estate in private form, and I think that is going to some sort of transformation too, but with interest rates climbing, real estate is becoming trickier.

Tom Shapiro of g T I S says the housing market is taking a real hit. The housing market is tremendously decelerating at this point sales or optomendastin. Famed investor Sam Zell says it may be worth less than the market thinks. I felt that the real estate market generally

has been overpriced, particularly in on the private sector. And now Blackstone has limited withdrawals from its massive real estate investment fund because too many people were taking their money out too fast, which Larry Summers sees as a potentially ominous sign. When you see prominent financial institutions telling people that they can't take their money out, that's never a happy thing. Makes me wonder about what's head And we welcome back to Wall Street Week. Now somebody who knows

real estate terribly well. He's Jeff Blau. He's the CEO of Related and that is, of course one of the largest real estate developers around the country. They have properties throughout the countries and our unlast time I checked the largest landlord in New York City. I think Jeff one Off. I don't know if all of the largest, but who are up there, so welcome back. Great, So tell us about real estate right now. It has been a good hedge against inflation. Inflation is a problem. At the same

time interest rates are going up. At this end, we have some real problems with some office occupancy. So you've got a lot of topics in there. Uh. First, if you think about what's happened over the last year, we've had the fastest rise in interest rates in in probably twenty plus years, and the impact on real estate is pretty significant. Now you break down different parts of real estate because real estates broad so unstabilized assets buildings that

people own, whether it's apartment buildings or office buildings. In a in a way, inflation is good for those assets, right, rents eyes they go up, and if you did a good job managing your assets, you might have fixed rate long term debt, so cash flows increase. So in the in that bucket of real estate, inflation is a great head. Uh.

Inflation is great for for real estate assets. Um, if you're in the funds business, whether they're credit funds or equity funds, this is a great time for that business. The banks, as you know, have stopped lending or have certainly pulled back um significantly, and so the private credit markets are are booming because where they were competing with the banks in the past, the in effect could make bank type loans at two times the rate. So that's

a great opportunity for credit funds equity funds. We haven't yet seen real distress. We might start seeing that in the in the next couple of months, So I think the funds management business in real estate is going to be very strong going into twenty three. The difficult part for real estate is is anything you want to do new new development is difficult if there's not a lot of financing. There's not a lot of construction loans. Costs have gone up, UM, so it makes harder to build UM.

So it's it depends where you are in the real estate markets. UM. As to what you know, the impact is the office sector. As you mentioned, that's that's a whole topic into itself, UM. And I think really people people ask me all the time tell me about what the office market, and really the office market is very bifurcated, and I don't think there's one answer. Again, UM, what we have seen is is a real dispersion in values

between older buildings and and brand new buildings. Um. And it's not just new, it's new with the right features, the right amenities that tenants are looking for today. UM. So we're seeing more and more corporations thinking about how do they get people back to their office and thinking about using the physical space as the attraction to bring

people back. But truthfully, people don't want to go back to old kind of quiet offices that are dark and have bad air circulation and long waits in the elevators and no amenities. So what corporations are doing is investing in their office space not for occupancy but for talent

attraction and retention. And I think that's where you're really seeing, uh, the A buildings and the new buildings that are focused on this, that have the right amenities, that have the right h v A C circulation, that have hospitality type services, that have great air and light, um and the right type of build out. The build out in office space

is changing tremendously. Where we used to see kind of the old mad Max version of a build out with you know, private offices on the exterior wall and assistance offices or cubes inside. That's really not the way office is built today. We're seeing well much more collaboration space, teeming space, meeting space, food service tables around food where people are using for gathering and working as opposed to private offices. So this type of office of the future

UM we think can be successful and is successful. The data is there today, UM for these new buildings. So we compared brand new buildings across markets in the United States, UM, not just here in New York. And you look at new modern buildings with the right features, the right amenities, and the demand for those buildings is tremendous. And at the very same time, you can go a couple of blocks, like if you take huts in Yards for example, we just opened last last week. Actually a first tenant moved

in at fifty Huts and Yards. Fifty Huts and Yards is a three million square foot building. It costs US over four billion dollars to build this building, and and it's essentially ninety plus percent at least at this point, we're getting the highest rents in New York City in that building, over two hundred dollars a foot in that building. And because it is it has all those features and amenities. It is new, it has all those things that we're

talking about. You can go three blocks away and find as much space as you want in B buildings that's probably listed for six exteen dollars and they can't at least even with everything you say about the A. Are people needing a little less A space? I mean we had the Meta situation actually hunts in yards where they gave back two or fift square feet. Are you seeing that more broadly where people saying, yes, I really like A but I don't need as much of it? So

not really. So there's a couple of different situations. So Meta. Actually what Meta did is when we made the deal with them, they are anchored one of the anchor tenants along with Black Rock in in fifty Huts and Yards. When we made the deal for them to move into fifty huts and yards, that was three plus years ago, four years ago UM, and they needed space immediately, so they took some swing space in thirty UM with the intent to move into fifty So that's the space that

they are not staying in today. Everyone thinks there was this big announcement, but that was that's that was the plan. So they are moving the employees that they have in thirty huts and yards, which was which were in swing space into fifty And answer your question, there are companies like Meta today that are back on office space in general, but that has nothing to do with their build out of the space. That's you know, the tech sector is

pulling back, they're cutting costs. That's based on their business. That's based on kind of what's happening in the broader economy. If you if you ask Meta about their office space per employee in their new types of buildouts, and so they have actually stepped back rethought about the office space of the future, and it's all the things that I talked about. Much fewer private offices, much more gathering and

meeting spaces. And when you when you take the same when you take the the same number of employees and compared the old build out and the new build out, the mix of public space and private space is completely different. But the total square footage per employee is the same. Now if they have if they're pulling back because of general economic issues, that's not a real estate issue, right, It's not an office space issue. Let's come back to

the BNC buildings as we call them. I've read about so called zombie office buildings now in New York City they're really empty. How bad a problem is that? What are we going to see? What's the followup? And by the way, does that also create some opportunities and bargains to pick things up cheap? Right? So I think it is a pretty significant issue for New York City. You've

had some companies leave New York. Um, You've had some companies suffer through the economic downturn and COVID and supply chain and all the things that have happened, UM, and have vacated space in those B buildings. UM. The problem is there's not there's not a lot of tenants that want to release those spaces. So we're seeing vacancy in the B buildings increased significantly. We're seeing the vacancy in

the not just A buildings, but in new product A buildings. Jeff, thank you so much, Jeff Bloggy, CEO of Related Coming up, we'll wrap up the week with our special contributor Larry Summers of Harvard. This is Wall Street Week on Bloomberg. This is Wall Street Week. I'm David Weston, and we welcome back now our special contributor in Wall Street Week.

He is Larry Summers of Harvard, So Larry, normally we talked about what's happened during the week, particularly what the FED might make of it, what might happen with rates, But it strikes me there isn't a lot of that this week. Let's talk about larger issues that really you are focused on. David. I think it's important for us always to remember that ultimately, trends are more important than events, and trends most of the time are positive, and events

most of the time are negative. So we have to step back and look at things that may be markers of trends. And I saw too such things this week, China's huge evolution away from the zero COVID strategy, and what happened with chat GPT from open Ai, which may be a marker of a profound change in what it means to be a machine and what it means to be human. So let's take each of those up in turn,

if we could. Let's start with China, because as you say, they really are backing off of their strict policy on COVID and the isolation and that they've been pursuing, and also up a lot of the testing. But do we know yet, well, that's gonna be positive or negative. It could be positively for the economy. But now and if they have a real spike in cases and really overload their medical system, we may have a problem. Look, I

think we know two things. We know that a big change in China happened because of an expression of popular will and protests. That's a profound thing for the governance of that superpower with one point four billion people. You're quite right, we don't yet know how this is going to work out. Is this going to be a successful rejoining of the reality of the rest of the world, or or is this going to lead to catastrophic delegitimizing performance of the Chinese healthcare system? And we don't know.

But either way, there's a big chance that China is going to be a quite different country six months from now than it is today. And so I think all of us are always watching China carefully, but we need to be watching China much more carefully over the next over the next six months, when you're gonna be seeing leadership change at the same below the level of shijimping. Of course, at the same time that we're gonna be seeing probably the biggest UH set of policy experiments UH

that we've seen in China in decades. So let's turn to that second SUT together, the open AI creation of chat GPT. I won't pretend that I understand this, but I have read about it. Again, Is this a positive thing or potentially a negative thing? Because we already have a lot on the Internet, we don't know where it comes from or its origins. Now we're gonna have something we can't even tell whether a person created it. Look, when I went to graduate school, we used to estimate

statistical models with five parameters. Now they're gonna be a hundred and seventy five billion parameters that go into UH one of these UH systems. The great computer scientist Alan Turing seven years ago said that it was going to be a threshold for humanity when a machine could sept could it could imitate a human being's answers to questions in a way where another human being wouldn't be able

to tell the difference. We're somewhere in the territory of that right now, and that is a profound thing for humanity. It points to a profound change in the way we're all going to be working. We're all going to have a kind of caddy that or many of us are going to have a kind of caddy that is going to augment our creativity, augment our capacities, to bring knowledge

to bear on what we do, augment our accuracy. But just as the printing press or electricity was a huge change because it was a general purpose technology, this could be the most important general purpose technology since the wheel or fire, and that is something we are all going

to be changed by. My hope is that the very transcendence of these kinds of events can bring a kind of unity, can bring a kind of unity because they are so large relative to the differences between Democrats and Republicans, or even the difference between the West and China, that these opportunities and threats because they are both, whether it's microbes, whether it's artificial intelligence, whether it's a climate change, that the very transcendence of these global events can become a

source of cohesion and progress. But there is no assurance at all of that we are living in truly historic times. Learn I want to talk about a different sort of threshold that I came across this week, and I was a little bit surprised. I was reading Bono the Leader of You too. His new memoir called Surrender is a

fascinating book. I find it very, very compelling. And who do I find in there but one Larry Summers when you were, according to Bano, originally new Treasury secretary, and he came in to meet with you and Cheryl Sandberg and Stephanie Flanders to talk about debt forgiveness for the poorest countries. And according to his rendition of it, it really started. You started with President Clinton, a real process that led to really historic changes in the debt of

some of the poorest countries in the world. What about that. We've still got a long way to go, don't we. David Barno is an unlikely but very close friend. I will confess it. I'd never heard of him before we had our meeting, and Cheryl Sandberg had to force me to take the meeting because I thought Secretaries of the Treasury should only meet with people who had a first name and a last name. But he was mesmerizing both in his charisma and his knowledge, and he drove that

debt relief program forward. We had an unlikely coalition. Pat Robertson Senator Jesse Helms, and we were able to do something that I think was hugely important for the African continent at that time. Sad to say, right now, the world needs comprehensive debt relief for the poorest countries, and what the world is getting is grudging, incremental, partial, limited, small efforts. And we've got to find a way to do UH better. And I hope bot I was going

to get the band together again. I'm certainly willing to do my part UH to help. This time it is going to be different because a lot of that debt is owed to China, and finding a way, even when things are vexed with China, to involve them in helping these countries UH move forward based on an understanding of how they see UH. The you is going to be UH necessary and profoundly important for a large number of

human loves. And finally, Larry, give us a moment, if you would, on what we normally do on this program, which is talking about what happens this week and specifically the question of the likelihood recession. We saw developments in the marketplace, oil price coming down, bond deals coming down, stocks coming down. Most people think that has to do

with real anticipation of a significant recession. Where are you on that I've been I've been saying, uh, soft landing very unlikely for a while, and I think it's looking even more unlikely. Uh right now, I noticed that the consensus is reflected by the Ft University Chicago survey of a group of fifty economists, is now moving closer to where I've been. They're saying that we're going to have a recession and that the unemployment rate will peak at

five and a half percent. That's up from where they were, way ahead of of the fat Is I've been saying six percent. So I think there's a growing coming together that we probably are going to make more progress on inflation than many people expected. But it's because the fat is gonna do what's necessary. But there's likely to be uh,

some adverse aspect of that. But you know, David, next week, I hope we can talk about what's happening globally, because we tend to focus here just on the American picture, but the two other major polls of the economy, China and Europe, are both going to have a huge impact on how the soul plays out globally. Let's do exactly that next week. Thank you so much to Larry Summers, our very special contributor here on Wall Street Week, coming up to the winners go to spoils, or at least

to the big time pro baseball players. That's next on Wall Street. Reek on Bloomberg. This is Wall Street Week. I'm David weston Bloomberg. Wall Street reporter Chaney Bosset got a ringside seat at the Goldman Secs US Financial Services Conference in New York this week, and this is what she learned about the mood on Wall Street. Thanks David. When it comes to the mood on Wall Street, a lot of the energy has been focused on talent. Talent

is often the biggest cost. And for all the talk of podential job cuts and reductions and pay it's worth taking a look at which jobs are under pressure, which are not, and how employees can adjust to new positions As they try to realign to a new macro economic environment. Now,

bankers are looking to reinvent themselves. Investment banking at Bank of America is on track to drop by more than fifty this year, for example, and that bank has actually gained market share in mergers and acquisitions and investment grade underwriting. During this week, Market CEO Brian moynihan said the company is slowing hiring ahead of a possible recession, but he's also said they're trying to move traditional dealmakers to new roles within the bank. He spoke to me at the

annual Goldman's Acts Financial Services Conference this week. We know we can absorb those teammates. We we by just manage our headcap carefully. So what do we do in at times like this? You look at your open positions, You look at your phil rate, which is how many people hires. Acent of people leave and in shape ahead come back in across the whole company. We take some of us talent teammates investment banking and bring them into other parts

of the company at times like this. Finally, one more thought, maybe we're not really all in this together. Just about everyone, at least every economist agrees that we are in for some harder economic times, and that includes former presidential economic

advisor Glenn Hubbard of Columbia. I think it's still likely that we will see a recession at the Federal Reserve pursues its path to get to two percent inflation relatively quickly, But to say that we are all facing an economic downturn does not mean that we will all take the same hit from that downturn. Some of us will get laid off, of which Morgan Stanley's Mike Wilson says is necessary and could actually be a good side for investors.

One layoffs cycle picks up in earnest, that will actually be one of the keys for us to get bullish, because that means the bleeding will stop on the operating leverage. One of the first group of workers to get hit has been tech, particularly big tech, which in some cases it may have been overdue the hiring that we sold through the pandemic, where companies like Amazon and Matza basically double the workforce. Clearly the semexis there then needs unwind

I thought echoed by for Tero's Dean Forbes. Most of these layoffs at scale are happening in the supers right, the happening in the metsas the happening in the Facebook's that happening in Twitter, and to a degree, it's just kind of right sizing. Even if we're not losing our jobs, most of us are finding that we make less because of the bite of inflation and now Goldman Sachs CEO David Solomon says that at least some of his bankers should expect cuts in compensation over and above what inflation

is doing. It shouldn't be surprising to people why the performance of the business this year. That one was an exceptional year. It was a record year for the firm, was the highest revenue year ever for the firm. Twenty two is a different year, and so naturally compensation will be a lower But never fear those layoffs and comp couents won't be reaching all workers, not by a long shot, and certainly not if you are a star pro baseball player.

Just last week, the Texas Rangers took two time Cy Young Award winner Jacob Degram away from the New York Mets, and in the process gave him a nice raise to thirty seven million dollars a year. But the Mets didn't grieve for too long. They turned around inside Justin Verlander, raising his pay to a cool forty three million dollars a year, putting him just about on a par with

his Mets teammate now Max Scherzer. But then we had the Yankees step up with three or sixty million dollars or nine years to keep star slugger Aaron Judge in pinstripes million our deal for nine years with the Yankees. That being reported by the Athletic forty million dollars a year. And I'm sorry, Lisa, it's just simple sports wins. The fact, as you see it, in the signing season of baseball,

big money is being thrown around. Now. Nobody can deny that all of these are truly great players, sure to make it into the Hall of Fame. But to put it all in a broader perspective, Mickey Mantle, surely one of the greatest players ever in the game, became the highest paid baseball player in the land back in nine And what do you get paid? Whopping one hundred thousand dollars a year And that is just over two percent of what Justin Verlander will make next year. And yes

that is adjusted for inflation. That does it for this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.