This is Bloomberg Wall Street Week.
I mean may not have an overall recession. We're having a rolling recession. A kind of role looks pretty strongly is when it comes to jobs.
The financial stories that shape our world.
Three major regional bank failures send shockwaves through the banking system. We're all trying to figure out what to make of generative AI through.
The eyes of the most influential voices.
Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America, Gebro Lair of the Paulson Institute, Glen Hubbard of the Columbia Business School.
Bloomberg Wall Street Week with David Weston from Bloomberg Radio Time.
In is everything for the FED, for the banking sector, and for asset managers. This is Bloomberg Wall Street Week. I'm Romain Bostic and for David Weston. This week Barkley CEO CS Bencotta Krishnan on his vision for investment banking.
You bring it all together, and you're talking about us thinking about the next generation of leadership of the investment bank.
Former Treasury Secretary Larry Summers on whether the FED spight the curb inflation is working.
I found the Fed's action a little bit confusing.
And CBR CEO Bob Selontek on how interest rates are reshaping America's biggest.
Cities, San Francisco.
That's probably the toughest story out there in office buildings.
There was a big sigh of relief on Tuesday. From Wall Street to Main.
Street to the hulls of the Federal Reserve.
The Consumer Price Index released a rise of just four percent year over year.
That's the smallest game.
Going back to March of twenty twenty one, and it suggests that the lag effects of a fifteen month rate tightening cycle are lagged no more.
I have been consistently in the camp that we would see some slowing in growth, put no recession, and that we could see inflation come down. And part of that is because I've had confidence in the Fed.
Then on Wednesday, a fresh report on supply side inflation hit that showed producer prices rising at the slowest pace since twenty twenty, normalizing supply chains and a broad cooling and commodity costs Aiding that trend. Two big data points this week in a disinflationary trend that ultimately gave the Fed enough confidence to stand down after hiking rates ten
straight times. The FMC decision to hold fire it was unanimous, and you can call it a pause if you want, but don't you dare call it a skip.
I think that the skip, I shouldn't call it a skip.
The decision makes sense.
Pal making it clear that the US economy isn't out of the woods yet and more rate hikes could come.
I still think and my colleagues agree that the risks to inflation are to the upside.
Still, less than a day after the FED left borrowing costs unchanged, the European Central Bank raised its deposit rate to the highest in more than two decades. But investors, they're betting that after four percentage points worth the hikes, the ECB, along with other major central banks, they're finally at the final stages and they're onslot against the global inflation shock.
We are determined to reach our target in a timely manner and to continue to apply the principles that have applied today, data dependency, the three elements of the reaction function, and moving meeting by meeting.
Meanwhile, the European banking sector entering a new era, ubs completing the government broker takeover of its story.
Swiss rival Credits sue.
It's the biggest global banking merger since the two thousand and eight financial crisis, and time finally may be up for Chrispinoti, ousted from his London based investment firm, A makes sexual assault allegations. Od Asset Management now hiving off its funds and.
Employees, a move that would likely signal.
The end of the multi billion pound firm altogether. Clients and business partners up against the clock right now to get their money out.
We're in the process of moving away from their basis.
And back here.
In the US, stocks scoring their best week since March, the S and P five hundred climbing more than two percent and the Nasdaq one hundred jumping by almost four That move higher in the US match by moves overseas, Japanese stocks pushing to their highest since nineteen ninety, the German Dacks closing at a record high, one of the main gauges tracking emerging market equities advancing for a third straight week.
Even commodities got.
Bought, posting their strongest weekly performance as a group going back to November. Joining US now to walk us through what happened this week and well, what could happen in the weeks ahead Sonala, Sig Franklin Templeton, Tick's income CIO, and Bloomberg Managing editor Tracy Alloway, the co host of the very popular Odd Lots podcasts. So I'll start with you, and I'll start with that FED meeting on Wednesday and.
That press conference.
Not necessarily a surprise what they did, but were you surprised at what Powell had to say?
So, you know, I actually feel in some ways that Powell got a little bit of the short end of the state this time around. Historically been quite critical of the communication that the FED does, but I think this time around they paused for a very valid reason. They hadn't guided the market. Well valid in some people's minds. This FED doesn't like surprising the market, and it chose not to do so. However, I think they really made it clear that sometimes a pause is really just a pause,
and that's what this meeting was. Prior to the meeting, there was a reasonable quantity of people who thought reasonable portion of the market which believed that the pause was really the end of the hiking cycle.
It's not.
That's abundantly clear, And I think that we saw action from the Bank of Canada from the Reserve Bank of Australia. Both in recent weeks have come back, recent months have come back from pauses, and so I think the market is beginning to be more realistic about what the Fed's outlook is.
Yeah, how do you feel about that, Tracy? We say a pause is just a pause. And of course even j Powell had that Freudian skip during the press conference. There is there some distinction that we should be paying attention to here Freudian skip.
Was that a Freudian slip of your own their romain or all day long?
We think it will create some of the most valuable companies market's ever seen, and I think it's certainly driven companies like Cisco, given them the life that they've had. It's obviously also spectacularly volatile, but the market is pulled back in this sector since it became public, since it began in nineteen ninety five, it's pulled back thirty to fifty percent at least seven or eight times.
All Right, A blast from the past there.
Henry Blodgett, then the Internet analyst over at Merrill Lynch back in June of two thousand, when he appeared with Lewis Ruckheiser on Wall Street Week. Internet stocks were all the rage then, and to a certain extent, they're the rage now. It's all about AI, artificial intelligence. There are a lot of people trying to look for some parallels between the AI frenzy that we're seeing today and the dot com frenzy, if you will, that we saw back in the late nineties and early two thousand.
Are you finding that parallel?
There is no doubt that we are going to see shades of dot Com in some of the enthusiasm around AI. I mean I was looking at in videos valuation before I came on here. I think it's something like forty two price to sales at the moment, which is a lot. And we have seen some companies already start to pivot towards AI. So of course a lot of the crypto players that aren't doing so well at the moment are
now talking a lot about this new technology. The one difference I think I was actually at an event with Mark Barribau, pgim's global equity head this week, and he was talking about the difference is a lot of the AI winners so far are incumbent companies. There are places like Nvidia, places like Microsoft. These are real companies with actual revenue, and from that perspective, we are in a different place to say, twenty twenty, twenty twenty one, where
people were betting on the really speculative stuff. I know it's a low bar, but it does bear mentioning that to some extent, these are people betting on already incumbent, established companies.
That's a good point, and Soanal I want to get your thoughts on that, particularly just in the context of investor sentiment and really this idea that there does seem to be a lot of folks out there who really sort of want to, I guess, grab on to that next big thing, and at least for right now, it seems like it might be AI.
It does look like this is going to be the decade of AI. Really, if you think about the last decade as a decade of mobility, that you know, if you look at the two thousand and ten twenty twenty. I am not an equity specialist. I always make that case, but I do think that this decade that we're in right now is likely to be the decade of AI. I'm not the person to peak individual stocks clearly I'm the last person to do so. But if I look at the technology, it is something we're very excited about.
Having said that, there are many other technologies. Whether you're looking at what's going on in the field of medicine with genomes, there's a lot happening and technology. More broadly, AI is very much the flavor of months. So that is the element which goes back to what we were talking about the dot com to some extent, I'd.
Say absolutely, and Tracy, I mean, you bring up a good point here about kind of these established players in videos, Microsauce, Alphabet's, proven companies with relatively solid balance sheets here, but there is certainly some froth in this as well, a sort of a lot of second and third tier companies that have mentioned AI. Your colleague Joe Wisenthal, the co hosts of Odd Lots, I thought, had a great point when he talked about Kroger, a grocery store chain, where the
CEO mentioned AI eight times on the conference call. I'm having a hard time making that connection, but I don't know, maybe they know something we don't.
I mean, look, I do think there is a danger here that everyone starts using AI as basically a synonym for every type of software that's currently an existence. I can see that happening. However, when it comes to the Kroger earnings call, sure he said AI eight times, but the stock still went down, which to me suggests that people are still being somewhat rational about this. That said, there are plenty of pockets of irrationality in the market.
So there's something called the bubble portfolio that GAM portfolio manager Paul McNamara put together many many years ago, and it contains a bunch of stuff like Tesla, Netflix, Chinese tech companies, real estate developers. That thing has shot back up I think something like thirty percent so far this year, which is about double the S and P performance. So clearly people are piling back in to some low quality names. That said, a lot of those names are coming off
of significant lows. So what does it mean if a company goes from you know, ten bucks to twenty bucks. That's doubling a performance, but it's still relatively low compared to prior history.
Thanks to both of you, a great conversation. Tracy Alloway, she's managing editor here at Bloomberg and co host of the Odd Lots podcast and Sonaltasi Franklin Templeton CIO for fixed.
Income coming up.
Whether or not bosses want their employees back in the office, the economy certainly does. Cbre CEO Bob Solentik says office vacancies might be.
The new norm.
You really are seeing a push from companies to get people back in. I do not think it's going to go back to where it was.
That's next on Wall Street Week on Bloomberg.
Commercial real Estate, Bloomberg estimates it to be a twenty trillion dollar market, one that benefited from years of low interest rates, but all that changed when the FED height rates at record speed.
Rates go up, financial conditions titan, and then what happens is that consumption drops, investment drops, and then we get job destruction.
Even as offices remained empty in the wake of the pandemic.
It's shocking to me that the vacancy rate for commercial space in San fran is thirty.
Five percent, hitting valuations hard.
You're seeing the office buildings that had a six hundred million dollar valuation or a three hundred million dollar valuation being sold for maybe fifty or sixty.
With the potential for the problem to spread to the banking sector, particularly for the regional banks responsible for much of the commercial real estate.
I think you're going to see more bank failures, likely in the small bank So it's not going to be the big headlines and the size of the failures we had so far. But I think there's more problems under the surface.
Well.
Banking experts like Roger Cohen say it may be a more narrowly focused problem than some think.
I think only a small slice of commercial real estate is really being effective, and that slice is office buildings in a few metropolitan areas, and even there there are vast differences in credit quality.
And Steve Ross have related insists that the problem does not extend to the top tier of office buildings.
Chennas today are looking to find class office buildings that are new, that embody all the latest and technology and where people want to work. It's really the class speed buildings where the carnage will take place.
But any way you cut it, as banking goes, so goes commercial real estate.
The key to commercial real estate today, though we'll be banking.
If the industry can't get a construction loan, real estate will have a recession.
And to take us into the world of commercial real estate, where it is now, where it's going. Welcome to someone who knows it terribly well. He's Bob Salentek.
He is the.
President and CEO of CBRE. Thank you so much for joining us.
Bob.
Great to have you here in Wall Street Week. Thanks for having me, David, really nice to be with you.
So we hear a lot abot commercial real estate right now, not all of it good, a lot of focused on office buildings, but we've learned that commercial real estate is more than just office buildings.
It's part of it, but not all of it.
Give us a sense of overall how commercial real estate is doing well.
Of course, office buildings are the most difficult part of the commercial real estate story today when you look at other asset classes, so for instance, industrial buildings, which is a big asset class, medical office buildings, hotels, life sciences buildings, multifamily,
institutional quality apartment buildings. Basically very strong fundamentals. And when I say fundamentals, I mean the following well leased, in fact, some of them historically well leased, strong rental rates and upward pressure on rental rates in a lot of cases, not a lot of new supply coming on. That's what we mean by fundamentals, and when you get beyond office buildings, the fundamentals and the commercial real estate group of asset
classes are generally very strong. And even within office buildings, there's a slice of office buildings. I'm going to say for thirty to forty percent of them, these newer, better configured, better infrastructure office buildings where companies are trying to create a really high quality experience for their employees to get them back in the office.
Those assets are doing quite well.
So the headlines, the headline grabbing stories of an eighty percent vacant office building, that's an anecdote. That's not a proxy for what's going on on a commercial real estate.
So when you talk about the newer buildings, we're learning to call them a's or A pluses as oppos the b's and c's. Yes, but if you take a look at commercial estate, the office portion of it right now, how much of it's A, how much of it be how much of C?
Would you say? In general?
Well, I think if you look at true A or A plus, it's maybe a quarter of the a quarter of the space out there. But you could go down a little further and have some very nice buildings that if upgraded appropriately, would be true a's and then you probably have the bottom core quarter or so that are real problematic buildings that are either going to have to be mega redeveloped or probably scraped and turned into land sites.
And then in between you have a variety of different kinds of buildings, some of which can be repurposed, maybe into multifamily all that's very difficult to do. Some of them will be upgraded to Class A buildings, and some of them will go the way of land also, so.
You have different parts to commercial real estate, and then within the office part of commercial real estate, you've got different classes. Look at what about geography, because another thing that we have heard is that it depends on what metropolitan area you're talking about. San Francisco may be troubled New York, maybe not so great Chicago. But then there are others, whether it is Miami, for example, some parts of Texas are doing pretty well well.
You mentioned San Francisco first, So that's probably the toughest story out there in office buildings, and it's for more reasons than just the tough to get people back in the office. First of all, everybody knows that's where so much concentration of tech occupancy is those companies have laid off a lot of people.
But David, think about this.
We all know that the technology companies that are going backwards with headcount now are going to go the other direction for sure in the long run. We know that's going to happen, and that part of what's going on is going to come back. And then, of course you do have the cyclical thing with the economy being down a little bit, and you have the secular thing with people not being back in the office as much, and technology companies kind.
Of lead that charge. But by the way, if you.
See what's going on now, the technology companies are talking about getting their people back into the office.
Talking about it, but they're getting that done. I mean, we just this week passed the milestone in New York of fifty percent occupancy, and that is by use of the sort of security cards they know they're actually in the office. Is it ever going to come back to where it was before?
Well, New York is a good example of quite a bit of the spectrum of what's going on. So in class A top quality buildings here in New York, you go over to Hudson Yards or you go to one Vanderbilt in Midtown across from a Grand Central station. These buildings are doing well and they're going to continue to do well. And they're doing well because they create a great story for the client or for the tenants and their people, a great experience for their people.
Other buildings are suffering.
More because they don't create that experience, but they're all slowly filling up. We did see a flat spot for quite a while I'm going to say from earlier this year till about now, but we're starting to see it rise a little bit again now, and you really are seeing a push from companies to get people back in.
I do not think it's going to go back to where it was, and in fact, the work we've done would suggest that in the long run, companies are going to take maybe eighty percent of the space, maybe as little as seventy five percent of the space as they previously had.
So I don't want to put words in your mouth, but I think what I'm hearing you say is by and large, looking at as far as you can, you say, maybe the market has largely discounted what it needs to discount at this point.
Yeah, I think that's probably the case. Now we all need to figure out what's going to go on with the economy. Right now, the economy has performed better than we thought it was going to perform, quite a bit better around the world, in fact that there's now an expectation that we won't even have a recession in Europe. If we ended up with a worse recession than we think we're going to get, values would come down further because people would stop spending money of all types, including
try to spend less on rents. But we think values have kind of hit the bottom are going to start recovering, and we think we believe that we're going to have a mild recession that's going to take place later this year, be relatively short, and you'll start to see things come back.
By the way, there is a massive amount of capital on the sidelines that wants to invest in commercial real estate, and there is a massive amount of real estate that wants to be refinanced or sold, and everybody's uncertain about what's going on with values. And as soon as we have some certainty, as soon as we think interest rates and peaked and are coming down, you'll start to see those assets trade and get refinanced.
As in so many places, you need the buyer and the cellar to agree on that price.
Yeah, and you need them to be confident that it's kind of gotten where it's going to get to.
That was David Weston with cbre CEO Bob Silentik.
Coming up. Former Treasuries Secretary of Larry Summers.
Gives us a reality check of the Fed's battle with inflation.
I don't see the idea that we've got a durable reduction in inflation clearly established.
That's next on Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Monetary policy dominated the week with great decisions from the US FED, the European Central Bank, and the People's Bank of China. Three big central bank meetings and three divergent outcomes. Let's get the view from Larry Summers, former US Treasury Secretary, President emeritus at Harvard University and now a special contributor to Wall Street Week. Larry, let's talk about the FED meeting more importantly, That FED pause not necessarily a surprise, but do you think it was appropriate?
I'm not sure I found the Fed's action a little bit confusing. I understand the arguments for not hiking at this meeting, but those arguments wouldn't point towards signaling to further rate increases. They wouldn't point towards significantly revising the
forecast towards a stronger economy and more inflation. I understand the arguments for having gone the other way, but I don't really understand the internal consistency of an approach of pausing at this meeting but then signaling to further rate hikes down the road, and signaling that they no longer expect unemployment to increase nearly as much as they used
to expect it. So this meeting felt like it was driven as much by the internal political dynamics of the Fed as by any consistent and coherent reading of the economic situation, and that was a bit disturbing to me.
They raised some of their economic projections, or at least they improved a little bit here, but you still have a market that seems to be betting on this idea of a recession, the idea that the FED itself may have actually overtightened, or at least is on its way to doing that.
That would not be my best guess.
I think it's very hard to read, but my best guess is that the consumer, which is seventy percent of the economy, appears to be running really quite strong. At this point. We've got very strong employment data, much faster than population growth. The indicators on wages are a bit mixed, but the ones that seem most reliable to me that adjusts for changes in the composition of the labor force
are showing substantial strength. So I don't see the idea that we've got a durable reduction in inflation clearly established, nor do I see clear evidence of.
A slowing coming.
So in that context, I think the FED has probably got to maintain a posture of moving towards restraint. I don't think it's very serious what the precise timing is, and so if they don't move this time and end up lifting rates fifty basis points at the next two meetings,
that's going to be okay as an outcome. But I think that they ought to decide what their balancing of risks is, and I was struck that the balancing of risks it was implicit in not moving today this time, was kind of inconsistent with the balancing of risks that was signaled by the two tightenings and by the forecast revisions.
I want to go overseas to China. They had a much different policy meeting coming out of the People's Bank of China, a cut And there's been a lot of discussion here Larry about the health of the Chinese economy and light of the data we've gotten and a lot of some of the reports by Bloomberg and others that they are considering fiscal or at least some sort of economic stimulus measures to get that economy back going back again.
You know, I think the Chinese have a very difficult set of challenges ahead of them. They're very serious financial overhangs coming out of what's happening in real estate. I take a somewhat more medium term view of it, and what's an economy about economies about people and it's about capital. And what we know is that the number of births in China has fallen by almost fifty percent in the last six years. Even though they eliminated the one child policy,
the number of births has kept really falling. And we know that Bloomberg reported that the number of millionaires leaving China was kind of high by historical standards and high by global standards. Now that's a funny measure in a lot of ways. But if you look at measures of attempted capital flight from China, they look to be pretty strong.
And if you look.
At measures of capital inflow, what you saw from Sequoia where they were splitting off their China business a week or two ago, is indicative of a lot of things that are happening, whether it's supply of people, investment in new capital.
I think you've got.
Some fundamental bets that aren't running that positive in China, and that's going to be a challenge along with the nearer term issues for the Chinese economy, and so that's something that for them I'm worried about. I think that's something that's going to point towards there being more softness and commodity prices globally than many might have expected, and we've seen a certain amount of that in the oil market.
Let's move over to the European Union, Larry. We got the ECB a rate decision, a hike as expected, and discussion from Christine Legard that the market should expect additional hikes here. When you look at economic conditions over there, and you look at monetary policy here, are they in sync?
You know, I don't think the objective really is to have policies in sync. I think the objective is to have policies appropriate to particular circumstances and then to let exchange rates suggest. And I think the inflation issue is probably a more severe one in terms of Europe.
They haven't moved nearly as.
Far as we have in the face of somewhat greater threats. So I think the European actions were broadly appropriate, and I think they're going to very likely need to continue acting, especially given that I think that monetary policy in the United States is more likely to surprise in terms of tighter rates than it is to surprise in terms of greater ease.
Before I let you go, Larry, I mean, I was just trolling through your Twitter feed here and I thought you tweeted out something related to a pain on the IRS. There's been a lot of discussion here about the funding for the IRS, about the funding and its capability of auditing folks, and more importantly, the return that it gets off of those audits.
Look, we don't have many better investments in government. What this study, which is the most careful one done to date by my colleagues at Harvard, Nathan Hendron and Ben sprung Kaiser, along with government officials, finds is that a dollar invested in increased revenues, increased enforcement with respect to top one percent taxpayers, people who are audited at a rate of only a little more than one percent, people who in some cases file returns and the statute of
limitations runs and the IRS doesn't even notice that a greater investment in those that area of tax audits can pay off twelve dollars at every extra revenue for every dollar.
That is invested.
And it's gotta be in that context penny wise and ton foolish to be underfunding.
The irs.
Larry, always wonderful to talk to you, Larry Summers. There, President emeritith Over at Harvard, former US Treasury Secretary and special contributor.
Here to Wall Street Week.
Coming up here a new wealth management giant on the block. We're going to hear from the Barkley CEO on what it means for his business.
This is Bloomberg.
This is Bloomberg Wall Street with David Western from Bloomberg Radio.
This week, banking saw its biggest merger since the financial crisis, UBS completing its acquisition of Credit Suite, creating a global wealth management powerhouse. We heard from the Barkley ceocs VN Kara Christnan. He sat down with David Weston's talk about what it means for his bank.
Credit Suite and UBS's merger has two important consequences. One for the financial system as a whole. It has stabilized it because a slightly wobbly GCPHI bank is no longer there. It's absorbed into UBS in a very solid transaction.
The second is as UBS.
Develops its business model, it will be for Barclays both an important client for our markets business and a competitor for us in investment banking. But that's the way all large banks are with each other these.
Days, Magett, how do you keep score? I mean, one way, we look at his price to book and your price to book. Right now we're around point four to four. You're lagging behind most of your competitors. Do you pay attention price to book? And if so, how do you get that price to book back up?
So?
I pay a lot of attention to price to book. It's probably the single most important metric for a bank, and a bank's price to book is dependent on one of two things, improving the quality of your assets or improving your profitability. We have excellent assets, so it's our profitability and the scaling of our profitability that we are focused on. So within the UK consumer business and the investment bank, as I said, we are at scale and
we look to continue to perform well. And then the other three businesses are areas where we would like to grow our scale. Our investment bank is about sixty percent of the bank. In a way, it's been very successful and what we would like to do is while keeping its momentum, growing the rest of the bank outside of the investment bank.
How much is the nest mak are the bankers that you have because you have had some exodus to Jeffries to other places, you've remarked about it, Actually what is the issue there? Why are you losing investment bankers? Are you losing the ones you want to lose?
So, first of all, we are losing a few investment bankers, but not that much more than what is normal annual turnover. I mean this is the period in the first few months of the second quarter when people have been paid their bonuses, and there's a little bit of musical chairs. As you know, it's a time order tradition in this industry.
We made a management change in our investment bank. We spend a lot of time last year thinking about what we expected the banking landscape to be over the next decade. So what you've seen is rising interest rates, changing business models, the importance of sectors that are fairly new to the economy, not just technology, but sustainability, mobility, climate, tech. And then there is just the different players and the importance of the players in the banking market. The private equity groups
have been very large. Private credit funds are becoming bigger. They're slightly dis intermediating what banks are doing. And we as we've began with a very American investment bank here in the US based from the Lehman acquisition of Barclays, and we've grown in Europe, we wanted to put more
emphasis in Europe as well. So you bring it all together and you're talking about us thinking about the next generation of leadership of the investment bank, building on our strendths in debt capital markets, but growing in equity, is growing in m and A growing in Europe. And when you do that kind of organizational change, sometimes it has impacts.
Well, you suggested something I was curious about. It is there a strategic shift in emphasis in the investment bank a little bit away from United States and toward Europe. Because, as I recall, your two coheads before were based in the United States. The two coheads now are you based in Europe.
One is in Europe and one is here in the US. So it's not a shift so much as an expansion. It is to try to give more attention to Europe. Relatively speaking, the US remains critically important to US and the US businesses or some things, especially in the debt capital markets, where we are absolutely leading and we want to maintain that position.
Absolutely in debt capital markets. What about equity? Are you shifting toward equity?
We are trying to expand and grow our business in both equities and advisory.
When you look at US expansion, where would you be expanding if you're expanding in I.
Said, I would love to grow our credit card business even more, and then our investment banking and trading businesses. As I said, we are the largest non US bank, but there's always room to increase our market share and our reach.
That does it.
For this episode of Wall Street Week, I'm romain pastic.
We'll see you next week.