Bloomberg Wall Street Week - March 1st, 2024

This is Bloomberg Wall Street Week.

And we may not have an overall recession, we're having a rolling recession.

To Cone rowl looks pretty strongly. It is when it comes to jobs. The financial stories that shape our work.

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, deebro Lair of the Paulson Institute, well then Hubbard of the Columbia Business School.

Bloomberg Wall Street Week with David Weston from Bloomberg Radio show me the money.

To keep the government going, to justify rate cuts, and for former President Trump to post his bond. This is Bloomberg Wall Street Week. I'm David Weston. This week, nad Meggie of Blackstone on the case for investing in real estate despite all you've.

Heard, what we see is a generational investing opportunity while others are looking in the rear view mirror.

And Lindsay Rosner of Golden Sachs on the risks and opportunities in fixed income when yields are high but spreads.

Are tight, We're finding an interesting pocket is actually in structured products.

But we start with the US economy.

Calling a Goldilocks doesn't go far enough for Nobel Laureate Paul.

Krugman, I've been arguing with people who say, you know, this is a Goldilock's.

Economy, and that's wrong. Goldilocks found a parts.

That was neither too hot nor too cold.

But you've got an economy that's hot where you want it to be hot, like in GDP growth, and cold where you want it to be cold.

On inflation, even as sentiment numbers lag well behind.

The levels of sentiment are more like deeper session levels than sort of mildly pessimistic levels. I think a lot of that is unrelated to the economy, and a lot of.

That negative sentiment is because of inflation, with some saying that the way the FED calculates it makes it seem worse than.

It really is.

The Fed's inflation numbers are artificially high. I think if you look at real housing costs and you talk to the people who own collectively hundreds of thousands of residential units across the country, even in the best markets, rents are basically flat. Most people aren't moving from their home because their mortgage is low, so their occupant zy costs are flat. So to say, inflation because of some metric that the FED is using, is six percent, and that's

This week we got the most recent numbers on inflation, the ones the FED pays attention to, and core PCEE came in just about we're expected, showing inflation growing two point four percent year over year. After the most recent numbers, we sat down with San Francisco FED President Mary Daily and asked her how she squares the strong growth and jobs numbers with the relatively weak consumer centim figures.

When you think about how hard it is to work as hard as you can work multiple jobs and not be able to afford things one month to the next, that has a psychological toll that I think we can't underestimate. And as the economy continues to make gains and we bring inflation down, that scar, if you will, will.

Start to heal.

But people need that certainty, and that's why we keep saying we're not done until we're done. You know these good inflation data that we're seeing. That's not price stability too.

Is For people in financial media and on Wall Street, the number one issue is rate cuts.

Yes, that is their number one issue.

But we work for the American people, not necessarily not for markets.

So but explain it to it.

In your summary of economic projections, the last one you have three in for the year. That's a projection. It's not a promise. But some people think you should have more. Maybe some people think you have less. Why are we talking about rade cuts at all? Given the strength of the economy and the economy scems, we're doing just fine with the rate cuts you've put in place.

So we put a projection out about what we think we'll need to do if the economy evolves as we expect it to. So what's the expectation inflation continues to come down gradually the labor market and the economy slow, but don't tip over, and then it would be appropriate as inflation comes down to bring the nominal rate of interest down to make sure we're not how holding on even tighter, because we want to avoid the following. We want to avoid holding on all the way to two percent.

I'm not expecting you to tell us one you're going to cut rates. But let me ask a different question. I'm old enough to remember when Potter student in the Supreme Court said about obersentity, you'll know it when you see it. How will you know it when you see it? That's the time we should start cutting rates.

That's a great question.

So what I look at is what I think of as a dashboard of indicators and The dashboard of indicators has the published data, which everybody focuses on, but those tend to be data points, and you don't want to be data point dependent.

You want to be data dependent, So you have to.

Look underneath the hood of those data and really see what's driving them. And also you have to talk to people. And what I'm looking for right now is for the published data continue to gradually slow and inflation to gradually come down, but for the behavior when I talk to firms, when I talk.

To businesses, etc.

That they're saying, oh, yes, we're not going to continue to raise prices. Oh yes, we see input costs coming down. Workers saying we see jobs, we want to stick.

With our employer. We are not worried about.

Five percent wage growth because we don't feel inflation's going to continue. I'm looking for those things to all come together and form a collage of evidence, if you will, that we are on the path to price stability sustainably.

I'm seeing parts of that.

I see a lot of green shoots, as we like to say, but we're not there yet.

You talked about your dashboard.

Let me ask about one specific figure on your dashboard, and that is inflation.

Numbers.

There's some concern now that maybe inflation's overstated. I've talked to a couple of people who are pretty active in real estate, commercial real estate in recent days who said the owner equivalent ret is overstating inflation. As pactic matter, somebody said, actually recently on this program as much as one point seven to one point eight percent, are you concerned that maybe we're overstating inflation right now?

So that's a really terrific question, and it might help for me to just talk about how I look at the data. So there are multiple inflation indicators, and you can unpack all of them into what's driving them. But we can't just look at those published inflation data to see the story. We have to actually go into communities and look at what's happening with local house price appreciation, what's happening with rental price appreciation, and there you do see the elements of the slowing you.

Would expect to see.

So I actually am growing more confident that housing inflation, shelter inflation, and rental inflation are coming down. The speed at which they come down is still unknown, but I'm not seeing signs that they're picking back up yet.

What is the reason why you have such a concentration of tech in your district. I mean, we tend to think about Silicon Valley as being close to Stanford and Berkeley and some universities. Is it the educational system there, is it some other factors? Is just critical mass?

I think there is a bit of critical mass, and there's a number of research studies that say, you know, these network effects are large. So one of the things we've seen is, and you see this anywhere in the country, really is that people might start in Silicon Valley, they might start in Austin, Texas, they might start in Boston, but then they move, you know, family things take them

As strong as the tech sector is in Mary Daily's region, commercial real estate has been struggling a bit, as it has in some other major urban areas.

I was just in New York recently and it seemed a lot more animated than certainly parts of downtown San Francisco. But again, I think the venture money is here, and

Commercial real estate's a big name for a lot of different segments. So if you're an industrial and warehousing space, you're feeling very good.

About things right now.

If you're in retail space or even multi family housing out in suburban areas, then you're feeling really good.

You're confident.

The place where you're seeing weakness and everybody knows it is in the urban cores of particularly cities like Seattle, Portland, San Francisco. LA is doing a little bit better, but you can find pockets of this in LA and that has to do with the fact that a lot of people are still working from home in those communities. Those big office complexes that were built up for those individuals to work in, they just aren't They're not filled, and

So there'll be some repricing, there'll be.

Some loss of valuations, for sure, but it doesn't seem today to be the kind of disorderly adjustment that you would worry about. It's something that is more orderly, even though it might be certainly going to be painful for those involved, is not going as likely to be as disruptive.

One of the concerns is about regional banks, which tend to be more exposed to really commercial real estate. And then we've heard about that from the FED in Washington, absolutely sure about that.

How do you assess it out there?

You have a little experience with this with Silicon Valley Bank and things like that. Well, how do you assess the risk for the banks, the regional banks?

So I would separate the failure of Silicon Valley Bank, Signature Bank, and First Republic, which really they all three had the same experience, which is depositors who were uninsured ran and that's a different situation than the commercial real estate.

But what they did.

What that situation did is it alerted all investors and depositors to the fact that there's a portfolio underlying the health of a bank, and we should focus on that portfolio.

I think it's useful to remind people too.

We have over forty five hundred banks in the United States and only three failed. So the banking system is safe and sound and resilient, but there will be adjustments. And one of the things that you've heard the Chair of Supervision Michael Barr speak about and other the FDIC chair and occ is really focusing their efforts on ensuring that banks are preparing for those adjustments, So it's certainly there.

Many thanks to Mary Daily, president of the San Francisco Fed. Coming up, we go over the week in the markets with Barbara Reinhardt of VOYE.

That's next on Wall Street Week on Bloomberg.

This is Bloomberg Wall Street Week with David Weston from the Blomberg Radio.

This is all straight week. I'm David Weston.

Most equity markets continue their upward climb this week, with the S and P five hundred closing it another record high of fifty one thirty seven, up just under one percent for the week and still nicely over the median year end number of five thousand from our Bloomberg Elves.

To take us through the week.

Of the markets, we welcome back now with Barbara Reinhardt, Voya Investment Management, CIO of Multi Assets Strategies and Solutions. Great to have you back with his barber. So, so, what's causing this form reporting of the markets? Is it that strong economy Mary Daily.

Just talked about.

Well, I think there's a couple of things, David. Number one is you have to remember the Fed pivot rally that's been in place for the past two months has been pretty powerful, and it's been driven by a lot of multiple expansions. Specifically, since the end of October, multiples have driven about eighty seven percent of the S and P five hundreds run. But you've had a relatively good earning season as well, right, so earning's estimates continue to

Well, that's one of the things I'm interested because where the market was on how many cuts and where it is today is quite different. So then cut it like in half the number of cuts, and yet the markets didn't seem to take that to adversly.

Why is that, Well, the bond market certainly did, right, so you had the long long data. Treasuries had backed up pretty significantly, but the equity market was pretty much able to power through it. And we think one of the reasons that this is the case is that many companies US companies, specifically large cap companies have termed out their debt so they don't have big refinancing risks coming

One of the concerns you hear a lot about is concentration in the equity markets, particularly there's magnificent seven or help many our count it. How concerns should we be about that concentration that is not broad enough in the equity markets.

Well, the concentration is indeed going global. You see it in the US markets, you see it in the international markets as well, specifically in Europe and also in Japan. In the US, though, I think there's a really interesting point.

To look at this. So if you take go back to the dot.

Com period in the early two thousands, right, the top five companies, they had a net income margin of about twenty percent. Right, if you take a look at the top five companies in the S and P five hundred this year, their margin is closer to thirty to thirty one percent. I think you cannot strip out the operational dominance of these large companies and the high free cash

One of the things you hear about is evaluation. I mean, does it make sense to buy more at these valuations because it seems to be a lot is where they say price.

To perfection and price of perfection.

Short there's not many places that you can find great value at this point, along with improving fundamentals. But we do think that the US is going to have another relatively strong year relative to the rest of the world. I know there's a lot of chatter going on in the markets right now about maybe buying Europe, maybe buying the emerging markets. China may do a big fiscal stimulus. We think that the relative valuation and the premium that the US commands is for a relatively good reason. We're

On its back, but Japan is not quite the way it was on its back as before. Is that sort of coming up a little bit? I hear some talk about Japan.

It only took thirty four years for it to recapture it's nineteen eighty nine high. So look, Japan is a really interesting market to US. I think that if you're going to go out to Japan, you have to head your currency back into US dollars.

Japan, because they've been.

Through so much over the past really three decades, they don't the market doesn't tend to respond much to recessions as you do, say in the US or in Europe. But Germany right now is in a middling recession. Emerging markets don't feel particularly good. If I had to be any place, i'd probaly stick in US large caps.

US A large cap, not medium and small.

No US large.

Yeah, it's too hard to pick those stocks in as small as the large.

As a probate, you need a fed rate cutting cycle to really get that smaller cap size of the market.

Going one last quick one, what about terming out debt and fixed income because you might want to lock in some of these rates.

Look, we think that there's a lot of money sitting in money market funds. At this point, everyone says I can get five percent in money market funds, Why do I want to do anything else? Even if the Federal Reserve doesn't cut interest rates this year, five percent won't be there forever. There's a reason that cash is generally not part of an asset allocation portfolio. I would say that the most interesting piece right now to us looks

Robert's always a true to have you. Thank you so much, Barbert Reinhardt a voya.

Commercial real estate has taken something of a bading recently, as higher interest rates and lower occupancy rates at least when it comes to offices have forced a repricing and a fair amount of refinancing as well. Blackstone is one of the leading investors in the asset class and welcome now it's global co head for real estate. He is in the Deem Midgie. Many thanks to Redemed for being here. So the deam give us a sense of where we are in commercial real estate. Have we seen the bottom.

Thank you David for having me on the program. You know, if you take a step back, we've had two really difficult years for commercial real estate and there are really two reasons for that. One of those is a historic increase in rates, which put downward pressure on valuation multiples for real estate. The other thing that's happened is office buildings have faced a lot of pressure and the combination of that has resulted in negative headlines and negative sentiment.

And frankly, those headlines will continue.

To be negative because you're still going to have stories of banks dealing with loans that they made in a different environment at a different moment when rates were lower, sponsors owners who maybe did deals in a different rate environment. But from our perspective, that's all priced into asset values today, and in fact, when we look forward, we see something very different. What we see is a generational investing opportunity, buying opportunity while others are looking.

In the rear view mirror.

And what we believe is happening is that values are bottoming. And the reason for that is number one, interest rates inflation is cooling. Rates have come down from their October hives from last year, and credit formation is once again happening in real estate.

All in, borrowing.

Costs are down two hundred basis points over the last five or six months, and transaction activity is picking back up. The other thing that's happening that I think is under reported is this idea of new construction, which is down thirty to seventy percent in our core sectors versus two years ago, and I think that in the medium term will lead to a sharper recovery than the market likely expect.

In fact, US office represents only one and a half percent.

Of our global portfolio because we were nervous about office. On the flip side, look at data centers, which are our fastest growing asset class two percent vacancy, twenty five percent rent growth, ten times the demand that we saw only five years ago. And the AI revolution is just getting started. So for us, it's all about understanding the difference between the winners and the losers, and doubling down in the places where we see more growth.

We hear from about warehouses with e commerce, and especially now data centers with generative AI and the expectation we're need a lot more data centers. Are people already rushing into those properties that make it less attractive to you?

No, it's interesting.

It's actually quite the opposite, which is to say that in both data centers and warehouses, for example, the fundamentals from a long term perspective are as attractive as they've ever been, Yet there's a shortage of capital pursuing these opportunities. There's a shortage of liquidity in the system. So even as debt capital is coming back, there's still quite a bit less competition today than a couple years ago. So when I think about data centers, for example, this is an asset class.

Where we took a view a few years ago.

That the combination of digitization of the economy, the cloud, artificial intelligence would all result in a greater demand for data centers because all of this data that's being created needs to be housed inside servers, inside data centers. And what we see on the ground is that the major technology companies have announced that they're going to invest one trillion dollars of capital into their digital infrastructure over the

We've grown the installed.

Capacity by sixfold over this very short period of time, and we still think we're in the early innings.

But again, not anyone can do this.

You mentioned Europe earlier.

What opportunity do you see for you Blackstone in real estate in Europe.

Sure, you know.

I think sometimes people are surprised by the fact that our most active region globally has been Europe in light of a sort of nominal backdrop GDP growth that's been quite quite flat. But what it turns out is that sentiment is so negative today and liquidity is so short that you have folks who need to raise cash. And so we've been buying from groups who for whatever reason, are willing to part ways with high quality assets in this moment. But we're buying at prices today that don't

Warehouses throughout Europe.

We've acquired four billion euros of warehouses in only the last twelve months, and what we see is deep value. And as we look forward, we think that that buying opportunity, in buying opportunity in Europe continues because there are very few folks who have the scale that we do who can compete with us across the continent.

The theme it's a real treat to have you on Wall Streeter, thank you for being here.

That is Nade Meggie of.

Blackstone Coming up, we move from investing in real estate to investing in fixed income with Goldman Sachs Asset Managements, a head of multi sector investing, Lindsay Rosner.

Typically when there are geopolitical flares, you see a flight to quality rally, people go into treasuries.

That has not been the case.

That's next down Wall Street Week on Bloomberg.

This is Bloomberg Well Street Week with David Weston from Bloomberg Radio.

This is Wall Street Week. I'm David Weston.

After years of little or no return, fixed income is back as an attractive asset class. To take us through the opportunities and the risks. We welcome Lindsay Rosner, Goldman Sachs Asset Management, head of Multi sector Investing. So, Lindsay, welcome. Is really great to have you on Wall Street Week.

Thank you for having me excited to be here.

So let's talk about those opportunities and risks because they are out there. Where is there risk you can take that you get paid for right now?

In fixed income?

Yes, So it's a really interesting environment right now. Yields are abundant, they abound. However, spreads are tight, so you really need to be thoughtful about where you are taking that risk. And to your question, where are there opportunities ret large US investment grade, very very tight spreads, high yield, pretty tight, tighter than average as well. Where we're finding

So why isn't the market pricing that accurately? Now, what's the market got wrong about that?

Well, I think it's not necessarily that the market got it wrong, But what's happening in the market has changed so dramatically. And where we lived in twenty twenty three and even started in January was a world in which the FED may continue to hike or at least hike and hold at those high interest rate levels. It is very difficult for some of the collateral and some of

Now we had a.

Really consequential CPI print in October which told us, hey, a soft landing is very much on the table and the deflation or disinflation is really taking holds. That has really changed that narrative that you see in the rates market, and for us, we believe that also changes the expected return or the outcome for various parts of structured products.

So pick up on that. I'm curious.

There has been a real shift in the expectations about rad cuts this year, and some people think that's a bad thing because when it was many rate cuts. But I wonder if the reason the markets were pricing in that many rate cuts was actually the anticipation a chance of recession, and as that goes away, it actually reduces the need to cut rates, so.

There is definitely less of a view of recession. Goldman had a fantastic hall last year calling for a softish landing.

I think it was lonely in that camp.

Many were calling for a recession, and in fact we really are getting a soft landing ish situation as that recession has really come off the table. If the Fed doesn't have to do those insurance cuts to protect the economy, instead, they can be more metered and take some time to be sure that inflation is coming down and that growth actually is not reaccelerating too much. So there's kind of this like happy medium kind of channel they're looking for.

Right now, as we sit here, it looks like things are pretty good in the United States. The economy teams are doing pretty well. The labor market's in pretty good shape. You know, the rates have gone up, but they don't seem to be going up too far. What is the risk we should be looking out for that we may not be missing. I think early on in your career you had some experience with that at l Amen.

Yes.

I did have some experience with risks at Lehman Brothers. I was two years out of college. As I like to say, I am not responsible. I feel like I have to put that out there. But I learned a lot. And what I learned and it's never left me, is that you don't necessarily know what the risk will be, but risk will come. And I think this is the idea of the black Swan as well, and they happen with frequency. So it's important, especially when things feel really good,

It's done. It still exists.

So that's something that's really important to remember that can be out there now. What's been interesting in the market is typically when there are geopolitical flares, you see a flight to quality rally, people go into treasuries.

That has not been the case.

So there is this real exuberance in euphoria. And it's exactly then that we like to say, are we thinking about things properly?

Are they properly valued?

So geopolitical would be one thing that I would think about. The other one, I think is just an interesting technical that's developed in the market, which is the private credit world has grown and I'm sure you've spoken a lot on this show with people who are part of private credit, or at least speaking about it. And it is a one point seven trillion dollar right now.

That's really big. We've never seen it this big.

And the interesting dynamic is that money has been committed to it, but not all.

The capital has been called.

So, as you're a private credit investor, you're waiting for your capital to be called to go service deals, where do you put it?

And I think that's a big question.

It's probably not sitting under a pillow or under a mattress somewhere. It's maybe in money markets. It's maybe in US investment grade funds, or maybe it's in public high yields, because that is a yield more analogous to what investors thinks they'll get in private credit.

That makes me wonder about liquidity because if it all got called tomorrow, which is not, but if it all got called tomorrow, they would take a lot of liquidity out of the marketplace. At the same time, you have the FED starting to really run down the balance sheet. But is taking liquidity out? Is there a prospect of really a liquidity issue here?

That is exactly the issue. I mean you said it.

If that capital needs to be called, likely there will be a liquid of something to get that money out the door. And so that is something we're also thinking about. If investors have to sell, where are they going to sell? And with spreads, as I mentioned, so tight, I mean something's like US investment grade is at the tenth percentile, really really tight spreads. Could they stay at this level if there were four sellers or outflows, It'd be hard.

To imagine it could.

And so big picture, when we're thinking about investing our portfolios and I invest, me and the team in public fixed income, we are constructive on risk, but we aren't all in. We're using I would say about forty or fifty percent of our risk budget, meaning we have dry powder for if and when a geopolitical tension happens, flares up, maybe something like private credit and a movement of capital and the need to deploy money happens, or just a

Quid you missed mentioned a couple times private credit, which is huge, and we do talk about a fair amount. Is there a risk there in private country credit because of the name private, That is to say, we don't necessarily know the valuations the underlying assets where they don't mark to market the same way we do in a public market. Is that a risk for the system overall that could redound to all of our dis benefit.

Well, there is less transparency. You're absolutely right. There actually was a paper published by the FED on February twenty third discussing all of this. But certainly, having both the lack of transparency and the lack of liquidity, private credit is locked up. It is not in the world I live in a public fixed income you can typically and in most situations, get liquidity or your money both invested or taken away on any given day. It is not that in private credit. So I think where there is

But there is something there. You're absolutely right.

Linda's a real treat to have you on Wall Street, Reeve. That's Lindsay Rosner of Goldman Sachs. Finally, one more thought. Last weekend, Warren Buffett sent his annual letter to shareholders and even as Berkshire Hathaway approached a market cap of one trillion dollars, he doubled down on his quest for companies that quote can deliver wealth almost beyond measure. Even airs to such a holding, can ugg sometimes live a lifetime of leisure.

That is an ug from Warren Buffett.

We've recently had plenty of examples of wealth beyond measure, even from those not pursuing Warren Buffet Charlie Munger's conservative investment strategy. Much of this untold wealth has come from tech, as Elon Musk as a master over two hundred million dollars, and Jeff Bezos, Mark Zuckerberg, and Bill Gates are all with him in the top five on the Bloomberg Billionaires list.

Coming up fast as the co.

Founder of Nvidia Jensen Wong, who shot up the list of twenty in just a few short months with a net worth of nearly seventy million dollars thanks to his AI company, capturing the imagination of investors everywhere.

Look the godfather of AI in Jensen and Video. I mean, this is really the yearning's heard around the world, the most important earnings in many years, and it chows this AI party. It's just getting started.

But it's not just tech.

The man who owns everything from Vovkli Coo to jivon She to Louis Vitant, Bernard Orna is the second richest person in the world, coming in just under Musks two hundred million dollars.

Benois seventy four years old. He's actually changed the rules recently to make sure he can run the company until he's eighty. But clearly the succession story at LVMH will be in everybody's mind over the next few years.

Here is the rich get richer, some of them a lot richer, and kind of is like Paul Romer warn about the dangers of leaving so many of our fellow citizens behind.

If you look at employment the average adult, the average number of adults who have a job in the United States has gone down, mostly because the people who are high school educated have such miserable prospects that some of them have given up. The rest are staying there in the market.

Other economists like Larry Summers, say that economic growth and innovation doesn't require a tax system that prefers the accumulation of vast amounts of capital.

It defies belief that the young Bill Gates, the young Mark Zuckerberg, the young Steve Jobs would have not done their projects if they thought they would have had to pay a bit higher capital gains taxes, and we would have been without those companies.

And Warren Buffet himself has condemned a tax system where his secretary pays a higher tax rate than he does. But whatever the risks or benefits to unimaginable wealth, there's plenty of evidence that wealth doesn't have to translate in to a life of leisure.

Warren warned about.

The wealthy routinely contribute enormous amounts to charity, led by Bill Gates.

Elon Musk, and our very own Mike.

Bloomberg, each of whom, according to the Chronicle of Philanthropy, gave away more than a billion dollars last year alone, and Warren himself is always at or near.

The top of that list.

This week we got another reminder of how much good can be done with great wealth when we learned of a gift of one billion dollars to the Albert Einstein College of Medicine in the Bronx, which will pay for the tuition for all of its students in perpetuity. It came from a longtime member of the school's faculty and former board chair, doctor Ruth Gottessman.

I'm happy to share with you the starting in August this year, the Albert Einstein College of Medicine will be tuition free.

And where did it come from?

Those companies Warren Buffett and his partner Charlie Munger have been picking through the years. It turns out that doctor Ruth Goddessman is the widow of Sandy Goddessman, who connected with Buffett around the time Warren took over the company

That does it.

For this episode of Wall Street Week, I'm David Weston this is Bloomberg.

See you next week.