Taking different paths.
China slows down as the United States heads toward a soft landing after all,
and Morgan Stanley fires on all cylinders while Goldman reboots.
This is Bloomberg Wall Street Week. I'm David Westin.
This week, contributors Larry Summers of Harvard and Steve Rattner of Willing
Advisors on what generative air could mean for the economy and for investors.
I have a suspicion that A.I. is coming for the cognitive clash.
History is probably still on the side that we will find our way through this
in a positive way. Oh, and Thomas of Boston Properties on
just how bad it could get in commercial real estate.
The sentiment is worse than the reality that we're experiencing.
And Dennis Arfa of Artist Group International about what Taylor Swift's
billion dollar tour means for the business of music.
She's raised the bar. She set a new bar. Global Wall Street spent the week
looking to different directions as China economic numbers once again pointed to a
disappointing year. The private sector is a big part of the
Chinese economy. They're just not spending or investing
like they used to. And Kristalina Georgieva of the IMF
warned about what that could mean for the rest of the world.
China's slowing down, of course, affects Asia, affects the world.
But at the same time, the numbers seem to be getting worse in China.
They continue to point towards strength in the United States, leading Treasury
Secretary Yellen to say a US recession may be off the table.
I don't expect a recession. I think that we're on a good path to
bringing inflation down that stronger than we thought.
US economy helped most of the big banks do better than we expected on their
earnings. Led by Morgan Stanley with CEO James
Gorman chalking the success up to three basic things the combination of really
high conservative capital levels, obvious organic growth within a couple
of core businesses and very high dividend yields.
But things weren't quite as rosy over at Goldman Sachs with reduced profits, in
part because of challenges in the commercial real estate business.
They have about $28 billion in loans in the commercial real estate space, so
that's about 15% of their total loan portfolio.
And CEO David Solomon admitted that the bank is going through something of a
rebuilding period. We are making tough decisions that are
driving the strategic evolution of the firm.
Given both these factors, it should come as no surprise that we're going through
a period of lower results. Through it all, the S&P 500 continued
its surprising march upward, adding another 7/10 of a percent to end the
week at 4536, way above where the Bloomberg LS had been.
Although in fairness, the elves have been taking their median estimate up now
indicating a 4300 S&P by the end of the year.
The Nasdaq didn't do quite as well, giving up just under 6/10 of a percent,
while the yield on the ten year was just about flat hanging out at 3.83, though,
it did dip as low as 3.73 on Wednesday and then flirted with 3.87 late on
Thursday to take us through the week in the markets and what investors should
make of them. We welcome back Sarah Malik.
She's Nuveen chief investment officer and Christina Hooper, INVESCO, chief
global market strategist. So welcome to both of you.
Thanks for being back with us. We start with you as Christina.
What did you make of the week of the markets?
So I was happy to see a continued broadening in markets.
So we didn't see tech do well. But that's okay because there was more
participation from a variety of sectors. So I think in general, this is a fairly
healthy environment, but we should expect that it's not surprising if we
get some kind of pullback. We've had a strong rally this year.
There should be or there should likely be a digestion period over the coming
months. So a broadening of the markets.
Do you see that as well, Sarah? We actually at Bloomberg have a chart
indicating the relationship between SMALLCAPS and the S&P 500, suggesting is
a bigger divergence in 20 years. Are you seeing a broadening of the
markets or not? There's three reasons why the Bulls beat
the Bears again this week. One is broader participation in the is.
Second is inflation, which is continuing to moderate.
And third, of course, is earnings season.
So participation rate for everything outside of those top ten technology
stocks has been very strong since June 1st.
That's a healthy sign for the markets. Moderating inflation with CPI and PPE
coming in under expectations is another positive.
But we are still concerned about wage inflation and core inflation, which
remains above the Fed's target. And let's move to earnings.
We came into this earnings season with a low bar moderate estimate cuts coming in
and expectations for negative year over year earnings growth that set the bar
low and is allowing these banks and other cyclicals to beat earnings.
Now, the story is not the same with tech, where we came with with high
expectation for earnings. And a lot of those companies have shown
that they couldn't quite meet that high hurdle.
That's why we're seeing tech underperform and other areas of the
market outperform. So sorry, we're still early on in the
earnings season so far, so we'll have to find out what actually happens.
But where are you on the S&P 500 by the end of the year?
We still think there's upside as long as employment markets remain strong and the
consumers keep spending. And you tend to see that when people are
comfortable with their jobs, they will keep spending money.
I think the market still has upside if that's the case.
Now, I do acknowledge six months of monetary tightening, including what we
think is one more rate hike next week until and then we're done with rate
hikes for a while. But all of that putting together, as
long as we don't see a recession this year, which we doubt that we will, I
think the markets keeps climbing higher technology.
I wouldn't count that out either. It has a lot of tailwinds like lower
inflation yields that are moderating and artificial intelligence.
I think tech stocks also will continue to move higher once they consolidate.
David, I don't disagree with Sarah. I think after that digestion period that
I talked about and the potential for a modest pullback, what we're likely to
see is some improvement in the S&P 500 by year end.
And I would argue that that is being fueled by what I will call a bumpy
landing. I don't think it's a soft landing, but I
don't think we go into any kind of significant, broad based recession.
We're also going to see history help us. What we know is that when the Fed stops
hiking rates, typically in the one year period, the two years after the end of
rate hikes, that is when we tend to see good performance, strong returns,
usually from the S&P 500. I don't think this is going to be
different this year, especially since this time around.
This kind of downturn is a job, full downturn.
And so we see the consumer continuing to spend, as Sarah mentioned, because they
have jobs and they can spend. And with inflation coming down, that
also helps helps with discretionary spending.
So next week, obviously, Christine, we have the Fed decision.
We all expect 25 basis points. But what about after that?
What is the Fed looking at at this point?
What data is it looking at? Where is it pointing as of now?
Well, if we think about the way Jay Powell tends to look at things, he
breaks down inflation into three categories.
He's got goods, inflation, he's got corn, he's got up services, inflation,
and he's got housing services. Ex housing is what he's focused on.
And in particular wage growth, which is a very significant part of services
inflation. And so that is certainly higher.
It's not where we want to be wage growth, but clearly it's coming down.
And I think he recognizes and hopefully most of the Fed recognizes that there is
a significant lag to monetary policy. So what has been.
Done thus far hasn't shown up yet in the inflation data, or it hasn't largely
shown up in the inflation data, nor has it shown up in the economic data either,
which is why we do have to worry about the risk, however small, that there is a
significant recession. Well, it may not have Shaun of the Day
yet, Sarah, but I wonder if it's showing up in the strength of the dollar right
now. That is to say, anticipation that the
Fed may be getting close to being done because we do see some weakening of the
dollar, do we not? We do.
And our view is that the dollar is likely flat to down.
It has downside from here, which is one of the reasons we like non-U.S.
markets, particularly emerging markets. So if inflation continues to weaken and
the Fed is one and done next week, I think the dollar has downside.
We like emerging markets for a couple of reasons.
Number one, they're further along in their front in their fight against
inflation. And we want to be in the later innings
of this battle. Secondarily, we think that China, which
has struggled from here, will continue to add stimulus to their economy and
China could start to recover. These are both reasons why we think
emerging markets could outperform. And of course, valuations are in their
favor. And that brings me to where can we find
value in markets that are up so significantly year to date, not only
emerging markets, but back to the U.S., where we still feel technology has
upside. But look at other segments like small
caps, where they're at one of the largest gaps at a discount to large caps
and also dividend growers. These provide income and portfolio
protection. Usually during downside, they've
underperformed significantly year to date because a lot of tech and
technology companies don't pay or grow dividends because they would love to
have people like you and Sara on because you're experts in your own right, but
you also talk to clients all the time. What are you hearing from clients about
those opportunities Sarah is talking about to really participate right now in
the marketplace? Well, I think clients certainly have
some feelings of FOMO if they've been sitting on the sidelines.
And I think that is that that is very much the case for a significant portion
of clients. They got out, they got spooked.
Certainly the October lows created some fallout and and they haven't known when
is a good time to get back in. There's some who are worried that we may
retest, Carlos, which I don't believe will be the case.
So certainly they're starting to dip their toe in, be interested and they're
starting with some fixed income opportunities.
Let's face it, all the pain we went through last year has created very
abundant yields in a variety of areas of fixed income.
They're a little more skeptical about areas like emerging markets and just
developed international equities, like European equities.
But I do believe that the more we talk about the cases for them and there
really is a compelling case for Asia M as well as a good case for European
equities. I think they become more comfortable
with that idea and start to dollar cost averaging.
You know, there seems to be a lot of dry powder out there.
The question is when people will get back in.
Thank you so very much. I was so helpful to Sara malik of Nuveen
and also Christina Hooper. She's at INVESCO.
Coming up, Taylor Swift's billion dollar tour and what it means for the business
of music from someone who knows it from the inside.
Denis Arfa, He's founder of AGI. That's coming up next right here on Wall
Street Week. And we are on Bloomberg. This is Wall Street Week.
I'm David Westin. If it is summer, it is time to catch
some live music. And this summer, the biggest live music
that there is out there comes from Taylor Swift, whose era's tour is
expected to bring in $1,000,000,000. We welcome now Denis Arfa.
He's head of global music at IAG. He has represented artists such as Billy
Joel, Metallica, Rod Stewart and many others.
Thanks so much, Dennis, for being with us.
Appreciate it. Thank you.
So we have a sense as as fans, as people who follow Taylor Swift that she's
really big. But for the music business, how big is
she? Well, what she has accomplished with our
tour is unprecedented. Never before have we ever seen an artist
put multiple stadium shows on sale in the same city and blow them all out on
the on sale. That's never happened.
And so she's raised the bar. She set a new bar because now
that somebody can play whatever, I believe it's 51 stadium shows and sell
it out on the on sale is incredible. It's what I'd call Beatle esque.
It's what we would have expected the Beatles to do.
Had they been touring in prime time as today, they would they would kind of we
would expect to have that same kind of result.
So we talked to investors here. Give us a sense of the economics of
this. You referred to the Beatles.
My understanding from reading about it is the economics were different back
then, that a lot of the economics were driven by the records.
The old LPs that we bought, not so much anymore.
When we talk about perhaps $1,000,000,000 in this tour, where does
that money come from? How does a break down?
Well, it breaks down from ticket sales and then the additional monies that come
from ticket sales, platinum tickets, VIP tickets, Merchandising is a as a as a
big ingredient sponsorship. You know, so those are kind of the
things that bring up the the dollar amounts.
But it's ticket sales is the base. Where does recorded music fit in
anymore? Well, you know, today you can have a
record that's number one and or and B, 100,000 or 50,000 units.
25 years ago, you know, many artists were selling 1,000,000 million albums,
million records, you know, on release or, you know, it was it was more common.
So the album sales are diluted and the record sales are diluted in comparison
to what it used to be. I mean, there's artists, whether it's
the Eagles or Billy Joel and 24 million, 27 million, Michael Jackson, the
thriller, those numbers really don't exist.
And if they do, they're really aberrations.
The Adele success, the Taylor Swift success, those are aberrations.
That really wasn't the case 25 years ago.
I have a lot of gold records and platinum records on my wall.
And some of those artists, you don't even know who they are.
And today, you know, if you did 25,000 in the week, you could end up being in
the top ten. So we've heard that she has several
albums right now in the top ten, as it were, right now.
Does that mean it's not quite as important, for example, to her and her
team as all those sold out concert venues?
Well, it doesn't bring in the revenue that it used to bring in to the label
and cetera, because it's not millions of records that are being sold weekly.
It's an amazing again, another amazing accomplishment.
But it is not it does not have the same revenue stream that it did 30 years ago.
What does this mean for the venues? Are they making a lot of money off of
this, as a practical matter? Sure.
The venues are doing a wonderful they make from the food and beverage, the
parking, the ticketing. Oh, yeah.
This is a it's a big business for the venues.
Many venues now, especially the stadiums, are very aggressive in trying
to lure talent. This is a big business.
Taylor Swift in herself is a big business.
Who runs that business? Well, you know, I don't represent
Taylor, but she has, you know, her team. And I think my my my perception is that
Taylor, I think for an artist to really be very successful, I think they have to
be smart and they have to have good instincts and they need to have business
savvy. And I think Taylor probably fits those
qualifications. Is that your experience as you
represent, in fact, that they the good ones, the successful ones, particularly
over a period of time, are pretty savvy about how they manage their business and
their brand? Well, a lot of artists have managers,
but no matter what, there's always somebody usually in a band who's running
the band who the manager has to bring their suggestions to.
But the artists, ultimately. Make their own decisions.
So as much as you know, people are going to be very influential.
But you need to have good instinct and good savvy.
And I think, you know, I think that's an ingredient.
I've seen people lose careers because their heads weren't in the right place
to handle it. One of things we hear a lot about is
selling the catalog, particularly for artists who are more or farther along in
their careers. And Taylor Swift.
Go take us through the economics of that, whether that makes sense, because
I've heard some people say that's not a good idea because you're selling your
first wide and then there's a lot of money sitting out.
There has been recently private equity and others buying catalogs.
I think it's a personal decision. You get into your seventies.
Some people want to take the money now. Some people want to avoid a conflict
with their family and the future of how their music will you know, how they're
going to handle the money, how the catalog will be handled.
So and some people see it as an opportunity.
And greed always wins, you know, So, you know, it's hard to tell somebody, hey,
I'm 72 years old. I can get, you know, 250 million for my
catalog. You can't take it with you.
That seems to be right. So Wall Street Week really addresses
investors. And most investors are not going to be
Taylor Swift or even Taylor Swift wannabes.
But if somebody wants to invest today in the music business, is there a part that
it makes sense to invest? And it was a time, for example, you
probably invest in RCA, invest in Decca or something like that.
Where do you invest today if you want to invest in music?
Well, I mean, the live space, you know, in the space I live in is the number one
space. To me, that's the gold and the golden
goose. I mean, there are artists that can make
as much as 10 million a night, you know, performing, which is which is, you know,
a stupendous number. And so I think, you know, how much room
is available. It's a billionaires game.
There's no doubt It used to be a millionaires game.
And today it's a billionaires game. You have to have deep pockets because
you could also have deep losses, but you can have huge wins.
When you say it's the live space, does that mean the promoters, the people who
put it together? Because there are companies out there,
even some we know the promoters of the venues.
Yes. It's a very attractive business.
It's not for everyone. Again, you have to have deep pockets
because as many as the Taylor Swift's and the Billy Joel's and the Metallica's
and the Bad bunny, the jab, there are a lot that never get to that level either.
And sometimes you're responsible for growing some of these artists.
And sometimes, you know, money wins when it's time, when they when they get to
the to the upper echelon that people buy them.
Yeah. Fascinating.
Is it a good business? Oh, I've had a good time.
I mean, it's a fun business, you know, with
you know, it's got it's like being it's like being an athlete in a way.
You're an athlete is like, is it fun playing baseball?
It has its pressures and it has its moments.
But to play baseball for a living, so to be a participant in music, which was
kind of a fun activity, and I look at it like I go to a lot of parties.
Big concert, but they're big parties. Okay, Dennis, thank you so much for
being on Wall Street week. That is Dennis Arfa.
He's the founder of a G.I.. Coming up, has the strong dollar run its
course? We'll go through where we are and how we
got here. That's next on Wall Street Week on
Bloomberg. Both. This is Wall Street week.
I'm David Westin. The US dollar had been on something of a
tear recently, hitting its peak last September, driven by all those rate
hikes and expectations of more to come. But since then, it's given up over 5%,
with prospects that the Fed may be nearing the end of turning up the heat.
And JPMorgan warned this week it may get worse from here.
But it's still nothing compared to what Louis Rukeyser was looking at on Wall
Street week back in 1993. The American dollar repeatedly dived to
new post-war lows against the Japanese yen.
Fast approaching the once unthinkable level of ¥100 to the dollar.
And one Japanese financier confided to me that the next logical step would be
to revalue. Knocking off the last two zeros so that
¥1 would equal and perhaps even exceed $1.
Never mind that many economists seriously question the wisdom of a
succession of our own governments whooping the yen higher and the dollar
lower while beating on the Japanese to open their markets wider.
To take us through where we are today with the dollar and where we may be
going. We welcome back Bloomberg International
economics and policy correspondent Michael McKee.
Unfortunately for Mr. Rukeyser, the dollar continued its dive
in 1995, reaching the once unthinkable level of 80 yet.
That was back in the days when American consumers seemed to be buying everything
Japan could manufacture. The slide wasn't arrested until Robert
Rubin, who became Treasury secretary. Just as the dollar reached its nadir,
was able to hammer home a new mantra that a strong dollar was in the best
interests of the United States. And since then, as you've often heard,
markets go up and markets go down. By 1998, the yen had weakened so much,
the US was willing to join with other G7 nations to strengthen it.
Why? Well, for one thing, the euphemisms
strong and weak, are quite misleading. There are advantages and disadvantages
to both conditions. If the dollar appreciates, it means
foreign goods are cheaper to buy. That helps hold down inflation, which
means interest rates can stay lower than otherwise necessary.
But it also means American exports cost more overseas if the dollar is
depreciating. Those exports are cheaper and U.S.
companies can sell more. More foreign tourists can afford to
visit. And American assets become more
attractive to foreign buyers. Now, some politicians worry about what
they call a weak dollar. And it has been depreciating.
The dollar rose because the US economy has been much stronger than others and
the Fed's raised US interest rates higher than other central banks.
With the Fed almost done. That's changing against many currencies.
Currency strategist forecasts some dollar weakening, but no crash.
It's still historically strong. A drop may disrupt some carry trades and
other strategies, but it's not necessarily a bad thing for the U.S..
Just sounds bad, David. Thanks to Bloomberg's Michael McKee.
Coming up, we're told the gender of it will change all of our lives in ways we
just can't imagine. We put together a special Wall Street
Week roundtable of Larry Summers and Steve Rattner to give us an early read
on the possible effects of this revolution on macroeconomics and on
investors. There's a substantial chance the air is
going to be much more of a threat to IQ than it is to IQ.
It is the cognitive classes, as you call them, who are most at risk.
This is Wall Street week on Bloomberg. Artificial intelligence.
We may not yet know exactly what it is, even though the technology isn't all
that new. But everyone agrees it's going to be
huge. We don't know yet all of the different
applications that are going to come up or you're seeing that just within the
past six months is a revolution. With Julie Sweet of Accenture saying
just about all executives believe it will change their world.
In fact, 97% of executives in a recent survey that we did have said they
believe that Jenn-air will transform their industry and their company.
Leading those funding startups to shift their investments.
With Pitchbook reporting, VCs last quarter spent less on crypto and digital
assets than at any time since 2020 while investing more in A.I.
than crypto, even at its peak. Hopes are high that I will make our
lives better. We'll also see AI coming more and more
to the forefront, both to help folks stay productive and from a security
perspective. But as with all powerful tools, there
are also risks involved with the head of Google's DeepMind calling for more work
on guardrails. The number one thing that needs to be
done right now is to put more investment into safety research and understanding
what these systems can do and what guardrails that we therefore should
have. And Elon Musk urging the government to
step up to the challenge. I'm in favor of A.I.
regulation because I think advanced AI is a risk to the public.
But chat GPG pioneer Sam Altman warns about the difficulties.
Overregulation is hard, you know. You don't want to do it for sure, but I
think global regulation can help make it safe, leaving us all with some difficult
questions about how to get the best of what artificial intelligence promises
and yet manage the risks. To help us begin to explore some of the
questions we have about, I welcome now our special contributor Larry Summers of
Harvard, and Steve Rattner, chairman and CEO of Willett Advisors, which manages
the personal and philanthropic assets of our founder and majority shareholder,
Michael Bloomberg. So welcome to back to both of you.
Steve, let me start with you, because you wrote a piece in The New York Times
that a lot of thought was quite thoughtful about this, making the point
in part, this is not a new thing. You like the 17th century.
There are questions that looms. Give us your sense about the opportunity
to offices and some of the resistance to it.
Look, as I wrote in the piece, I think that that economic growth and prosperity
and better living standards for everybody in the world, no matter who
they are, where they are, depends on increasing productivity, efficiency at
work. And in my mind, I it may be it may be a
quantum leap, but we don't know that yet.
But it's part of a continuum going back to even the,
you know, the 13th century. I wrote about also in that piece briefly
of of improvements and productivity and getting those into the hands of the
workers so that people can have a higher standard of living.
And as part of that, you have what Schumpeter famously called creative
destruction. You have some jobs that are lost and
other jobs that are gained. We had 450,000 telephone operators in
this country in the 1950s. You tell me the last time you're talking
to a telephone operator, we had close to 2 million people, I assume most of them
women, classified as typists. That's not even a job category anymore
in the BLS. This is all of some things, things that
have happened. And alternatively, we've developed
millions of jobs in technology industries and finance and other sectors
that have actually been helped by the development of technology.
So a Steve, of course, is an investor. Larry, you are a macro economist as a
macro economist. Is Steve on the right trail about
restoring the growth of productivity, which has dropped off, as he pointed out
in his piece? It really has dropped off significantly.
Steve's right to be for technological progress and to recognize that overall
it's through change and evolution, mediated through markets that life has
gotten so much better. And it's all right.
Just one thing. In the 1960s, 96% of American American
men, 25 to 54 were working and only 4% were not.
Today, it's more like 14%. Are there things we should be doing
right now that we failed to do with automation and with globalization?
To think about those distributional effects, potentially to make sure that
we bring more people along with the progress?
Absolutely. Look, I don't think actually, Larry, and
I really disagree. I understand the problem he's talking
about. It actually relates to automation a lot
and and also to trade and where I think, frankly, the economists, Larry, may jump
down my throat for this, but I think the economists got it wrong on trade, which
is similar in a lot of respects to automation or other technological
improvements in terms of its impact is that trade had huge macroeconomic
benefits for the country. We missed the macroeconomic impacts.
Those workers in Flint or Detroit or in Ohio, some of their jobs were actually
just read something the other day, you know, rough justice, maybe half their
jobs were lost to automation, the other half were lost to trade.
And we didn't we had this little trade adjustment assistance program, which
basically did nothing. And we have not really done a great job
as a society, both in getting the benefits of technology into the hands of
everybody. There's been this lack of wage growth
commensurate with the productivity growth over a fairly long period of time
now, as well as individuals and finding them things to do where they can be more
productive and happier. Lori, what about it?
Did the economists and yes, the policymaker in Washington, it sort of
let us all down with respect to both automation and trade.
We should have done more to cushion all the various changes associated with
trade. I agree with that.
I'm not sure I agree with Steve's quantification.
And I think that a full calculus on trade has to recognize a large number of
benefits in terms of jobs created and in terms of real wages enhanced.
But that brings me to the other point I wanted to make about A.I., And I don't
know for sure about this, but if my suspicion is right, it's very big.
Most of the technological changes we've had before came for working people doing
relatively routine things. They were automatic ways of picking
cotton that came from agricultural workers.
They were things that replaced typists or telephone operators, as Steve
mentioned. I have a suspicion that A.I.
is coming for the cognitive clash, and part of the reason you're seeing such
hysteria now is that it's the people who.
To write articles and their friends, the people like the three of us who are more
at risk from a competition. That has been the case with most of the
technological innovations in the past. I would say that there's a substantial
chance the AI is going to be much more of a threat to IQ than it is to IQ.
It will be a very long time before A.I. will replace many of the kinds of direct
physical work. Think of working in a garden of, for
example. So I have a suspicion that the
distributional consequences of A.I. for the bosses versus the boss may be
very different than the distributional consequences of many of the other
technological revolutions. And that affects how bosses are going to
think about it in profound ways. They're going to be much more scared and
on the other side may be more benign from the point of view of some of those
who've been traditionally left behind. So, Larry, I agree.
I agree with that. I think it is the cognitive classes, as
you call them, who are most at risk. I might make it.
I'm not sure I would think about it as bosses and boss and I'll use it, but I
will use this historical analogy to give us a little bit of hope.
When I started on Wall Street as a young investment banker, I had nothing.
I had an early HP 12 C calculator in my hand.
We had no we had no Excel. We had no computers to speak of.
We had no nothing. All of our spreadsheets were done by
hand. They took a really long time.
They had to then be typed up or put the typists aside.
And then if I wanted to make a change, I had to start all over again.
And now that can all be done with a click of a mouse with an Excel program
by anybody with a small personal computer.
And yet the number of people doing what I did 40 years ago when I started on
Wall Street has multiplied since then. And so it became a productivity
enhancing tool, not a job destructing destructive tool.
I'm perfectly prepared to believe that this may come out a different way.
All I'm saying is I don't think we know yet, and I think history is probably
still on the side that we will find our way through this in a positive way.
Laurie, I want to pick up on the bosses versus boss, whether it was the right
terms or not. And I think a related subject, I think
if President Biden or some of his senior administration were here listening to
this discussion, they'd say one of the reasons why the labor force is not
participate fully in some of the Productivity Games so far is because a
concentration in industry. This week we heard some of the outlines
proposed regulation on mergers and acquisitions, which is part of a larger
set of issues that the Biden administration has pursued.
And I suppose the leader of that has been when economies are perceived to be
at the FTC. What is your perception of where the
administration is going on mergers and acquisitions?
I guess I would say these things. I do not think it is remotely plausible
to ascribe lower real wages or more men not working to anything about monopoly
power. I think that traditional thinking has
had it about right in this area in believing that the standard for thinking
about merger policy, for thinking about the organization of industries is lower
prices for consumers. Sometimes that happens by breaking up
monopolies. Sometimes that happens by really
efficient firms expanding by bringing lower prices, as with Wal Mart or as
with Amazon. And I think these guidelines, by moving
away from an emphasis on lower prices for consumers to broader abstractions,
are a substantial risk. And you've seen a number of actions by
the FTC that have been rejected, rejected decisively, almost scornfully
by courts, in some cases rejected decisively by judges who were appointed
by President Biden or other Democrats. And I wish that this stepping back and
offering merger guidelines had been and taken as an opportunity to rationalize
the policy and step back rather than to double down on what.
Sometimes seems almost like a war on business.
So based on what's been put out for public comment and a very rapid study
I've been able to do so far. I have to say I'm a bit disappointed.
So I agree with you completely about the way antitrust policy has been pursued
during this administration, particularly by the FTC, particularly by Lina Khan.
The idea of going after a $400 million proposed acquisition by Meta, Facebook,
whatever you want to call it, know in an area augmented reality that doesn't even
exist yet is really it's just it just seems beyond credibility credulous.
But let me put this also in a little bit of historical perspective, which is that
I think that really since the early nineties, probably we've had a very,
very benign antitrust environment. And I in my days as investment banker in
the nineties, the 2000 companies would come in every day and basically say,
Tell me how I can buy my competitor, not meaning from an antitrust regulatory
point of view, but from point of view of less, how do we get this deal done?
And that's what everybody wanted to do. And you have seen, I think, a lot of
consolidation horizontally in the business world.
And I think that when you look today at how corporate profits have done through
Covid, through this inflation, through supply chain and how well they've held
up, and you listen to these analysts calls with business, they clearly have a
lot of pricing power. And that, I think, suggests to me that
at least some sectors is an insufficiency of competition.
So I think there's a middle ground here somewhere between the way we approached
this in the nineties and the 2000s versus the crazy policies that are being
pursued by the FTC today. And it'll be great to have the two of
you back to try to find that middle ground.
But for now, many thanks to Larry Summers of Harvard and Steve Rattner of
Willett Advisors. Coming up.
Everywhere we turn, we hear about problems with commercial real estate.
We'll talk with the head of the largest publicly traded developer of high end
office space in the country. Owen Thomas of VIX Pete.
Remote work is like a benefit. It's like compensation.
You have to meet the market. That's next on Wall Street Week on
Bloomberg. This is Wall Street Week.
I'm David Westin. This week brought another round of bad
news and commercial real estate from Goldman Sachs, saying a $485 million hit
from the property market. The news of yet another big mortgage
default, this one for $212 million. And the Atlanta office tower owned by
Starwood Capital. To put it all in a broader perspective,
the good and maybe even the not so good. Welcome back.
Now, Owen Thomas. He's chairman and CEO of BXP, that is
the largest publicly traded developer of high end office space in the country.
Owen, always great to have you with us, as I say.
And, you know, there's so much bad news in commercial real estate.
Put it in a larger perspective exactly where we are at this point.
What are you seeing in your business specifically in terms of occupancy
rates? Are people really coming to the office
yet? Yeah.
Well, David, nice to be with you. I would say in summary that the
sentiment is worse than the reality that we're experiencing.
So let's talk a little bit about usage of buildings.
There is a steady stream of corporate announcements going on right now of
companies returning to the office like Amazon did on May 1st.
Companies that were in the office three days a week, moving to four days, even
some companies saying we're going to evaluate all the all new employees based
on your office attendance at year end. So you're seeing more and more of this.
I think CEOs all want more in-person work.
They report they recognize that remote work is like a benefit.
It's like compensation. You have to meet the market, but it
comes with a real cost of productivity and and culture.
Are you seeing it in your buildings, though, and actually people showing up?
Because we have things like Castle Card reporting, it's still like 50% in
Manhattan. Are you seeing it move up?
So the building, we don't use Castle systems and a lot of the landlords that
we compete with don't. So I know the industry uses their data,
but so I'll tell you what we're experiencing.
So in New York, in Boston, Tuesday, Wednesday, Thursday is more or less at
pre-pandemic attendance. I think Monday's about 60% of that peak
and Fridays, probably less than 30% of that peak.
The West Coast markets where we operate, Seattle, San Francisco and L.A., they're
probably 50% of all those numbers. So well behind.
What about repurposing some of these office buildings?
Because we've heard a lot about that and whether for residential or I think
you've been big in life sciences, actually, haven't you?
Yes. How is that going?
Is is there too much of a move in the life sciences?
Are you seeing a glut? Yeah.
Well, let me talk about the repurposing. We definitely have repurposed several
office buildings successfully into life science, and we've done it very
carefully in some of the premier life science markets in the country.
But on the residential conversions which you asked about, this is something that
theoretically makes a tremendous amount of sense.
We need more housing in our cities, we need less obsolescent office buildings,
we need more real estate tax revenues, we need more activity on the street.
And when you repurpose an asset, the carbon footprint of doing that is much
lower than demolishing and reconstructing.
However, there there are obstacles to doing all these things regulatory zoning
requirements, residential zoning versus commercial zoning, physical
requirements. The building has to be empty.
The depth of the buildings residential needs more light and air than office,
and many office buildings have deep floor plates and then financial.
You know, to do a successful conversion, the office building has to be
contributed at something pretty close to land value.
So there it makes a tremendous amount of sense.
There are a lot of obstacles, but I would think about it this way, David.
There are 400 million square feet of office space in New York.
If 1 to 2% was converted, that's 4 to 8 million square feet of new housing.
And it's also probably, you know, 5 to 10% of the vacant office buildings.
So not a lot as a percent has to happen for it to be meaningful.
You raised the geography question because you particularly are obviously
in Boston, but also New York, San Francisco, some of the cities have been
hit a little harder when it comes to residential I'm sorry, office space.
Are you thinking about going to other places?
We hear a lot about Austin, We hear about Miami, we hear about Florida.
Are you thinking about expanding into other geographic areas?
Yeah, well, we're very happy with our footprint.
We believe in having real estate where they're barriers to new supply and also
knowledge clusters of workers. And we think our cities have those.
There's clearly been some migration to the Sun Belt and there's been strong
growth in the Sunbelt markets, But there's also been a lot of development.
If you look at the vacancy rates in many of the Sunbelt cities, they've gone up
very significantly over the last year to 18 months and in many cases are above
the vacancy rates in the cities where we operate.
Oh, when you're in a particular position, which is a publicly traded
company, the largest publicly traded company when it comes to high end office
buildings, which means you have a lot of resources, access to resources, and you
have them. There's a mark to market every single
day in a sense, that's affected your stock releases.
As you look at it right now, do you see opportunities?
I mean, are there bargains out? They're because, in fact, there are
problems getting financing. The prices are coming down.
Yeah, I think there are a we've so, for example, we launched at the end of last
year a billion and a half dollars of life science development in East
Cambridge. We're building a 600 plus thousand
square foot lab building for AstraZeneca at attractive yields to our
shareholders. We're also converting another
significant office building in East Cambridge to life science for the Broad
Institute, also at attractive yields. So those are the types of things that
we've been investing in. But I think as
this market evolves and there's more pricing discovery and a reset, I do
think it will create great opportunities for a well-capitalized player like BXP.
Thank you so much. Always a treat to have you with us.
That's Owen Thomas of XP. Coming up, turning old into gold.
Whether it's politicians or executives or yes, movie stars, including a certain
83 year old leading lady. That's next on a Wall Street week on
Bloomberg. Finally, one more thought to everything.
There is a season, but sometimes that season can last pretty long.
It's the summer of everything old being new again.
We're a year away from the true start to the next presidential race, and a lot of
the focus is already on the age of the two frontrunners.
As former President Trump, a spry 77 year old, looks to reclaim the White
House from the more senior president Biden clocking in at a mature 80.
But then again, Senate Minority Leader Mitch McConnell beats them both at 81
and some of those after. Mr.
Biden's job aren't too shy about showing off how useful and vigorous they are.
From robert kennedy jr. Doing bare chested pushups for the
camera at age 69. That's a fit boy to the baby in the
group. 45 year old miami mayor francis suarez
demonstrating he can run all over town in a tight t shirt and shorts.
I'm going to run for president. It's not just Washington where the
mature are showing their staying power. Bob Iger retired as CEO of Disney at age
70 after 15 years running the company, only to come back for return performance
with a contract that now will keep him in charge until he's at least 75.
This isn't really a huge surprise, right, that his contract has been
renewed. At this point, it's incredibly enticing,
I think, and very tempting to keep him on board.
But Bob is just the right age to deal with some of the leading men driving the
box office this summer from Tom Cruise at 60 starring in yet another Mission
Impossible. I don't accept that.
The Arnold Schwarzenegger at 75 Saving the World in FUBAR.
I'm retired to Harrison Ford, returning as Indiana Jones at age 84.
And I've been looking for this my life. But wait, there's more.
The star of what may well be the hit movie of the summer tops them all at the
age of 83. Yes, 83 years old.
And she is a leading lady. I'm talking, of course, about the one
and only Barbie. You might say no, Barbie is only 19.
Well, that is the age she was when she first appeared.
My Barbie doll. Really?
But that was back in 1959. Since then, she's come back again and
again, including for the old millennium, when she made a guest appearance on Wall
Street Week with Louis Rukeyser for Christmas.
Back in 2000, Barbie is staging another of her periodic comebacks.
Mattel's Millennium Princess version is a hot seller this season at $40.
And now Barbie is back, bigger than ever in her own blockbuster movie as a
thoroughly mature 83 year old, something that even Barbie herself may not want to
think too hard about. The best day ever.
It is the best day ever. So was yesterday, and so is tomorrow.
And every day from now until forever. You have everything about dying.
Here's to eternal use. That does it for this episode of Wall
Street Week. I'm David Westin.
This is Bloomberg. See you next week.
