Wall Street Week - Full Show 06/16/2023

timing is everything for the FED for the

banking sector and for asset managers

this is Bloomberg Wall Street week I'm

Romaine Bostic and for David Weston

this week Barkley CEO C.S Ben

katakrishnan 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 feds fight to curb inflation

is working I found the fed's action a

little bit confusing and CBRE CEO Bob

salentek on how interest rates are

reshaping America's biggest cities San

Francisco that's probably the toughest

story out there in Office Buildings

[Music]

thank you

foreign

there was a big sigh of relief on

Tuesday from Wall Street to Main Street

to the halls of the Federal Reserve the

Consumer Price Index released a rise of

just four percent year over year that's

the smallest gain going back to March of

2021 and it suggests that the lagged

effects of a 15-month rate tightening

cycle are lagged no more I have been

consistently in the camp that we would

see some slowing in growth but 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 2020. normalizing Supply

chains and a broader 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 10 straight

times though fomc decision to hold fire

it was unanimous and you can call it a

pause if you want but don't you dare

called it a skip I think that the skip I

shouldn't call this skip the the

decision makes sense pal making it clear

that the U.S economy isn't out of the

woods yet and more rate hikes could come

I still think and my my colleagues agree

that that the risks to inflation are to

the upside still less than the 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 of hikes the ECB along with

other major central banks they're

finally at the final stages in their

Onslaught against the global inflation

shock we are determined to reach our

Target in a timely manner and to

continue to apply the principles that we

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

Credit Suisse it's the biggest global

banking merger since the 2008 financial

crisis and time finally may be up for

Chris minotti ousted from his

london-based investment firm amid 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 from that business

and back here in the U.S stocks scoring

their best week since March the S P 500

climbing more than two percent and the

NASDAQ 100 jumping by almost four that

move higher in the U.S matched by moves

overseas Japanese stocks pushing to

their highest since 1990 the German tax

closing at a record high in 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 it's an all-desai

Franklin Templeton fix income CIO and

Bloomberg managing editor Tracy Alloway

the co-host of the very popular Odd Lots

podcast and I'll 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 power got a little bit of the short

end of the state this time around I've

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 were 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 cause

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 uh from the RB the Bank

of Canada from The Reserve Bank of

Australia both in recent weeks have come

back for a recent month have come back

from causes and so I think the market is

beginning to be more realistic about

what the fed's Outlook is here how do

you feel about that Tracy we say a pause

is just a pause and of course even Jay

pal had that Freudian skip during the

press conference there is there some

distinction that we should be paying

attention to here yeah

Freudian skip was that a a Freudian slip

of your own there Romaine or just a

really good talking on that all day long

that's excellent that I really

appreciate that no I mean I I agree with

cinult to some extent I think the

confusion arises because you had a pause

which is not a hike and then if you

looked at the longer term Dot Plot it

was clearly indicating tighter policy so

people are trying to reconcile those two

messages that said you know the

linguistic debate over whether it was a

hawkish pause or a skip I tend to lean

towards a skip I was reading uh funnily

enough Tim Dewey um before I came on the

show and he was making the case that he

thought the FED had made up its mind

basically back in May to pause at this

particular meeting of course they're not

allowed to say so each meeting is

supposed to be you know an independent

decision data dependent but that said if

you look at the data that's coming out

between now and July there isn't a ton

of it I think Nick tamaros from The Wall

Street Journal actually asked pal this

question and so the conspiracy theory

now is that while maybe the decision for

a hike in July has already been made

well so now pick up on that here I love

a good conspiracy theory I am curious I

mean it's one thing to say we don't want

to surprise the market if this is how

they guided great follow through with

that but was the data the data that

they're looking at the same data that

I'm sure you see and that Tracy sees was

that supportive of a pause

I think you're looking at the wrong data

remain you should be looking at core

core is at 5.3 core CPI has essentially

not much in over a year if you pull that

chart up I'll think I think you will see

what the FED is looking at and right now

core is higher than headline and I think

this is going to remain the case for a

major part of the remainder of the year

that core CPI which is something we've

been focused on now for a couple of

years is very very sticky and it is

following the trend that we're seeing

from wages which are still growing at

roughly core so if I look at those two

factors together I think the FED has

every reason to continue to hike and

after hiking any more interesting thing

is that they expect to cut a reasonable

amount of Market expects them to cut

even more I'm not sure that we're going

to get as much by way of cuts and what I

would consider the resting point

for fed funds after we've hiked order to

550 call it to 575. eventually the FED

will cut and I think it will cut quite

substantially because it's going to take

us back because it will presumably cut

because it needs to stimulate a slowing

economy it might take us back to 2.25

but

uh after that I don't think that's where

the FED stays that's where I disagree

with the FED right now I am and I think

there is some disagreement in the market

as well Tracy we talk about the big

rally that we saw in equities the moves

that we saw in the fixed income space

seem to suggest a little bit more I

think along the lines of what cenal is

thinking herself

yeah I mean I I gotta say

to Mystic

saw a lot of optimism on Wall Street

today that was reflected in things like

Risk assets things like equities and it

makes some sense I mean to the fed's

credit just last year Powell was talking

about how it would be extremely

difficult to get inflation down to

Target without below Trend growth and

yet here we are in 2023 it does seem

like inflation is beginning to reduce

although to cinahl's point it's still

double the two percent Target of course

however it's happening while growth is

still relatively strong we haven't seen

a substantial increase in wages we

certainly haven't seen a rise a

significant rise in unemployment and

people are starting to talk about that

proverbial soft Landing now how you

define it does the FED have to get back

to two percent in order to have achieved

officially the soft Landing I think

that's open to debate but I am seeing a

lot of people talking about up side

risks at the moment all right we're just

getting this conversation started I do

want to get both of your thoughts here

on the what actually is driving uh some

of the sentiments some of that optimism

out there we're in conversation right

now with sonal Desai over at Franklin

Templeton and Tracy Alloway the co-host

of the Odd Lot podcast we're going to

talk about survival of the fittest in

the AI space that's coming up next on

Wall Street week on Bloomberg

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we think it will create some of the most

valuable companies the Market's ever

seen I think it's certainly driven

companies like Cisco given them the life

that they've had it's obviously also

spectacularly volatile the market is

pulled back in this sector since it came

public since it began in 1995 it's

pulled back 30 to 50 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

2000 when he appeared with Louis

ruckheiser on Wall Street week internet

stocks were all the raged in and to a

certain extent they're the rage now it's

all about AI artificial intelligence and

that has been the dominant part of the

conversation surrounding Equity markets

so now Desai over at Franklin Temple

engine still with us along with

Bloomberg's Tracy Alloway and Tracy I

want to start with you here because

there are a lot of people trying to look

for some parallels between the AI frenzy

that we're seeing today and the.com

frenzy if you will that we saw back in

the late 90s and early 2000s are you

finding that parallel

yeah I mean there is no doubt that we

are going to see Shades of.com in some

of some of the enthusiasm around AI I

mean I was looking at nvidia's um

valuation before I came on here I think

it's something like 42 price to sales at

the moment which is

um a lot and we have seen some companies

already start to Pivot towards AI so of

course a lot of the crypto players um

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 um Mark

barabow pgms Global Equity head this

week and he was talking about the

difference is a lot of the AI winners so

far are incumbent companies they're

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 2020 2021

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 it's an all 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 the decade of

Mobility that you know if you look at

the 2010 to 2020 uh I'm not an equity

specialist I always make that case but I

do 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 pick

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 in technology more broadly AI

ha AI is very much the flavor of the

month so that is the element which goes

back to what we were talking about

the.com to some extent I'd say

absolutely and Tracy I mean you pick up

bring up a good point here about kind of

these established players in videos

Microsoft's alphabets proven companies

with relatively solid balance sheets

here but there's a certain some froth in

this as well a sort of a lot of second

and third tier companies that have uh

mentioned AI your colleague Joe why

isn't all 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 in existence I

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

um in the market so uh there's something

called the bubble portfolio that gam uh

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 30

percent so far this year which is about

double the s 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 the company goes

from you know 10 bucks to 20 bucks

that's doubling up performance but it's

still relatively low compared to Prior

history yeah that's actually a great uh

index or I guess a sort of hypothetical

index out there to track here thanks to

both of you a great conversation Tracy

Alloway she's managing uh editor here at

Bloomberg and co-host of the odd Lots

podcast and sonal decide Franklin

Templeton CIO for fixed income coming up

here A New Wealth Management Giant on

the Block we're going to hear from the

Barclays CEO on what it means for his

business this is Bloomberg

foreign

[Music]

this week banking saw its biggest merger

since the financial crisis UBS

completing its acquisition of Credit

Suisse creating a global wealth

management Powerhouse we heard from the

Barkley CEO C.S Ben Carter Christian he

sat down with David Weston to talk about

what it means for his Bank Credit Suisse

and ubs's merger has two important

consequences one for the financial

system as a whole it has stabilized it

because a slightly wobbly gcp 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 like how do

you keep score I mean one way we look at

it is Price to Book and your price to

book right now is somewhere around 0.44

you're lagging behind most of your

competitors do you pay attention to

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 the book it's

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're 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 60 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 does this make are the bankers

that you have because you have had some

Exodus to Jeffries to other places and

you've remarked about it actually what

is the issue there why are you losing

investment bankies are you losing the

ones you want to lose so first of all

we're 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 owner tradition in this industry uh

we made a management change in our

investment Bank we spent 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

disintermediating what banks are doing

and we as we 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 strengths and debt

Capital markets but growing in equity is

growing in m a growing in Europe and

when you do that kind of organizational

change sometimes it has impacts you

suggested something I was curious about

is is there a strategic shift in

emphasis in the Investment Bank a little

bit away from the United States and

towards Europe because as I recall your

two co-heads before were based in the

United States the two co-heads now are

innovation in Europe one is in Europe

and one is here in the US so the this

it's not a shift so much as an expansion

it is to try to give more attention to

Europe relatively speaking the U.S

remains critically important to us and

the U.S businesses are some things

especially in the debt Capital markets

where we are absolutely leading and we

want to maintain that position

absolutely looting 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

U.S expansion where would you be

expanding if you're expanding the United

States I would love to grow a 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

there's been a little bit of the shaking

up if I could put it that way in the U.S

banking system with some of the regional

Banks starting with Silicon Valley Bank

what do you make of that situation more

broadly do you expect more bank failures

in the United States

I'm not sure I expect failures what I

expect is concerns and Banks cleaning up

their act if you like so Banks which

have asset liability problems will go

get ahead of it they will try to sell

assets I think the net effect of it will

be a curtailment or diminishment of

lending especially in Middle America

where the regional banks have a

footprint are you tightening your credit

standards right now

so the big Banks I think all tightened

our wholesale credit standards through

the leverage Finance business last year

and uh you know there were many large

loans some didn't get placed and so the

the wholesale banks with Rising rates

tighten their credit standards the

retail standards we have tightened it

but they are marginally tighter than

they were say during covet I think what

you're going to see in the regional

Banks is a tightening of credit

standards in areas like commercial real

estate small business lending the things

that they do so you may said the magic

words commercial real estate how exposed

is Barclay commercial real estate first

of all not very much we we do some

direct lending in the UK but it's small

and in the US we mostly Finance vehicles

or portfolios of commercial real estate

assets but we you know have adequate

protection in in terms of first loss

protections and loan to values there are

some fairly substantial assets that

probably have not been marked to market

yet particularly in the commercial real

estate area what is the likely effective

there to be on the banking system in the

United States but also more broadly in

the economy so I think two things will

happen as they get marked down some

lenders and some investors will be

exposed hopefully it's Equity investors

and people who invest in them through

hedge funds or private Equity vehicles

then there will be Banks who might get

exposed and then ultimately I think as

an all real estate Cycles there will be

a surplus of Supply meaning empty

buildings and then over time that will

adjust itself you know how to manage

risk control risk we've seen a fair

amount of risk recently coming from odd

places I mean Jeffrey Epstein with

respect to private uh wealth we've seen

it just with Chrisman O'Day over in the

UK with prime brokerage you're pretty

big in Prime brokerage we saw before

with arcados how do you manage for very

very large clients like that who I'll

put it go off the rails yeah

David it's a very difficult question

it's a very important question at the

heart of our business we are dealing

with people

and assessing the people know your

client as they say is really important

I think on the one hand we like to see

successful people and work with them we

also believe in generally we believe in

the goodness of human character and we

believe in human Redemption on the other

hand you've got to be fairly clinical

about the reputational risks some of

these people pose to our businesses so I

think it's important to assess your

client when you onboard them and assess

them periodically and be very hard-nosed

if there's bad news well what about the

technology last question AI we hear a

lot about generative AI what does that

hold out for Barclays as potential

opportunities

tremendous potential in how you service

your clients how you produce documents

and and how you sort of manage the

business equally we are a large

regulated institution with very strict

controls over information so we've got

to make sure we use it in the right way

that was Barclay CEO C Aspen

karakrishnan

coming up whether or not bosses want

their employees back in the office the

economy certainly does CBRE CEO Bob

selectic 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

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commercial real estate Bloomberg

estimates it to be a 20 trillion dollar

market one that benefited from years of

low interest rates but all that changed

when the FED hiked rates at record speed

rates go up Financial conditions tighten

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 35 percent hitting

valuations hard we're seeing B Office

Buildings that had a 600 million dollar

valuation or a 300 billion dollar

valuation being sold for maybe 50 or 60.

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 lending I think you're going

to see more bank failures likely in the

small tank 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

though banking experts like Raj 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 tenants today are

looking to find Class A office buildings

that are new that embody all the latest

in technology and where people want to

work it's really the class B buildings

where the Carnage will take place but

any way you cut it as banking goes

sogo's commercial real estate the key to

commercial real estate today though will

be banking if the industry can't get

construction loan real estate will have

a recession

[Music]

and to take us into the world of

commercial real estate where it is now

where it's going welcome now someone who

knows it terribly well he's Bob silente

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

about commercial real estate right now

and not all of it good a lot of focus 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 multi-family

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

in 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 4 30 to 40 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

store the headlines the headline

grabbing stories of an 80 vacant office

building that's an anecdote that's not a

proxy for what's going on in commercial

real estate so when you talk about the

newer buildings we're learning to call

them A's or a pluses as opposed to B's

and C's yes but if you take a look at

Commercial Real Estate the office

portion of it right now now how much of

its a how much would be how much would C

would you say in general yeah well I

think if you look at true a or a plus

it's maybe a quarter of the uh 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

multi-family all that 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 to 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 other others whether it is

Miami for example some parts of Texas

are doing pretty well

well you mentioned San Francisco first

so that's that's probably the toughest

story out there in Office Buildings uh

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 head count now are going

to go the other direction for sure in

the long run we know that's going to

happen in that part of what's going on

is going to come back and then of course

you do have the cyclical thing with the

uh 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

LED 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 are they getting

that done I mean we just this week

passed the milestone in in New York of

50 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

um well New York is a good example of

quite a bit of the spectrum of what's

going on so in 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 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 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 80 percent of the space maybe as

little as 75 percent of the space as

they previously had as you mentioned

there's the financing aspect as well we

read a lot right now about maybe some

arrears building up maybe some concern

about needing to refinance this year

what is the situation in financing of

Office Buildings right now what are the

risks out there

uh well we've looked at that everywhere

you can imagine I want to start with

banks so you've heard a lot we've all

heard a lot because of some of the bank

challenges we had a couple months ago

that commercial real estate was going to

put a lot of pressure on Banks and

Office Buildings in particular we're

going to put a lot of pressure on banks

the facts are about about one and a half

one and a half percent

of Bank assets or in office building

loans one and a half percent and that's

all office building loans all Office

Buildings loans now we think that there

there is going to be some Jeopardy among

that portfolio of loans but we think

it's going to be like 20 25 percent of

those loans so take 25 percent of one

and a half percent and you can see that

the banks aren't going to have a really

big problem coming from commercial real

estate they will have some problems they

will have some loans that need to be

restructured they'll have some

foreclosures we know that some of that's

going on already but again this headline

this anecdotal driven

sensationalized headline about all the

crashing down that's going to take place

it's really overstated putting aside

crashing down there are some adjustments

going on how far along are we in that

adjustment period particularly with

respect to valuations obviously

evaluations come down both because

interest rates are going up so it's more

expensive to finance things but there's

somewhat less demand for at least some

Office Buildings where are we on that

adjustment evaluations well I mean

mentioned all those asset classes

earlier in our discussion values have

come down for all those asset classes

and the reason one of the real drivers

of that is the cost of debt goes up when

the cost of debt goes up it's more

expensive to leverage your buildings the

value the equity goes down Office

Buildings have gone down the most the

other asset classes may have gone down

10 15 percent Office Buildings maybe as

much as 30 percent we do think that the

decline in values has kind of run its

course and will stabilize now and we'll

start to come back later this year the

fact matter is interest rates have

stabilized we think they're going to

start to come down inflation appears to

have peaked it's coming down and so we

think the decline in values has kind of

played out 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 think 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 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 there's now an expectation that we

won't even have a recession in Europe if

we ended up with a 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 have 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

seller 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

was David Weston with CBRE CEO Bob

celentic

coming up former treasury secretary

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 in inflation

clearly established that's next on Wall

Street week on Bloomberg

[Music]

monetary policy dominated the week with

rate decisions from the U.S 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 U.S 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 dead 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 uh confusing I understand the

arguments for not hiking uh this at this

meeting but those arguments wouldn't

Point towards signaling to further rate

increases they wouldn't Point towards

significantly revising the forecasts

towards a stronger economy and more

inflation

I understand the arguments uh 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 uh Ray

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 uh 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 over tightened or at least is

on its way to doing that

that would not be my best guess uh I

think it's very hard to read but my best

guess is that the consumer which is 70

percent of the economy appears to be

running really uh quite uh strong at

this point we've got very strong

employment data much faster than uh

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 a substantial uh

strength so I don't see the idea that

we've got a durable reduction in in

inflation clearly established nor do I

see clear evidence of a slowing uh

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 uh this time and they end up

lifting rates 50 basis points that the

next two meetings that's gonna be okay

uh 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 that was implicit in

not moving to that this time was kind of

inconsistent with the balancing of risks

that was Inc that was signaled by the

two tightenings and by uh the forecast

uh 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 in light of the data

we've gotten and in light of some of the

reports by Bloomberg and others that

they are considering uh fiscal or at

least some sort of economic stimulus

measures to get that economy back going

back again

you you know I I think the Chinese have

a very difficult uh set of challenges

ahead of them there are very serious

Financial overhangs uh coming out of

what's happening in uh real estate I

take a somewhat more medium-term view of

it and what's an economy about an

economy is about people and it's about

capital and what we know is that the

number of births in China has fallen by

almost 50 percent in the last six years

even though they eliminated the one

child policy number of births has kept

uh really falling and we know that

Bloomberg reported that the number of

millionaires leaving China was kind of

high high by historical standards and

high by global standards now that's a

funny measure in a lot of ways days 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 Chinese China business a week

or two ago is indicative of a lot of

things that are happening so whether

it's a supply of people investment in uh

new capital I think you've got some

fundamental bets that aren't running

that positive uh 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 and I think

that's something that's going to point

towards uh there being more softness in

commodity prices globally than many

might have expected and we've seen seen

a certain amount of that in the oil

Market

let's move over to the Euro to the

European uh Union Larry we got the ECB a

rate decision a hike as expected and

discussion from Christine Lagarde 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

uh exchange rates adjust 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 uh

broadly appropriate and I think they're

gonna 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 saw you tweeted out something uh

related to a paper 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 uh to date by my

colleagues at Harvard Nathan hendren and

Ben sprung Kaiser along with government

officials fines is that a dollar

invested in increased revenues uh

increased enforcement with respect to

top one percent taxpayers people who are

audited at a rate of only a little more

than uh 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 uh that area of tax audits can pay

off twelve dollars at every time in

extra revenue for every dollar that uh

is uh invested and it's got to be in

that context uh penny Pennywise and uh

ton foolish to be underfunding uh the

IRS Larry always wonderful to talk to

you Larry Summers there uh president

Emeritus over at Harvard former U.S

treasury secretary and special

contributor here to Wall Street week

coming up central banks are trying to

get a handle on inflation but Beyonce

might be making things more complicated

the price pressures from Queen B and are

high next on Wall Street week on

Bloomberg

[Music]

finally one more thought on inflation

and the blame game for almost two

decades now the headline inflation rate

in the United States average at or below

two percent that lull broken in a big

Way by a pandemic by supply chain

disruptions and by fiscal stimulus the

turbocharged consumer spending effects

that the FED at the time deemed

transitory we've had several months of

high inflation that

um most economists including me believe

will be transitory by the time the FED

began to raise rates last year to curb

inflation the CPI index was on its way

to nine percent team transitory benched

and the narrative shifted to the labor

market and to employee compensation as

businesses were forced to pay workers

more the legend goes companies pass

those costs on to Consumers a wage

growth spiral there's still a lot of

work to do when it comes to wages and

getting them down to a tolerable uh pace

of growth that meets the fed target but

a Funny Thing Happened on the Way to the

Forum what if rather than wages being a

large driver of inflation inflation was

driving wages it's not just semantics a

recent analysis by San Francisco fed

Economist Adam Shapiro argued that the

high correlation between wages and

inflation doesn't actually equate to

causation in fact his research found

that when you look at a key CPI measure

less than five percent of the run-up in

that measure could be explained by

employment costs alone former Fed chair

Ben Bernanke last month co-authored a

paper that also poked holes in the wage

spiral Theory saying that while the

strength of aggregate demand led to a

tightening of the labor market the tidal

labor market didn't create much

inflation the data backs that up and

eventually so too did Jay Powell I do

not think that wages are the principal

driver of inflation I think there are

many things I think wages and prices

tend to move together and it's very hard

to say what's causing what so what is to

blame housing used cars fiscal stimulus

or is it Beyonce oh yeah Beyonce

economists over at danska Bank in Europe

doing yeoman's work should add say they

found that a recent Resurgence in

inflation in Sweden overlapped with the

kickoff of Beyonce's Renaissance world

tour at the friends arena in Stockholm

it was a two-night appearance and that

two-night appearance contributed to a

large increase in hotels airfare and

other Recreation prices now to be fair

the Beyonce effect is likely to be truly

transitory but the tour it does land

this weekend in the Netherlands and the

CPI data for that country set to be

released a couple weeks later I'm just

saying that does it for this episode of

Wall Street week I'm Romaine Bostic

we'll see you next week