Micron Sales Forecast Tops Estimates on Insatiable Memory Demand

23:23Carol Massar:But institutional investors right now own less than 1 % of homes at the peak. In 2022, they own 3 % of homes. So what we're waiting for is there's a lot of build-to-rent developers that are on the sidelines waiting to see how this shakes out to get back in and unlock some capital, which will help the supply problem as well. Is anything on the local level that you mentioned, the permitting or anything, at least when it comes to the way people feel about zoning on the local level, is that happening in any part of the country right now? Well, I mean, especially this bill, it could help with environmental deregulation.

23:58Carol Massar:There's also some provisions currently in it that would help with smaller banks improve their lending capabilities, also deregulating manufactured housing. So at the local level, we really need federal funding to incentivize local governments to speed up zoning. Because if you spend three to five years trying to get land zoned for the approvals, that alone adds thousands of dollars per house. That's a more significant impact to housing affordability than a 50 basis point rate cut is going to be. So bottom line with the president is trying to sign this bill, that's not really necessarily going to make housing lower.

24:34Carol Massar:I mean, we are always reminded it's, you know, location, location, location. It's all specific on a state, a city. I mean, between zoning and so on and so forth. That's really what comes down to it in terms of supply and pricing, whatever the economy bears, right? That's right. I mean, anything that we can do to make mortgages more available and improve affordability helps, but that's not really going to fix the supply issue at the national level. Like you said, Carol, it's local. I mean, I feel like we have this conversation whenever we're talking, like you can do whatever you want at the federal level, but unless those laws, regulations, environmental rules, zoning, and you get people to say, we are okay.

25:17And by people, I mean voters, we are okay with increasing density in certain parts. You're not going to move forward with fixing the problem in this country.

25:27Carol Massar:Exactly. And that's why you continue to see the South, Texas, Florida, the Carolinas continue to dominate in new homes because they have less regulation. They still have affordable markets where it's the cities and the locations that have great land parcels, but just too much regulation to make it worth the builder's time. It adds years of cost and it's just too expensive. Katie, in a lot of parts of California, they seem to be making a dent with this idea of the ADUs, the accessory dwelling units, and taking a lot and adding a two or three bedroom home. In some cases, you can add a pretty big home depending on the lot size.

26:01Is that actually making a dent?

26:04Carol Massar:We are starting to see some additional developers who were not able to make deals pencil before. Now they're coming back to the table and saying, okay, if I can improve density myself through ADUs, it definitely could help. That's wild. Like you see stuff on social about that too. And it's just amazing, like the homes being put everywhere and anywhere. I am curious, Katie, from the clients that you guys talk to, the home builders, what is top of mind for them? Is it the rate environment? Is it policy, legislation? Is it labor costs? Is it material costs? What is it also? though? Yeah, I mean, at the local level, definitely, if we could get some type of incentives for local municipalities to either approve or deny zoning in 90 or 120 days without dragging it out, that would help.

26:55Carol Massar:Certainly, so shortening that time, which reduces costs and reduces their carrying costs on their land assets. They're also really continuing to adjust the type of homes, building smaller homes, and building what product people are looking for. It's not that people are going and looking and shopping for incentives. They're really shopping for an improved quality of life and a payment that they can afford. And so builders that are delivering that and buying down the mortgage rates are still doing well, as evidenced by Lenar recently is still building and delivering 20 ,000 homes a quarter, which is just, it's incredible, but they're doing it on purpose, eating into their margins to deliver that volume.

27:35Carol Massar:Interesting. All right. Listen, perfect person to talk to on this Wednesday. Katie, thanks so much. have a good rest of the week. Katie Hubbard, President of U.S. Capital Markets at Walton Global joining us. This is the Bloomberg Business Week Daily Podcast. Listen live each weekday starting at 2 p.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa, play Bloomberg 1130. Amy's setting us up so well talking about oil. We do see prices across the globe falling as more tankers cross the Strait of Hormuz.

28:12Carol Massar:And we've got some signs of progress in the U.S.-Iran. Peace talks, that really eased fears of an immediate supply crunch. A slide in energy prices, kind of also helping ease those inflationary pressures. We'll get a read on inflation tomorrow. But yeah, it's definitely a different trend than we've seen as of late, certainly since the war started. Even though oil prices are still up more than 20 % year-to-date, They're down about 40 % from their high during the peak of the conflict. A steady increase in traffic is adding to workarounds that were put in place to mitigate disruption through the Strait of Hormuz.

28:45Carol Massar:All right. So we wanted to do a little bit of a deep dive into the energy market, what it means for prices today going forward and the risks that might be still out there. Dr. Ellen Wald is back with us. She's president of Transversal Consulting, senior fellow at the Atlantic Council, author of Saudi Inc., with us from Boca Raton, Florida. Ellen, good to check in with you. We have been, I feel like, since the war started, we've talked to you a lot. The lower price in oil and the benchmarks that we are seeing today, what does that indicate to you? Well, I think it indicates that there's a lot of positive sentiment in terms of flows normalizing.

29:19Carol Massar:And I think that's very much based on what we're seeing at the moment, which is this bath log, okay, that had been sitting there. both of Iranian oil, by the way, and tankers that had been sitting there or oil that was ready to be loaded, all coming out. And so I think that to equate that with this idea that flows are normalized is really probably doing a disservice to what the actual market is looking like. So I would say that probably prices are reacting to this maybe a bit more than they should. There's a lot of volatility. And so I think that that we're seeing a larger drop than is indicated.

30:02Carol Massar:So what's happening now is not necessarily what we're going to see happening, you know, next week or in two weeks. What do you think we will see happening then? I think we're going to see we're going to see a lot of difficulty chartering tankers. And I think that we're already seeing some evidence of this. The Basser Oil Company in Iraq is directing operators to shut down production because they can't get tankers in to load crude oil. Because there is a great fear, and I think this has been evidence that ever since, you know, this MOU was signed and whatnot, are they going to be able to get out?

30:41Carol Massar:Like I said, we're seeing all of these tankers clear. We're seeing the backlog clear. And then the big question is, is anyone going to want to chance going back in and loading as they would? And I think we're going to see they're going to have to pay a lot more, you know, to take that risk. And the question is really, is anything either available? Because a lot of tankers are engaged in other routes right now because we have tankers taking, you know, oil from the United States to Asia, to Europe. You know, are there tankers available? And how much are you going to have to pay to convince someone to go back into the Persian Gulf?

31:16Carol Massar:And that's going to play out over the next couple weeks, potentially even a month, as, you know, it depends how long it's going to take these tankers to unload and figure out what they're doing next. But it could be a very choppy situation. Well, you know, I'm kind of glad you went there because just because we do have progress in the U.S.-Iran peace talks, you kind of can't put the genie back in the bottle. And by that, I mean Iran has showed its might and its ability to kind of bring the energy markets, global energy markets, to its knees, and that is by closing the Strait of Hormuz. And so until I don't know, will we ever will anybody ever feel confident, comfortable that they can kind of go in and out of the straight easily?

32:02Carol Massar:Or is there always going to be a little bit of fear now? Well, look, if you take what happened in the Red Sea as an example, then the answer is going to be no. We are not going to see a return to what we would call normal. The situation has forever been changed, particularly as long as this current regime exists with the capability to threaten the safe passage of ships, whether that means with drones, with speedboats and whatnot. If they have that capacity, there will always be the concern that they will threaten this. And so it will either cost more or we're going to see oil companies investing in workarounds.

32:46Carol Massar:That's, I think, where the big push is going to be, is to not depend on maritime passage to get your oil out. And for some countries like the UAE and Saudi Arabia, that's much more straightforward. For Kuwait, for Bahrain, for Iraq, that's much less straightforward. But there are options. And I think we're going to see them working on these pipelines. We're going to pipelines to outside, to the Gulf of Oman, to the Arabian Sea, pipelines to the Mediterranean, Jordan, Syria, Israel, Egypt. They're all going to be major players in this. And it's going to change the way the region looks. It's going to change the distribution of wealth in the region.

33:26Carol Massar:It's going to change the strategic importance of various ports. But overall, we will see, I think, it's going to become more diffuse. There will no longer ever be one waterway that, you know, accounts for 20 percent of the world's seaborne petroleum supplies. Ellen, I want to connect all this. I want to connect all this to gas prices and what consumers are seeing at the pump. It's certainly important in Washington and important in congressional districts, too. At the beginning of the year, it was 283 a gallon, according to AAA. Now it's at 393 a gallon. President Trump not happy about this. He said he's ordered the Department of Justice to look into gas prices, saying they aren't falling fast enough.

34:06He complained that big oil companies are not dropping their price at the pump commensurate with the sharply lower prices they are paying for oil. What's the relationship? Is that is there any fact behind his statement?

34:19Carol Massar:I would say there's very little, very little fact behind his statement. This is this is not the time to start attacking big oil. First of all, a lot of these retail stations, you know, are not owned by big oil necessarily. So they're not even responsible for the pricing that's going on. And yes, the vast majority of the price of a gallon of gasoline comes from the price of a barrel of oil. But that's not the only issue. And, you know, we've seen refineries running at full tilt, OK, basically to supply gasoline, diesel, not just to the United States, but to other countries that no longer can buy it from the Middle East.

34:54Carol Massar:So it's going to take a bit of time to shake through the system. We're going to have to replenish our stocks. These products have to get to the places where they need to go, combined with the fact that we're now in summer gasoline. Most of the country switches between a winter blend that we were seeing that was used, you know, when this war started to a summer blend, which is more expensive anyway. So when you look at things like inflation, when you look at the switch to summer blend, when you look at the higher demand that we see in the summer, just saying that we are, you know, a dollar or so more as the average than we were, that's not really looking at the full picture.

35:29Carol Massar:And I do think that the animus towards these companies is really very misplaced at this juncture. Ellen, just really quickly, 30 seconds, you wrote Saudi Inc. back in 2018. It was all about the history of Saudi Arabia and the rise of the state-owned oil company, Saudi Aramco. We are eight hours, eight years, I should say, from that book. What would be the book you would write today, the narrative, just quickly? It would be an oil company that is navigating a changing situation, probably changing faster than almost anything they've ever experienced before. And how are they going to preserve what they see as God's gift to Saudi Arabia?

36:09Carol Massar:Maybe entitle it Slippery Slope or something. That would be a good one. Ellen, thank you. Thank you. So glad you could join us. Dr. Ellen Wald, president of Transversal Consulting, senior fellow at the Atlantic Council, author of Saudi Inc. Stay with us. More from Bloomberg Businessweek Daily coming up after this. What if you could have more wins? More support? More sound effects? At LPL Financial, we like the sound of that. Because LPL offers more. Advisors, what if you could have more ways to help your clients? Ready to invest? What if you could find an advisor that really understands you? When it comes to your finances, your business, your future, at LPL, we ask, what if you could?

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39:29Carol Massar:I do want to point out that you do have the big banks following passing of this year's Federal Reserve Stress Test. You do see Wells Fargo, JPM, Goldman, BNY, a bunch of banks increasing their dividends. JPMorgan also planning a$50 billion buyback. So I just want to throw that in. We're going to kind of stay with the financial world. Yeah, let's talk a little bit about private credit. Because you recall over the last couple of days, we got some big news. A$7 billion private credit fund run by Morgan Stanley is capping investor withdrawals at 5%. Also, Apollo Global Management once again limiting withdrawal requests from its largest non-traded private credit fund for retail investors as broader concerns about the asset class persist.

40:08Carol Massar:Yeah, we should point out withdrawal requests at major funds across the$1.8 trillion market have largely come in higher this quarter after many moved to block full exits in the prior period. you know it continues to trickle out we've got a great group of voices on this len tannenbaum is founder of tannenbaum capital group it specializes in private credit real estate lending and strategic general partnerships before tcg he started fifth street capital and grew it to a five billion dollar in assets ultimately selling it to oak tree that was back in 2017 he's here in the bloomberg interactive broker studio also with us james crombie senior editor of credit at bloomberg news welcome to both of you len i gotta be honest there was a moment a few months ago where it felt like, well, a few weeks ago, I should say, it felt like maybe we've, when it comes to the asset class, we're like, stop, we're not hearing about the asset cap withdrawals or the withdrawal caps rather.

41:00Right. But then we get the Morgan Stanley and Apollo news. You've been doing this for more than 30 years. Are we out of the woods? Where are we? Oh, no, this is going to continue. I mean, we were at the Decker conference yesterday with BDCs and private credit, and it was consistent what was said across my peers, which is really, it's going to create more and more withdrawals. You have liquidity draining out of the market. The good news, remember there's always green shoots coming out of this. You're going to have a positive effect and spreads, better covenants, and better deals coming out of this for the next, I think, two-year vintage.

41:33So I think I'm really excited for the next two years to invest, especially where we are in the lower middle market.

41:38Carol Massar:So what's happening? Is it lack of liquidity or just deals that aren't great? Well, that's a good point. So there's a lot of software that's not great. And it's hard to parse through that. I mean, the$5 billion loss by a major private equity firm, right, where they hand back the keys, that didn't help either. So it started with Pluralsight. Remember that? And we talked about that maybe the last time I was on Bloomberg. But now it continues to get worse. And you're seeing that in PIC. You're seeing that in non-accruals. You're seeing that in a lot of places where the warning signs are still there.

42:08But, again, you're also going to see dispersion of return. The good guys are going to do really well, and the bad ones not so much. Wait, I have a follow-up, and then I'm going to let James just take it away, because I want to talk software. Do we know software is bad right now, or is that just the concern? Like, has it been proven that AI will disrupt software? Not all software is bad. But the concern is that software was eating the world, and now AI is eating software. Software is just a large piece of so many companies and so many BDCs. They're talking to a BDC CEO, and they're like, we have a lot of software exposure.

42:43Now, just be careful when they restructure the software. And we saw this in one of the securities in a BDC. I won't name names, right? To make a problem disappear, I'm going to try this, James. I'm not sure I can explain it simply enough. You take a 13 % yield, nice security, and it gets impaired. The company can't pay back its money. So what do you do? You turn it into a 20 % PIC security.

43:05Carol Massar:And I think PIC is poop, which is principle on outstanding principles. That's another word for PIC is poop. It doesn't matter how much your poop smells. But if you think about that PIC, right, if you take it on accrual, if you're accruing it, you're paying it as dividends, but you may not collect it, that's a problem. And so that stuff, that restructuring stuff, that hiding good securities and restructuring them into pick securities, that's part of the problem. And that pile of stuff builds up. And when liquidity is draining, that all shows up. I'm just going to say poop is a tough branding problem.

43:44It doesn't have the same ring to it as Mag7.

43:47Carol Massar:Just going to say, James, take it away. You're the expert. So how widespread really is this then? Because when we talk to the BDCs, they say it's very limited. It's all under control. We know that people want their money back. Redemptions will happen, but they have a cap, so they're fine. Is it a real stress point across private credit? Well, it depends on how levered they are. It depends on what exposure they have to the bad assets or how long they've swept things under the rug, or have they been honest about it and dealt with their bad assets? So it's manager by manager. There's some excellent managers, and they're going to do really well in this environment.

44:19And there's some not-so-excellent managers, and a lot of them getting some withdrawals, and their problems are going to suffer, you're going to see a piece come out by a very smart person. Again, I didn't get clearance to say it, but he came up with this concept, which I listened to yesterday, where you may want to sell. And why do you sell? Because if you haven't marked down the assets and you believe the assets are going to be marked down and you're in a private BDC, not the public ones. The public ones have been sold. They're trading low. The private ones, you may be getting out at NEV. If you're getting out at NEV, and this is why I think you're seeing the withdrawals, This may be a good number.

44:55And even if it's not, it's certainly not going up from here. And so you sell now, and you may want to buy later or buy new vintage. Move on. Yeah. And a very smart person, I think, in a pretty big shop is going to come out with that. How low are the loans selling for now in the secondary market? And that's a good point. So where are these loans when they actually trade? Goldman said, if you really want to find a price, sell 10%, and I'll tell you what the price is. I believe that. You really don't know. And you saw that where the SEC is looking, where BDC marks between 70 and 90, and people are making excuses about information or agents or whatever.

45:31There are some reasonable excuses. But wow, the dispersion of marks is huge. So what are they selling for? Is that the real price? And I think that's going to be interesting.

45:41Carol Massar:You've been doing this for a long time. Is this a good time for BDCs? Because you seem to think there's an opportunity here. If so, why not launch a new BDC? and we are we're going to do a founders round we're going to give away a lot of the gp2 which is which is really interesting because i made we did quite well selling to o tree and we want the investors to participate on both sides of the equation this time so we are uh my son adam tannenbaum is going to help raise it and he we're circled up i'm excited to get back in the industry i think this is a good time the deals we're finding in the lower middle market and we're talking about$5 to$25 million EBITDA deals, are great.

46:18The spreads are widening. The deals have real covenants, real cash flows, real sponsors. So I'm happy to come back in, but I haven't invested in it since 2017 when I sold because it got very frothy and the big guys just took over the whole market.

46:33Carol Massar:Is it just too big? Is there just too many people chasing deals and that leads to not such great deals being made. That's happened over and over again. In the 25 years I've done this, it started with American Allied, American Capital, and GE Capital sucking the wind out of everything. And us little guys had to fight for space. When that happened in 2008 and they fell out of bed, that's when we went public. That's when we had capital. That's how I started the last firm. That opportunity set is going to get only better over the next two years, but I'm not that smart to pick a bottom. Do we need a crisis to have that opportunity?

47:10Yeah, you do. You need the liquidity to come out of the market. What's that crisis look like? What's happening now?

47:16Carol Massar:Okay. You would call this a crisis? Yeah. Not yet. Not yet. At what point would you call it a crisis? It's a crisis when, well, we're talking to small software companies, for example, and venture companies. I just talked to one yesterday and they can't refinance. There's a huge refinance. Software, the real problem is a lot of these are coming up for refinance next year. It's rough. How are they going to do it? Well, the ARR game is up, right? So these multiples of 20 times ARR are down to five to 10 times multiples. Have the private equity firms mark them down. But the debt firms are probably fine.

47:51And one thing I want to say about the BDCs, BDCs and private credit, it's institutionalized. It will definitely be here. It's an asset class that's going to be here to stay. The debt of those companies is safe. Definitely safe. I think the rating agencies have it right. But we're talking about what is really the equity worth? And that also depends on what the assets are, how many they've sort of not reconciled, and how levered are you. Is there enough stress in the system, though, to take one of these BDCs down? Well, that's always the case of where it happens, where it's Bear Stearns or Merrill Lynch or whatever, right?

48:24They have to go down to sort of be the poster children for the new thing. I think the big diversified managers are definitely not going to go down. They sort of can't. They have a lot of pockets to go into. But you're looking for that canary in the coal mine. I'm not sure who that's going to be.

48:40Carol Massar:But it's going to happen. I hope so. Because that'll start cleaning the industry and allow for... You say it like a good thing. It is a good thing. But is it a wider problem that impacts the financial markets and stress more broadly? It's similar to the problems. The vintages that are in trouble are the 2001, 2002, zero interest rate vintage. that would do it a certain way. And then all of a sudden, interest rates climbed up. Nobody was planned for it. They swept it under the rug a long time because they didn't want to deal with the portfolio problem. Now they've got to refinance. They can't sweep it under the rug.

49:15They're getting redemptions. The problems are coming out.

49:21Carol Massar:TV continued, because we know it will be continued. We so love having you here and along with our own James Crombie. Thank you so much, Karen, Tim, James. We love it, love it. Len Tannenbaum, founder of Tannenbaum Capital Group, here in studio, along with our James Crombie, Bloomberg News Senior Editor of Credit, also has a great podcast that you should highly, highly check out on the Bloomberg. This is the Bloomberg Business Week Daily Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live weekday afternoons from 2 to 5 p.m. Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app.

49:58You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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