Power Lunch - ‘Urban Doom Loop’, Fed Up 9/8/23

Episode Date: September 8, 2023

All across the country: downtowns, office spaces and shopping centers are at risk of becoming ground zero for a new economic hazard: the “urban doom loop.” That’s the growing likelihood that a commercial real estate apocalypse could spiral out across the entire economy. We’ll speak to the professor who coined the phrase. Plus, it’s not just commercial real estate that’s in a precarious position. Higher rates are creating around all of housing, and Ron Insana says the fed is to blame. He’ll join us to explain. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch, everybody. Alongside Kelly Evans, I'm Tyler Matheson, and coming up today, all across the country, downtowns, office spaces, shopping centers, at risk of becoming ground zero for a new economic hazard, the urban doom loop. That is the growing likelihood that a commercial real estate apocalypse could spiral out across the entire country, and we'll speak to the professor who coined that phrase. Plus, it's not just commercial real estate that is in maybe a precarious position, higher rates. are creating uncertainty around housing in general, and Ron Insana says the fed's to blame. He'll explain more in just a moment. But first, here's a check on your markets, which are green, even though they're going to be red for the week, most likely. All the major average is up about a quarter percent, although the Russell at last check was slightly in the red. Kroger climbing 4 percent, and seeing those gains despite sales slumping as disinflation hits faster than expected. And Planet Labs, down 15 percent, the satellite imagery stock, delivering weaker than the. than expected results. And worth mentioning, they aren't the only space firm in the headlines,

as the FAA is grounding SpaceX's Starship Rocket and requiring them to take 63 corrective actions. Apple also continues to remain a focus of investor attention as it becomes the newest chess piece in U.S.-China tensions higher today, but still down more than 5% this week. All right, joining us for the hour to talk markets. Apple and a heck of a lot more is our friend Steve Grasso, a global and fast money trader. Last time I saw you was on fast money. It's good to be back together. It's great to see you in the middle of the day. Who knew you had a spot in Englewood? I didn't know. We have multiple offices around the globe, around the globe. It's bizarre. You guys make it look so easy. And we're glad. And as do you. Let's talk about the just sort of overall state of the market. September is doing what September often does. It seems a little choppy. The start, the first couple of days of this trading week were negative. What do you see from now on out through the end of the year? I've been accused of being overly bullish of sometimes, but I do pivot, right?

So I pivot when I think there's a reason to pivot. And I still think that we're looking for higher markets going into year end. And when you look at September, people have said about seasonality, am I right? Correct. Seasonality happens. 2020, September was terrible. 2022 was terrible. But when you look at it on aggregate, that has skewed the last five years because that's how they figure out seasonality.

They take the five years and then they come up with an average percentage. I think September's were bad before COVID too. They were bad before COVID, but people are looking at that outlier of that down 9% September. Right. And there were a lot of things going on. And the interest rate environment was a lot less. But if you're bullish in the long term, you should be cheering a September sell off if you think it's just a blip. You should.

But someone who's in my position as a fast money trader and someone who trades on an everyday basis or at least every week basis, trimming and adding different amounts, you want to be proactive on those months, as Kelly said. If you can get that, then you want to take it. But the problem is if you're a long-term investor and you get those months when they're down and then you sell it to lows. For a while. That's what most people do. Think about this.

I think we're making this way too complicated when we analyze the Fed, where most traders and most people make life too complicated. Are we closer to the end of the rate rising cycle or the beginning? The answer is rhetorical. Right? So now if you're thinking about if we're closer to the end, what else are we closer to? The actual first cut. What's going to happen with the first cut? And everyone says, well, then there's going to be terrible news. No, there's not. It'll be greeted with welcome arms from the bulls on the street. And I think that's what I'm looking for. I'm looking for large cap tech to rally. We've had China. We've had rates. We've had everything hit large cap tech. What have people done with large cap tech? Use it as a safety play. So when banks were failing, they ran into technology. When rates were rising, they ran into technology.

But they like the Fortress balance sheets. They ran in also when we started seeing the market price in those rate cuts. So what's interesting to me now is we're getting closer to those cuts being a reality, maybe still six months out. Now they're selling out a tech. They only want to own energy. So it's like almost like they sold, they bought the rumor and are now selling the fact. Yeah. I think you're correct.

But I think if you add in the China dynamic, those are risks that. that people are looking at selling their large-cap tech names. I think the bark is always much worse than the bite when it comes to geopolitical worries. Usually, most of the time, when you know the old saying, when you're strong act weak and reverse, right? So China seems to be acting very strong. I think they're very weak at this point. I think that Tim Cook has done a masterful job of being able to be agnostic. He's a U.S. citizen, but he operates inside of China.

Who else has done there? Elon Musk. I think at the end of the day, they will figure out ways around it. So what's happened is the negative headline for Apple and China has been a contagion episode for the rest of either large-cap tech or tech as a whole. And I think the market is overcorrected. When you say the information on China and Apple, are you talking specifically about this presumed ban on the purchase of Apple phones, a use of Apple phones by CCP people and government people, right?

Correct. How many phones is that, really? Well, I think we're talking about 500,000 to a million as the story states right now. So one to two percent of the phones that are in China that Apple is. So we're doing a lot of hand-wringing over this, and the fact is it's- The market is probably, yeah, and the market is probably factored in five million phones. or more to that event. Although if it expands to state-owned enterprises, as is rumored,

that's probably the biggest share of it. I mean, how would we even tally how many people would potentially work at those tens of millions? It possibly can be. But you know what consumers do? They figure out ways around it when they want to get a product in their hands. So either it's two phones or they figure out which one to buy or which one to keep it home. The product is inferior to the Apple iPhone. And people, consumers don't like inferior products, no matter where you live, no matter what country you live in.

We have the good fortune to have you with us all hour long. But right now we're going to bring in CNBC.com and CNBC contributor Ron Insana, who argues that the Fed is hammering the U.S. housing market in two ways. He says the Fed's actions are putting pressure on home prices, and it's also to blame for the supply of existing homes hovering near historic loans. Loos, excuse me. We're historic loans for that matter. The NBC senior analyst and commentator Ron Insana is here with Moore. He is also a chief market strategist at Dynasty Financial Partners. They might say in England, dynasty. Welcome, Ron. Good to have you with us.

We don't say it that way. You know, under normal circumstances, you might expect to see rising interest rates act as a suppressant or a restraint or on rising home prices. But in many markets, that is certainly not the case. Why this time? Well, it's interesting. You know, you use the expression doom loop to talk about other aspects of the economy.

And I think we have something similar going on in residential real estate. And it's counterintuitive, Tyler and Kelly and Mr. Grasso, because by raising interest rates, the Fed has effectively created a post-COVID residential real estate lockdown. We had so many. homebuyers lock in, according to Redfin, at rates anywhere below 6% to below 3%, 91.8% of mortgages

below 6, 82.4% below 5, 62% below 4, 23.5% below 3. People are not selling their homes. So the lack of supply and the rising cost of homes has created this vicious cycle. The only thing that, in my estimation, they could cure it, and this is counterintuitive because this would actually bring down shelter inflation. If the Federal Reserve cut interest rates, it would release the supply of homes, maybe moderate the prices and also allow more transactions to take place. That's not going to happen, as Kelly just said, probably for another six months. In other words, you've got people who are so comfortable, they don't want to move, Steve, they're holding on to their homes. The result is restricted supply. And when you have restricted supply and an equal number

of buyers, what happens? The price goes up. Right. And we, we termed it married to your mortgage, right? So as Ron laid it out perfectly, when you look at what the mortgage, mortgages are at right now collectively, no one is getting rid of their homes. So that's why you've seen a bifurcated market. You've seen the new home sales and you've seen existing home sales. New home sales, the builders can actually buy down those rates. so they can make it more affordable to the home buyer. You're not going to see that what existing. So Ron, it is 100% accurate as he usually is.

You're not going to see these things develop overnight. And yes, the Fed could help. But I don't think the Fed really wants to make that what they're focused in on. They're focused in on breaking the back of inflation. Go ahead. And the problem here, Steve, is, look, I mean, they're creating the very inflation that they don't want. because they're pushing shelter prices up.

They've referenced shelter prices as a big component of consumer prices, right? So that is a self-defeating process. And what's also really strange about this market is that the spread between 10-year note yields on which many mortgages are based and official mortgage rates is 300 basis points. The average is 150 to 200 basis points historically. So again, there are these anomalies in the market. We have overseas sellers of bonds. The Fed is engaging in quantitative tightening, selling,

bonds effectively as well. And they're not helping the housing market and they're actually causing shelter inflation, which they're going to worry about later in the year and then use as a pretext to raise rates further. So I think they're looking at the wrong source with the wrong solution. They may not think about it that way. I'm sure they don't. But I think that's what's really happening in the marketplace. Steve, that's an interesting point, Ron, that you just made, which is that inadvertently the Fed may be contributing to shelter inflation. You know, not intentionally, inadvertently,

and that then they may use that shelter inflation as justification to raise rates even more. Yeah, I mean, it's the same problem they have with the labor market, which, by the way, is now in the middle of a self-correcting process. We're seeing wage inflation, and I hate to use that word, we're seeing higher wages moderate. Right. We're seeing companies like Walmart saying that entry-level wages are being pushed back down,

this was, again, a supply issue, not a demand issue in a post-COVID world. So I think they've identified two areas that would have ultimately been self-correcting in a post-pandemic environment that they've chosen to exacerbate not help. I know this is not conventional wisdom by any stretch of the imagination, but that's the way I'm looking at it. And I think the Fed is causing a greater problem than they are curing here. We like unconventional wisdom around these parts. Ron and Sana, thanks very much. We could talk a lot more about this topic, and I know we will.

And I want to specifically delve into the question of why so many people expect there to be a rate cut next year. And what has to happen for that to happen? We'll get to that in a minute. Steve Grasso, thank you. Main time, let's head over to the bond market and Rick Santelli, who's probably got a few things to say about all this. Rick. Absolutely. I guess my comment is that was an interesting discussion.

But as we say in Chicago, the Fed has to break a few. eggs to make an interest rate omelet. And I think that we're going to continue to see a lot of areas in the economy that don't move exactly as the Fed would like, but it doesn't matter. Jay Paul's focused, and I don't think anything is going to change that in the here and now. But one thing that has changed is how the markets are acting. The markets were fighting the Fed for a good chunk of the interest rate increased cycle. But in the last couple of months, it all changed. Now, as you look at a two-day of two-year, realize, two years only up a couple basis of points on the day, but it's up nine basis points on the week. You could see there the way we're coming back.

But if you open the chart up to nearly two weeks and put twos and tens on one chart, by the way, tens are up seven on the week. So you could see that there's a bit of a distinction there. But pre-holiday, pre-Monday, rates seem to be moving down. They seem to be moving up more aggressively on the two-year. The 10-year has really led the way. Consider this. We have not had one Friday weekly close except for the 25th of August at 508 since 2007. Many technicians, their favorite chart is a weekly chart.

So it's very important to monitor that 508 close because if we start to close above that in twos, you're going to see the entire curve move up. You're going to see a sell-off and you're going to see a steepening. They call that a bear steepening because 10 years going to continue to lead the way. but maybe the biggest thing this week has been the dollar. Now, the dollar's down a bit on the day. It's up big on the week, but it's up big against currencies that aren't a high percentage of the dollar index. Here's a year today to the dollar versus the onshore you won, and there's a year today to the dollar versus the yen.

There's a lot of issues going on in Asia. None of them good. And when you add in the German economy is sinking, these are all issues we're going to have to contend with, because when the globe gets a cold, everybody gets the sniffles. Tyler, back to you. All right, Rick, I love when Rick shakes his finger at me. I guess points of emphasis. Thank you, sir. Have a great weekend.

Coming up, retail shrink expanded. New numbers emerging on the actual impact of growing retail theft, and we will dig into those next. Plus, a rough road ahead for the big automakers. Just a week out from a likely UAW strike. What is on the table and what would a strike mean for the industry and for people like you? Power launch will be right back. Welcome back.

shrink and theft were central themes once again during retail earnings over the past couple weeks. Some companies are finally putting numbers behind just how much the growing problem is costing them. CNBC.com's Gabrielle Forn Rouge is here with those details. Steve Grasso is also still with us. And Gabrielle, let's start with what do we know in terms of the size and scope of this problem? So we learned a couple of things, right? One of the things that we've discussed a lot on this show is shrink is a problem, but we don't know how much of a problem it is.

Now we're finally starting to get an idea of it. We saw that lows in fiscal 22 counted nearly a billion dollars in shrink. That was about $997 million. But that represents just over 1% of sales. And you've got the retail industry standard. Shrink every business plans for about 1 to 1.5% of shrink. That's in line with that. So you're basically saying having combed through, added things up.

And despite all the scare headlines and companies losing 20% of their value, I think of dollar general or was it Target or some meat, Was it even Home Depot? I mean, some of these companies lost mega market cap, and are you suggesting their kind of kitchen sinking this and blaming shrink for what might be not so much an unusual problem by historical standards? Yeah, I mean, look, if you look at lows,

their shrink has increased as a percentage of sales, right? Like, obviously their revenue has grown over the last 10 years. Between fiscal 2012 and fiscal 2017, it was representing about half a percent of sales. And since then, it has jumped up to 1.03% of sales. So, yes, this is a growing problem for them. But then, you know, some of these other retailers, these are really small numbers. I mean, when you're looking at Target, you've got, you know, $219.5 million for the quarter.

That's just under 1% of sales. They're making a big fuss about it. It's obviously a problem. I mean, that's $219 million you could have had in profits. And then you look at Macy's. You've got $11.2 million in shrink. That's about 0.22% of sales. Wow.

That's not much. So you've given us an amazing perspective on this. Steve, should I as an investor consider shrink as I look at these retail stocks, or is it a non-event? So I think to the point that you just made, if these corporations can't figure out how to stop the shrink, because if they're using it as a method of kitchen syncing it, shouldn't they figure out, don't they look inept if you say there's a bunch of reasons or a bunch of ways for you to stop the shrink? Well, or they say it's a public policy problem. You know, they throw it back to, hey, this is happening to, and we've all seen the video footage of the smash.

Nobody's arresting them. So why isn't there better security? And what's the public policy problem? If you have a corporation, you have to defend your people that are working for your corporation. It's not a public policy problem. It's you have to enforce the laws as they are within your corporation. One thing, Gabriel, that I could never quite figure out about the shrink narrative is, just take an Abercrombie and Fitch, which has had amazing results. It is the most desirable

sought-after segment of the market right now. And it did not mention shrink in its latest quarter. Wouldn't the company with the most desirable items in the market have a bigger problem with shrink than others? Or maybe not. Maybe I'm misreading the kind of shrink that is really a problem. Maybe it's more the Walgreens and Dollar Trees in some of those companies. So there's a good reason for that, Kelly. And that's because Abercrombie has a high mall exposure. You see less shrink in malls than you do in off-mall location. right, in the Walgreens and the Targets and the Home Depot's and the lows of the world. It is harder to shop.

Because it's easier to get away? It's easier to get away. And it's really as simple as that. We've all been to a mall before. Think about it. You've got to leave the Abercrombie and Fitch. You've got to walk through the Macy's. Then you get to the parking lot.

You're going to get caught before that happens, right? So I think that's why you're seeing less. But Aproponby is recently expanding their off mall presence. They're opening a lot of stores in New York City. We could possibly hear more about Tring from them. But if you're a Nordstrom and you're the entryway to a mall, You can walk in right there in Paramus and walk right into the men's section and gather suits or shirts or jewelry by the armful. And anecdotally, have you heard, we've all heard the number, right?

It's $1,000 worth of shrink, quote-unquote. So if someone is stealing stuff off your shelves and it's less than $1,000, you let them go. That's a bad perception. It's a bad look because now you're only adding to the. the violation of it, right? If your choice, and I don't know, Gabrielle, if there's any data, I know we have to go, but have the companies who want to combat this do the broken windows theory for lack of a better term and stop it at its source, they have to staff out.

And the cost of labor right now, the cost of staffing out those locations must be formidable. Yeah, I mean, look, if you want to stop shrink, you need to properly staff your stores and you need to get your supply chain and your inventories in line. That's what it comes down to. It requires an investment. Some of these retailers, like the generalists who, you know, the margin on their products are so small, they don't have that extra. money to protect those small market.

You know, why can't they do something where they have? I mean, they've all got a lot of these grocery store, grocery department stores have, have those things that you have to disable to get out. What if you had that there? And if you had not paid for it and you're walking out with the tag on it, the doors lock. It's a cost event for them.

And also, how many times have we paid for the goods? Set it off. And we've set it off. Or we haven't set it off and you go home and you have to feed. And you have to YouTube. how to remove that from your clothes. Yeah, yeah. Well, it's an interesting topic.

And Gabrielle, thank you very much. Steve, always good to have you here. Further ahead on the program, Kroger's Crunch is good news for consumers, bad news for Kroger. As prices that shoppers pay for groceries stabilize or fall, you're seeing that. The supermarket operators, sales are sagging,

but investors don't seem to care. We will discuss Kroger and more in three-stock lunch. When it's time for that, you have to wait a little while. That doesn't mean it's coming right up. It's coming up here in a little while. You're going to be here for that. Yeah.

Work up an appetite. Welcome back to Power Lunch, everybody. An active week for energy, especially Brent. Pippa Stevens has the details. Hi, Pippa. Hey, Tyler. Well, it was a very big week for energy complex broadly. Starting with here with oil, with Brent topping 90 bucks for the first time this year.

After Saudi Arabia extended its one million barrel per day production cut through the end of this year, with Russia also curbing exports. Nat gas, though, falling this week as we enter a season. lower demand period. Energy stocks following oil higher, gaining 4% this week. The S&P's winner by a wide margin. The refiners, a bright spot with Marathon Petroleum, touching a record high today, while Phillips 66 is at a five-year high. But a different story for clean energy, the ICLN, which tracks the space sank to a three-year low today. Higher rates is hitting every part of the ecosystem with each vertical, that solar, wind, and hydrogen facing its own

problems as well, including supply chain delays and lack of clarity around tax credits. So a lot of red there on the clean energy side. I'm not going to dwell. I will save it for next week on the wind front. Pippa, thank you very much, Pippa Stevens. Let's get over to Christina Partsenevilus now for the CNBC News Update. Christina. Well, Ukrainian officials say at least four people were guilty in a wave of Russian air strikes.

The police officer died in one of those strikes, which officials say reduced the police administration building to rubble in president. Vladimir Rzolensky's hometown. More than 50 others were wounded in the attack. Switching gears, a CPAP manufacturer, agreed to a $479 million settlement over claims it now recalled devices, blue pieces of foam into users' mouths and lungs. The tentative agreement from Phillips' respironics only covers reimbursements to users and vendors and does not address other claims related to injuries from the issue. Talk about a diamond in the rough. A seven-year-old girls celebrating her birthday found a 2.95 karat golden brown diamond while visiting the aptly

named Crater of Diamond State Park in Arkansas earlier this month. Park officials say it's the second largest registered by a park guest guest this year. So there is hope for me. Kelly, back over to you. And for all of us. Christina, thank you, Christina Parts and Evelace. Still to come on power lunch, cities are struggling, whether from companies cutting back on office space, renters, moving, to the burbs or crime driving away retailers. And according to one professor, it has the potential to send these economies into an urban doom loop. We'll ask L.A. developer Rick Caruso about what he's seeing when we come back. The urban doom loop, that is what experts call the cycle of office vacancies causing the downtown downturn and leading to more vacancies and further downturn,

with commercial real estate prices off more than 16 percent from their 20-22 highs. and companies vacating massive office spaces. Experts say cities across the country risk falling into that doom loop. And joining us now is one of the experts who coined the phrase, but he also sees the potential for solutions. He's Columbia Business School Professor of Real Estate and Finance, Stein von Neuerberg. Professor, welcome. Good to have you with us.

Let's have you explain quickly, if you would, what you mean by the urban doom loop. And it's not just commercial real estate or office building, it has a metastasizing effect throughout neighborhoods and communities. Yeah, that's right. But the problem does start with the office demand, right? And we've seen with the advent of remote work and hybrid work and dramatic reduction in office demand over these past three years, that has led to rising vacancy rates and, in fact, to all-time high vacancy rates in the office market right now. And that does put pressure, downward pressure,

on the valuations of these offices. You mentioned that they're down, you know, probably 20, 30 percent already, they're likely to fall by more. And that causes downward pressure on property tax revenues. Because for a lot of cities, office tax revenues is a big chunk of their tax revenues, often as much as 50%. Some of that is coming from office, maybe 20%. So maybe 10% of overall tax revenues for cities comes from office. If those offices lose about half of their value, tax revenues fall, and that creates a huge hole in the budget. Now, the governments have, yes, go ahead.

So the transaction prices of office buildings has declined very markedly. Am I correct on that? And that's number one. And number two, is this a phenomenon that is affecting more the biggest of the big cities, the Washington's, the L.A.s, the Chicago's, or is it more pronounced in, say, what I'll call the medium-tier big cities, a Milwaukee, a Columbus. You know what I'm driving at. Yeah, this is a national phenomenon.

In fact, it's arguably an international phenomenon, but within the U.S., I think the cities that are most severely affected are cities in the west, San Francisco, Seattle, but also medium-sized cities, you know, cities like Minneapolis, for example, right? What these smaller cities, the problem that these smaller cities have is that often there's not a whole lot of other things that these cities have to offer in their downtown areas besides the commercial office district. And when that office district starts to falter, you know, it sort of affects the entire city. Places like New York City at least sort of have more amenities, they have more culture, they have more restaurants. So they have other things to offer to their to their local, to their local population and that sort of keeps them attractive even in the wake of some of these rising these rising vacancies. You know, Stein, we could say that New York is an outlier or we could say it's a preview

of what's to come. I mean, maybe the rest of the urban core. And this is the best case scenario. Obviously, we don't want to see the worst case kind of metastasized, but in the best case scenario, people are in the city for other reasons, more residential, more, you know, experiential oriented. That's right. And I think sort of this is the work and play, you know, not just the emphasis on the work, but also on the end play. And I think our cities will have to evolve to be more of that, you know, provide more entertainment value, you know, maybe more tourism. I think that's sort of the city of the future. You know, cities that are less oriented towards work more towards entertainment. What is the picture of the debt that office owners owe to lenders and how soon is that debt coming due? And what is that likely to mean?

That's a tremendously important question. There is about by lots of folks' calculations, about $600 billion of office debt that's potentially in trouble. A lot of that debt is sitting on banks' balance sheets. Banks have about 60% of commercial real estate debt on their books. And, you know, for some banks, this is a material part. part of their book of business. And so to the extent that we see large declines in property values, some of that debt is going to get impaired and is going to have to be written down and it will sort of erode the equity

of some of these banks that are particularly exposed to commercial debt. So that could potentially be sort of an additional spillover mechanism. Another doom loop if you want, where these local banks that are now have less resources to make local business lending, you get local credit crunch and it sort of pulls, drags the local economy down further. Professor Von Neuerberg, thank you very much. I know we'll have you back again soon to talk about this because this is a really critical problem

in so many cities across the country. Thank you very much, Stein von Neuerberg of Columbia's Business School. Los Angeles, one of the cities seeing office vacancies rise and one billionaire developer is on the ground there watching the problem, pitching solutions. Joining us now is our friend Rick Caruso, founder and CEO of the Caruso Real Estate Group. Rick, welcome. Good as always to see you.

Let's talk about the vacancy rates in your, let's call them commercial properties. I note that back in 2016, you had basically 100% occupancy. What's occupancy like today? Hi, Tyler. We are fully occupied. We're still running a very strong portfolio, but we're in the retail side of the business, and we're in outdoor centers, as you know, outdoor properties. And they remain strong, and our growth continues at a double-digit page.

So that's also a question which we've talked about in the past of how the consumer is doing and the consumer spending. When you take a look at what the professor was talking about, downtown office, which I'm not in the office business, they're running at over a 20% vacancy right now. And that is a significant problem. But I also want to say, I think there's a solution to those problems in these downtown cores. And what is it? Well, listen, first of all, it has to start with the six. cities, the counties have to be good partners. It's very difficult to fill up office space

when you've got a homeless problem at the base of the buildings, when you've got a prime problem in a lot of these downtowns, when they're not clean. So what you see happening in Los Angeles, there's a shift from the downtown core to other areas of Los Angeles where the office product is actually doing pretty well. The downtown product is really struggling. And the real impact that happens with that in addition to the building owners losing their buildings or the banks taking them back and the banks don't want them, by the way, is that all the small businesses that are dependent on that daytime population get impacted. And 90% of the economy in Los Angeles and most cities around the United States are based on small businesses and we need to protect those.

Clean the cities, solve the homeless problem, create a better environment for people to come to work. It's pretty simple stuff, but the government needs to be a good partner with these building owners. Rick, what about just to circle back to our kind of discussion slash debate about shrink and retail theft? A lot of you have a lot of kind of these outdoor shopping locations. How much of a challenge is that for you or for your tenants? Well, I think it's a challenge for everybody. Now, listen, on our properties, we have a zero tolerance in terms of thievery, and we have a lot of security. We have a lot of systems on the property from a security standpoint. You know, the Grove alone has over 300 cameras.

All of our properties are highly monitored because we want to have a safe environment. That's our number one priority. We want to make it safe and happy for the consumer, the mom, the children, the family, to come and enjoy the day. And so we spend a lot of time and money on that. But small businesses, streets that don't have sort of this whole ecosystem that we have really can't afford that. So they're dependent on local government. but shrinkage is a huge problem for retailers. The numbers you posted earlier are massive.

What is the impact? You make a really good point. I was talking to a friend who is the head of a mid-sized regional bank in Seattle. They just opened a brand new, beautiful downtown headquarters, and they find that they are impacted very, very distinctly by homeless people, by drug use, right on their doorstep or in their lobby from time to time. has marred what would otherwise be a very celebratory sort of environment. What is the impediment in cities to doing the kind of repair, clean-up work that you say needs to be done?

Are the obstacles political? Are they obstacles about policing? What are they? Well, I think the obstacles are political. I think the obstacles we have elected officials that don't have the current. or that maybe they don't have, you know, the wherewithal or equipment to make some smart decisions. They're not complicated decisions, Tyler. Clean the streets. Get the homeless in sustainable housing. Make the place safe. Police it. You know, these are these are basic things that the

government needs to do and they're not doing in major cities around the United States. So when you're a CEO or owner of a business, your priority is to keep you. your employees safe and your guests safe, you're not going to locate your office headquarters where you're putting your employees at risk. And that's why these downtowns are suffering. Now, certainly, work rules have changed on and on. There's a new normal. There's no doubt what the professors talking about with the debt, no doubt. But I really believe that you can get buildings filled back up. Some of them, maybe not because they're antiquated. Fill back up if you create the right environment inside of them and around them like we do on our properties.

You sound like a guy who ought to run for mayor, Rick. I tried, Tyler. I know you did. I know you did. Rick Caruso, it's always good to see you. Thank you for your candor and foresight. We appreciate it. Great seeing both of you.

Thanks, Tyler. Thanks, Kelly. You can't try once in politics. No, you got to keep going. Got to go 10, 20 times. Coming up, stalled out. Negotiations between the Big Three automakers. and its workers union are at a standstill with a potential strike just a week away.

A lot of the auto stocks are green today. They'll look at the latest details from the bargaining table. And what it all means if you're looking to buy a car soon? Power lunch will be right back. Welcome back. We're one week out from a possible UAW strike that could eventually cause a major drop in the supply of vehicles, just a couple of years after we already had one during COVID. And as they try to transition to the EV world, let's bring in Phil A beau for the details.

Hi, Phil. Hey, Kelly, let's start first off by talking about new data regarding used auto prices. And the reason we're showing you this is because I get a lot of questions from people saying, well, if you don't have the big three cranking out as many vehicles this fall, what's going to happen with pricing on used vehicles, which we know spiked late last year early this year. Here's the latest data from Mannheim autos, 7.7% decline compared to last year. But more importantly, a 0.2% increase compared to July. They're stabilizing.

It's a more normal used auto market, average retail price down 0.4%. That is good news that we are not seeing the continuation of what we saw earlier this year. And so you are seeing a more normal used market. Take a quick look at the auto dealer stock, some of them. And the implication here is that they will continue to do well, whether there's a strike or not, because there is enough demand out there both for new and used vehicles. With regard to the UAW and the big three, we're not at a point where, where we're now at a point where we're getting proposals, counter proposals.

And the wage gap, whether you call wage and one-time lump sum in pay, what you guys, UAW at 40%, then compare that with where GM, Ford, and Stalantus are. And again, this is generally speaking where they are for GM, Ford, and Stalantis. Stalantis is all wage. GM and Ford is a combination of wage, one-time lump sum payments. And this is going to continue over the next week. there will be proposals and counter proposals. We'll see how much of the ability there is for both sides to close that gap between 40% and the low teens,

which is where the big three are right now. Don't expect a lot of movement in these auto stocks until we see some kind of a resolution. And again, guys, we're not trying to be hyperbolic here, but almost everybody we've talked within the auto industry says they do expect some form of a strike come next Friday, whether it's at one automaker, more than one automaker, a targeted strike at a plant, or an entire automaker. That is the expectation in the industry. Those numbers of proposed wage and benefit increases are over multiple years or one year?

Over four years. Over four years. So the UAW is saying you give us 40% over the next four years. And there's a strictly about wage. GM and Ford are saying, look, we're going to give you 9% and 10% wage increase and then to lump sum payments over the next four years that bring it up to 16 and 15%. Stalantis today, it was 14. a half percent strictly on wages, not with any lump sum payments. So that's $6,000 one-time inflation

payment of the five, that's included in the 14 percent kind of math, Phil. I didn't realize that. No, I don't think that those are included in there. Those one time, there's a lot of lump sum payments here, Kelly and Tyler. You've got signing bonuses, especially at GM and Ford. And you also got lump sum inflation bonuses so that there's some protection here of like $5,000. $6,000. It depends on the automakers. So those are in there as well. Okay, Phil, thank you. We appreciate it. And Steve, I just wanted to kind of get into it because people look at that and they go, why offer 14% when someone else is offering 40 over multiple years? But there's these lump sum payments in some cases are quite large. So one way or the other, these automakers are going to be on the hook for

higher costs. Yeah. And this is in the face of them losing billions trying to ramp up on EV production. You know, Phil brought on the show last night, a great Adam Jonas stat that said that everything we're talking about is only 4% of the big three's global revenue. So we're not talking about a tremendous. When you look at these numbers, as you said, they look tremendous. But in relationship to the revenues, they're not that large. The problem is there's been nothing but headwinds for the big three. Yeah. Interesting. Always good to have that perspective of how much money are we really talking about here in comparison with total revenues or profits, whatever. All right, Steve, thank you very much. And folks, we've got more power coming to you next. Welcome back, everybody. Yes, it's time. It's time for three-stock lunch. And first on our menu today, our shares of Kroger, which is up four and a half percent after news they're paying a billion dollars to settle opioid claims and selling over 400 stores to get regulators on board with its alp.

Albertson's merger plans. Their second quarter results were mixed, though, a beat on earnings, but at the same time, a miss on sales. We turn to Steve Grasso for our trades. Can't quite figure out why the Poppin Kroger today. Yeah, nor can anyone. I think it's just a relief. Whenever you see a settlement, there's a lot of algorithms that read the tape. And once you see a settlement, they'll say, okay, now it's clear to be buying the stock. And I think you have to give, I always talk about the three-day rule. Major event or major news event or major spike or major major sell-off, you want to see how the market absorbs it on day three. I haven't always adhere to it myself, but for this one, this would be a sell for me. I don't think I'd buy into it.

Think about the three things that you just raised on that intro. None of them are positive, other than a conclusion to that settlement. Yeah, to the bad news. Fair enough. All right. Up next, we got the cloud data provider Snowflake up more than 3% after DA Davidson and initiated coverage with a buy, saying it has best in class growth rates set to benefit from increasing demand in AI applications. What do we think of snowflakes, sir? This is going to be a sell again, not to be a downer, but if you look at what they had said, they said that their product revenue growth, they ratchet it down from 44 or 45 percent down to 34 percent. There's too much competition in space.

I think a CRM could do what they do very easily. They have a partnership with Amazon. I'm not really sure what that partnership is. I don't know. They call it a frenemy. I've seen it written up in different analysis. This is a frenemy partnership. So if I have to really rack my brain and figure out what that partnership is,

I really can't buy into it. And then lastly, consumption versus subscription. Not a very good tailwind if you have a business strategy. I'd rather get that recurring income constantly without thinking about it, not giving your customers the chance to say, oh, maybe I don't want to pay it. And a fascinating little wrinkle with Instacart as well. And whether or not what it's happening with its contracts there is just a little window into more granularity than we usually get about its business. That brings us, and it's funny because these are three cells for you, even though you're probably one of the more bullish market guests.

And Gillian is in the sweet space. It's in health care. It's among the top gainers on the NASDAQ 100 today. They got an upgraded Bank of America by Jeff Meacham, who says the stock looks underappreciated and oversold. He raised his price target to $95. I'm underappreciated and oversaw. I feel like that. I feel like I can get this at home.

I feel like Gillian. No one pays attention to us anymore. But, you know, if you look at the performance, yes, it is oversold. And it is unappreciated. And if you're looking for one month down 5%, three months down 3%, for the year it's down 11%, not taking it to account what it's done today. Does it have an obesity drug? Nope.

That's the way you have to look at these drugs now. Does it rhyme with Unjaro? Right? Or Posenpic? If it doesn't, it seems like you can't buy these names. I do agree with the way you let off with it. I think that biotech is going to have a rebirth, an awakening, and you're going to see microbiotech start to get gobbled up with M&A.

But as far as Gilead, we're not talking about microbiotite. Gilead is not a microbiotach. You need to have a drug. It's a buyer, not a song. I'll give you a bonus for the three-stock lunch. I think Amgen, they are in trials with an obesity drug. And if you look at their performance, they have a job. not been respected for that as of yet. That could be the one that you want to bet on going forward.

Getting a little love today up nearly 2%. And just had that settlement with the government, did they? With Amgen Horizon is allowed to move forward. We've got a barometer for whether the FTC is kind of finally stepping back here and being less aggressive. Nonetheless, thank you, Steve. Great point. We got a bunch more stories to tell you about. A little time left. We'll going to have Steve help us power through its closing time on the other side of this break. Welcome back as we hit closing time here on Power Lunch. We just got a couple of your stock bails, Steve, but people want to know about your Apple position where you've been leaning into it amidst the sell-off this week. Yeah, I just think it's overdone. And as most people in the market know, the market overcorrects and undercorrects. And this one, they overcorrected. And I think this was sort of an easy thing. And this is not a big macro theme for me, but I do believe that when China barks this loud, you really want to buy that news. You don't want to sell it. What's your biggest position?

So Ethereum, gray scale trust. And I like the tailwinds of, Ethereum. Yeah, I like the tailwind of the ETFs coming out. Whether it's Bitcoin or whether it's Ethereum and Ethereum doesn't get a lot of the limelight. This, what for me is my biggest position, I expect it to do a lot better in the future. What about Coinbase? That's a no touch for me.

Yeah. Yeah, for me, it's too. I have to understand something and really get my arms around it. And you'd pick Ether over Coinbase? Yeah, I'd either. If I name to you, what are the cryptocurrencies you're going to name two? Bitcoin and Ether. There you go.

We've got to leave it there. Steve, thanks for joining us on Power Lunch. Kyle, thanks for wearing that Cowboys hat, man. Really? Really?