Equity International founder Sam Zell on Trump administration efforts to renegotiate U.S. trade deals, the state of the economy, the housing market and the outlook for stocks.
Q2 hedge fund letters, conference, scoops etc
Sam Zell On The US Economic Outlook And Trade Issues
Transcript
Joining me right now is the founder and chairman of Equity International billionaire real estate investor Sam Zell same it's great to see you. Great to see him. Thank you so much for joining us. Do you worry about these trade issues.
I think that the trade issues are issues that probably should have been brought up a long time ago. These agreements are old and you know after 25 years of NAPF which had a lot of foreign policy elements to it adjusting it makes sense. It's hard for me to believe that any resolution here is not going to include both Mexico and Canada.
Right. I mean you know Canada is sticking to its guns and basically saying we can't lose this we can't lose that there are certain things that it's not going to move on. The one thing they can't lose is NAFTA. Right. The one thing they can't lose is a deal with Japan and Mexico. Right. So you'd think at some point this will take care of itself. Like that's what markets think.
That's that's the man I mean obviously I'm not privy to it. It feels it feels like it's going to get resolved. I happened to talk to one of the Mexican negotiators last week who was very enthusiastic. About getting it. So I think that the momentum is in the same direction.
Let me ask you your thoughts on the broader economic story we've been having a debate this morning Sam about OK we just saw two quarters of 4 percent plus growth. You know there's this narrative that things are going to slow down in the next two years. How do you see it.
Well I think that you know everybody's been predicting the next two years slowdown for about four years now.
So and for four years you know we haven't had an end to quote unquote the longest string of positive scenarios. Almost 10 years of a positive environment. I think the question that I asked a Nobel Prize winner this question about six months ago we've just come through eight years of subpar growth. The U.S. system is built for. You know give or take a 3 percent growth rate. Now that we've had 10 years of less than 2. Do you have an end to it or do you have to have a catch up before there's an end to it. Yeah I don't know the answer. By the way the Nobel laureate didn't know the answer either. But I think there's a serious question as to whether the. Long period of subpar growth is delaying the normal cyclical response.
I mean do you think just because we've seen seeing this stability now and you know 4 percent growth and perhaps 3 percent for the year that it has to reverse within a couple of years. Just now the Fed is raising interest rates.
So the answer is No it doesn't have to. History says rising interest rates eventually slow down the economy. We're starting from a very low base. So it may delay the impact. For quite some time. But generally speaking I think the economy is doing as well as it has because there has been a change in attitude in Washington. Somebody described to me the other day in a heavily regulated industry and prior to the 16 election every discussion with the regulator was how much the punishment should be hanged. Today the conversation with the regulator is how do we avoid a punishment. Yeah that's a huge huge change of circumstance.
It's also a change of circumstances when you look at business managers were sitting on capital for so long they're sitting on cash unwilling to put it to work and now they're actually putting it in deals in I.T. and energy. You've been a seller of commercial real estate you've been selling telling us this now for a couple of times we have been on the show you are still a seller. I'm so sorry. Why. Tell us what you see happening in commercial real estate right now.
Well I think that to begin with we're experiencing supply I mean we came out of the great recession with no commercial real estate activity we've never quite had that for one year three or four year period where there was no supply added. And then everybody kind of say whoa maybe supply is OK. They're building huts in the yard near San Francisco and they're you know it had Engs 500000 multi-family units in 2017. So I think we're about to see the impact of supply and to some extent we've seen it already in the most housing area like in New York you know the growth rate has gone from you know rents have gone from maybe plus 5 to plus 1. And there's a lot of concessions and weakness in the markets.
How would you. Is residential real estate right now. Prices are going to come down there too.
I think it very much depends on where. I mean I I don't understand these super super expensive apartments in New York. And I've always felt that that was a way of hiding money not. You know not owning real estate. You know on the other side of the coin I know we're seeing starter housing high not selling. Out to a large extent because at least in theory people can't afford it. The people who've got student debt and other things that are impairing them from taking advantage of stared housing. So we'll see how that works out.
But I think the magic as far as real estate is concerned right now is supply and yet you've been a buyer of things like logistics waste energy. Tell me about energy and where you think the opportunities are right now.
Wow. I mean we were involved in a lot of different places. We're involved in fracking and and back and now we're involved in logistics in the Permian now we're involved in the stack. Buying up all the pleader wells. We're building up and we're building a company called Power Energy which is a refinery company and we're buying refineries at the Tiriel discounts huge discounts to what it would cost to replace them. That's been a formula that generally has worked in real estate and any other kind of heavy assets.
Let me tapping into the energy potential was a good idea because that's not just a job creator but it's an economic growth stimulus.
But remember that the response to this opportunity has been has in the past been to allocate enormous amounts of capital to it without much discipline. The thing that's been separating a team from 16 is the fact that there's real discipline in the oil patch today that there wasn't two years ago.
How about the stock market. Where do you see that. Is that overvalued in your view still. Well when you ask the when you use the word stock. Market.
What is the stock market is the stock market. You know the seven find stocks. How about that. It's trading at that. And I just have I think my own judgment was to do a little mathematics high if you take a company trading at 125 times earnings. That means in five years it has to be 25 percent of the U.S. economy has put those companies are eight none of them going to be twenty five percent have U.S. economy. So you know and by the way the last time I did that calculation was 1997. And that company was Cisco. And now we know what happened to us and I know what happened to this guy. I'm not portraying you know gloom and doom. I'm just saying that 125 times earnings means that you're willing to accept the return of significant significantly less than 1 percent. For your investment. Maybe there are people out there who think that's terrific. Not. Great analysis Sam it's great to see you. Thanks Mary. My pleasure. Sam Zell is joining us.
