Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple, podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg Terminal. Will next year
Speaker 1: be the Year of the bond? Eric Knutson joining us
Speaker 1: now multi asset class CIO at new Berger Berman. Eric,
Speaker 1: I want to start there because that seems to be
Speaker 1: one of the consensus is out there that this will
Speaker 1: be a great year, particularly in government debt. Do you
Speaker 1: agree what we do? We do and and two thousand
Speaker 1: twenty three could continue to be pretty challenging for stocks,
Speaker 1: but we do think that we are at a bit
Speaker 1: of a sea change. I've been doing this almost as
Speaker 1: long as Howard Marks, and I would agree that the
Speaker 1: next period of time is going to be quite different
Speaker 1: from the last ten of fifteen years. And one of
Speaker 1: the key elements there is that rates have to be
Speaker 1: in our view, structurally higher, associated with higher structural inflation
Speaker 1: and the FEDS determination and frankly, the capital markets need
Speaker 1: to have a real um positive real yield across the
Speaker 1: government bond curve. The FED is forecasting that rates at
Speaker 1: the end of this year are gonna be five ish
Speaker 1: per cent. Growth is going to be half of a percent,
Speaker 1: inflation is going to be three point two percent. That's
Speaker 1: a real yield of almost two percent. We haven't seen
Speaker 1: a real yield like that consistently for over fifteen years.
Speaker 1: We think you should pay attention to the FED. And
Speaker 1: this is a dramatic change from the environment we've seen
Speaker 1: over the last ten of fifteen years. Do we see
Speaker 1: a pivot eric? That's not our expectation the FED. We
Speaker 1: believe that FED and other central banks are going to
Speaker 1: need to maintain tight financial conditions through two thousand three.
Speaker 1: You see it with the Bank of Japan beginning their
Speaker 1: normalization process even earlier than people expected, and that that
Speaker 1: then encourages the rest of global financial conditions to to
Speaker 1: tighten um And now what appears to be an even
Speaker 1: more rapid and perhaps chaotic and disorderly you know, reopening
Speaker 1: by China, which could lead to more rapid growth, more
Speaker 1: robust growth from China sooner rather than later. That just
Speaker 1: adds to the need for global central banks to keep
Speaker 1: financial conditions. I thought about actually buying my hellcat by
Speaker 1: shorting JGBS, but I can't get a borrow and now
Speaker 1: with the end strengthening, that would kill me. Is there
Speaker 1: anything else you want to went about? Uh? No, No,
Speaker 1: I I just think it's an interesting trade that um
Speaker 1: now I understand really when I look at the end
Speaker 1: right now one thirty one why it's called the widow
Speaker 1: maker in terms of yeah, in terms of what else
Speaker 1: to expect for three? Um, where do you see earnings?
Speaker 1: Because this is uh something that a lot of people
Speaker 1: have flagged to us, is maybe the most important part,
Speaker 1: certainly in the equity space. Right we're still expecting two
Speaker 1: hundred and ten dollars two hundred and twenty dollars a share?
Speaker 1: Does that need to come in absolute? Well, So there's
Speaker 1: a huge difference in opinion between strategists and macro economists
Speaker 1: who are expecting recession and who are protecting earnings anywhere
Speaker 1: from eighty to two ten or dollars, and that assumes
Speaker 1: a recession and that or or even radically slow in growth.
Speaker 1: Even if we avoid recession, that's normally accompanied by earnings
Speaker 1: declines of ten to bottom up consensus Wall Street forecasts
Speaker 1: are still expecting earnings in two thousand twenty three about
Speaker 1: two hundred thirty dollars to share up four is per cent.
Speaker 1: Our view is that earnings have to come down from
Speaker 1: that two thirty dollar target percent um whether they get
Speaker 1: to one eighty were not quite that barage. We think
Speaker 1: that there are corporate management teams at various levers, especially
Speaker 1: in a more inflationary environment, to support earnings, but we
Speaker 1: think they end the year below the current per share
Speaker 1: that we expect for two two and that's the last
Speaker 1: leg down, that's the last source of pressure on equities.
Speaker 1: Is that more on the demand side that that earnings
Speaker 1: pressure is going to come, or on the input cost
Speaker 1: side and supply some of both margins have to come
Speaker 1: under pressure there. It's like there's still almost at secular
Speaker 1: highs um that has to normalize to a certain degree.
Speaker 1: Corporate management teams, particularly in the United States, have gotten
Speaker 1: very good at managing managing margin margins, but they have
Speaker 1: to come down somewhat. So it's going to be a
Speaker 1: mix of both popline pressure as well as pressure on margins.
Speaker 1: When do we start to go back to a new normal, right,
Speaker 1: I mean, at what point we can we reset and
Speaker 1: understand whether we just can expect a lower turns for
Speaker 1: the next decade in equity index indices, or perhaps or
Speaker 1: aversion back to the FED getting to low rates and
Speaker 1: some sort of pre pandemic norm. Well, we don't believe
Speaker 1: we're going back to the new normal of the last
Speaker 1: time of fifteen years with low inflation, low rates, financial repression, etcetera.
Speaker 1: We think we're going to a more normalized rate environment
Speaker 1: with structurally higher inflation, in part because of a fundamental
Speaker 1: change in the relative power of labor versus capital, which
Speaker 1: as we're just talking about, in part because of de globalization,
Speaker 1: in part because of de carbonization, um, in part because
Speaker 1: of changing demographics and the changing role and relationship of
Speaker 1: China with major major trade partners and with their domestic policy. UM. So,
Speaker 1: we don't think we go back to the new normal
Speaker 1: any type. So we're really going back to a more
Speaker 1: or old normal, more typical environment. Doesn't mean there aren't
Speaker 1: going to be interesting opportunities. We see great opportunities in
Speaker 1: short duration fixed income to your treasuries at four point
Speaker 1: three percent yield, they're they're battling with SMP five earnings yield.
Speaker 1: You haven't seen a comparison like that since two thousand seven.
Speaker 1: Short duration treasury, short duration investment grade credit, mortgage backed securities,
Speaker 1: structured product we think will be very interesting this year.
Speaker 1: Within the US. We like, we like value stocks, quality stocks,
Speaker 1: high dividend yielding stocks. Money now as opposed to money
Speaker 1: in the future. But now you've actually got competition from
Speaker 1: the ristory rate um for your capital. Eric Newtson doesn't
Speaker 1: necessarily paint a particularly wonderful picture for returns for equities,
Speaker 1: but certainly the short term of the treasury curve. Eric
Speaker 1: Neutson of new Berger Burman, thank you so much for
Speaker 1: being with us. We have seen such a rapid pace
Speaker 1: of tightening four five basis points in the span of
Speaker 1: nine months. The economy hasn't fully felt the effects of that.
Speaker 1: So I guess if you are on the team recession,
Speaker 1: you're saying, just wait until it hits dies. And that
Speaker 1: would really bring back the idea of credibility for the Fed,
Speaker 1: right that they can essentially shoot down inflation, which brings
Speaker 1: us to our next guest and esteemed member of the
Speaker 1: Bloomberg executive team, Editor in Chief Emeritus for Bloomberg, Matt Winkler.
Speaker 1: You wrote, a column that is fascinating where you basically
Speaker 1: pushed back against all the people who are saying the
Speaker 1: FED is just behind the curve. They're getting it wrong, saying, actually,
Speaker 1: it seems like they're bang on target. Well, thank you,
Speaker 1: great to be with you. Happy New Year. A year
Speaker 1: ago at this time, the prevailing narrative, as you say,
Speaker 1: was the FED was behind the curve. Now, let's just
Speaker 1: go back and remember that inflation was seven uh, and
Speaker 1: that's what prompted the outcry. And we also need to
Speaker 1: be reminded of the fact that the US was making
Speaker 1: the most dramatic recovery from the pandemic recession, which was
Speaker 1: the worst since the global depression eight decades ago, and
Speaker 1: we were getting close to what is now the three
Speaker 1: point seven unemployment, right, So the U s economy was
Speaker 1: actually doing very well, better than any major developed economy
Speaker 1: in the world. And that's when the FED decided, Okay,
Speaker 1: the data is what drives us. We're data dependent. We're
Speaker 1: now going to tighten credit. And everybody said they were
Speaker 1: too late, too little, etcetera. And we know that what happened,
Speaker 1: as you said, an unprecedented tightening, but a tightening that
Speaker 1: came when the U. S. Economy was much stronger resilient
Speaker 1: than it otherwise would have been. And I think that's
Speaker 1: the parenthetical clause that's left out of this, is that
Speaker 1: the U. S. Economy was much stronger when they Fed tightened.
Speaker 1: And so here we are today. Inflation is way below
Speaker 1: the nine point one peak in June, when everybody said
Speaker 1: the FED had lost its way. The bond market never
Speaker 1: gave up on the FED. The bond market was always confident, somehow,
Speaker 1: some way, this inflation problem is going to be resolved. Well,
Speaker 1: but the bond market got the FED wrong at the
Speaker 1: end of right because we looked at a two year
Speaker 1: yield that was zero point seven percent, we looked at
Speaker 1: a ten uere yield at one and a half percent,
Speaker 1: we saw a massive rise. People underestimated how much the
Speaker 1: FED would have to do in order to combat inflation,
Speaker 1: heading into how much credibility do you give the idea
Speaker 1: that we're in a new higher inflation regime that will
Speaker 1: cause a real question mark for the FED in terms
Speaker 1: of how far hard they have to go and how
Speaker 1: much pain they have to I'm not sure the bond
Speaker 1: market actually ever lost its way here that you know,
Speaker 1: we're talking about maybe relative values, but the bond market
Speaker 1: was never convinced that run over inflation was here ever,
Speaker 1: and that appears to be still correct. Okay, what the
Speaker 1: bond market, if you say, got wrong is it didn't
Speaker 1: expect the Fed to tighten to the extent that it
Speaker 1: did to contain inflation. But the bond market always anticipated
Speaker 1: that inflation would be much lower than many of our
Speaker 1: strategists and pundits have predicted. And so that's where we
Speaker 1: are today. The Fed is still going to keep interest
Speaker 1: rates elevated, They've already said that, and so the bond
Speaker 1: market is anticipating that we're still going to see what
Speaker 1: five six percent inflation six months, but a year from
Speaker 1: now it's going to be much closer to the two
Speaker 1: percent target. We talked to Eddie Ardnny yesterday who was saying, um,
Speaker 1: that you haven't really seen anything break. You've seen implosions
Speaker 1: here and there in crypto notably, but there hasn't been
Speaker 1: any contagion across the entire financial system. And he said,
Speaker 1: you know, maybe this Fed has gotten it right there,
Speaker 1: probably closer to a soft landing, and there's a chance
Speaker 1: that there's no landing at all. Um, do you think
Speaker 1: that we're starting to see a growing view that we
Speaker 1: could have a very short and shallow recession or even
Speaker 1: not have a recession. Okay, so here a couple of things.
Speaker 1: A year ago, we were all concerned about supply chain bottlenecks,
Speaker 1: if you recall, and the ships in the Port of
Speaker 1: Los Angeles, the largest port, We're backed up as far
Speaker 1: as the eye could see maybe sixty five ships waiting
Speaker 1: to unload their cargoes. When we caught up with Jeans Sirocco,
Speaker 1: who's the executive director of the Port of Los Angeles
Speaker 1: just a month ago, the whole waterfront was blissfully free
Speaker 1: of any supply chain bottlenecks. So there's an example where
Speaker 1: common prevailing assumptions a year ago turned out to be
Speaker 1: the worst as far as it went, and now it's
Speaker 1: gotten better. So it's very similar with the rest of
Speaker 1: the U. S. Economy, which is everybody you can think
Speaker 1: of was worried about it. Recession in July and paying
Speaker 1: double the price for used cars, right, I mean, prices
Speaker 1: were obviously that's part of inflation, just off the charts,
Speaker 1: and now we're looking at that and that market used cars.
Speaker 1: I've seen it just collapse. Right, We got data out
Speaker 1: of Spain, for example, today that shows inflation is coming
Speaker 1: down much faster than expected. Do we get closer to
Speaker 1: two percent? Are the break evens? Right? You think in
Speaker 1: a year? Well, look, the bond market is a collection
Speaker 1: of everybody with the most at stake, if you want
Speaker 1: to think about it that way. So these are the
Speaker 1: people who have resources everywhere. They're betting their reputations and
Speaker 1: their fortunes, and they're all over the world. And treasuries
Speaker 1: are the most widely held security anywhere in the world
Speaker 1: and the most liquid, and that collectively is, as far
Speaker 1: as I'm concerned, the most uh, if you like evidentiary
Speaker 1: way of looking at this equation, which is these people
Speaker 1: are saying, somehow, some way, just as you said, matt Um,
Speaker 1: the inflation that we've been seeing is not going to
Speaker 1: be runaway. It's going to decelerate um in the months ahead.
Speaker 1: And by the way, the economy still ends two thousand
Speaker 1: twenty two up, not down. Up. Well. Obviously, two thousand
Speaker 1: twenty two was a very hard year to predict, and
Speaker 1: so much has happened, including Elon Musk buying Twitter, which
Speaker 1: is another curveball that I don't think any of us
Speaker 1: saw coming back in April. Another one of your great
Speaker 1: pieces was entitled in defense of Elon Musk's managerial excellence.
Speaker 1: Having seen now eight months later, what has happened to
Speaker 1: Tesla's stock? What has happened inside of Twitter since he
Speaker 1: took over? How, if at all, does your view change
Speaker 1: in hindsight? Well, I never understood the Twitter UH debaccle
Speaker 1: of you want to call it that from the beginning
Speaker 1: and said so at the time. I think what's missing
Speaker 1: in the discussion of Tesla right now, which obviously has
Speaker 1: been the biggest casualty maybe of the tech UH industry,
Speaker 1: is that it's still valued more than Toyota. Okay, if
Speaker 1: you look at and nobody mentions that, if you look
Speaker 1: at the market capitalization of Tesla today, having lost what
Speaker 1: its value in, it's still what three hundred and fifty
Speaker 1: billion dollars in market uh and you know that's worth
Speaker 1: more than Toyota. So it's worth still after all this carnage. Now,
Speaker 1: why is that? I would say partly because the automobile
Speaker 1: itself is way ahead of where the rest of the
Speaker 1: auto industry has been. It is, by far in the
Speaker 1: US the most popular e V still um and you
Speaker 1: know that's the real what do you at the moment?
Speaker 1: Even if you add General Motors market cap to Ford's
Speaker 1: market cap to Toyota's market cap, Tesla is still worth substantially. Yeah,
Speaker 1: and so okay, maybe that's all a mirage, But given
Speaker 1: all the carnage that we've all been talking about, I
Speaker 1: just think it's interesting no one, no one mentions that
Speaker 1: the market cap of Tesla today, okay, in the twenty
Speaker 1: two is still worth more than Toyota. Matt Winkler, Fabulous
Speaker 1: to have you on with your perspective, Matt Winkler, Editor
Speaker 1: emeritus of Bloomberg, Editor in chief Emeritus. This has been
Speaker 1: one of the big questions, not only with respect to
Speaker 1: China and the economy, but also with respect to COVID.
Speaker 1: Do we have to care about coronavirus again? People have
Speaker 1: to start getting tested in more masks. Lawrence Houer, I
Speaker 1: was I loved speaking with you. I saw your name
Speaker 1: pop up and I thought to myself, I really want
Speaker 1: to speak to you, and I hate that I have
Speaker 1: to speak to you, because why do we have the
Speaker 1: reprisal of COVID yet once again, the associate professor at
Speaker 1: the University of Nebraska Medical Center and Special Pathogens Research
Speaker 1: Network Director, Lauren, It is great to see you, and
Speaker 1: it is also terrible to see you because people are
Speaker 1: starting to get worried about a new variant. How much
Speaker 1: are you concerned about this? How much is that tied
Speaker 1: just sort of the mass infection level that we're seeing
Speaker 1: in China. Yeah, that's a great question, and I agree.
Speaker 1: Happy to see you and sad to see you because
Speaker 1: it means we're back to seeing large numbers of COVID.
Speaker 1: So I think for me, one of the biggest concerns
Speaker 1: is less that that a new variants emerging UM and
Speaker 1: more about the just volume of cases that may be
Speaker 1: coming out of China. I mean, we've seen some numbers
Speaker 1: that look like the early days of COVID when we
Speaker 1: were we weren't even calling it COVID and we were
Speaker 1: watching from Afar to see what would happen in China.
Speaker 1: So I think the numbers of cases are what we're
Speaker 1: worried about seeing come into Europe, come into the US,
Speaker 1: come into the global UM environment. And and if we
Speaker 1: do see new variants emerge, I think it'll be important
Speaker 1: to track what they are UM, what what the sub
Speaker 1: variants are and make sure that we can adjust are
Speaker 1: our tools, Lauren, Can China be trusted to reliably do
Speaker 1: that and to count the case this period? I think
Speaker 1: it's it's not what we're seeing right now for sure.
Speaker 1: Um we're not seeing the data we would like to
Speaker 1: see out of China, especially on the deaths, um on,
Speaker 1: on the sequencing that they're doing. Um So they've reduced
Speaker 1: the amount of people that they're even testing. UM So
Speaker 1: we're not seeing testing data. But we also know that
Speaker 1: the testing is much lower than it was just a
Speaker 1: few weeks ago. Um And and so I think the
Speaker 1: pressure has to be on China to share every single
Speaker 1: number they have, right so, what what are the case
Speaker 1: counts that they're aware of, what testing are they doing,
Speaker 1: and importantly, what variants are they seeing? Is it only
Speaker 1: the variants that pose a risk to the rest of
Speaker 1: the world if we are worried about it's spreading once again,
Speaker 1: If no new variants emerge, how much of the population
Speaker 1: is going to be relatively immune or at least not
Speaker 1: have any form of severe disease because we've already had
Speaker 1: so many infections and vaccinations as well. Yeah, that's a
Speaker 1: great question. I think that that large numbers of COVID
Speaker 1: are are problematic and dangerous no matter what, because the
Speaker 1: more COVID cases you have, the more likely you are
Speaker 1: going to see those um those severe cases and the deaths.
Speaker 1: So no matter what, we are going to have large
Speaker 1: numbers of cases coming out of China and impacting the
Speaker 1: global health environment, the global economy, um and and that
Speaker 1: can be really dangerous. I think the anytime you have
Speaker 1: a less immune population, UM, you're going to see the
Speaker 1: potential for variance. So even if we're not seeing variants
Speaker 1: right now, uh, seeing those large numbers come out could
Speaker 1: impact the likelihood that we see a new variant in
Speaker 1: the future. Lauren, how does how does the US situation
Speaker 1: look right now with regards to COVID infection rates, specifically
Speaker 1: New York City around the Madison Square Garden area, because
Speaker 1: I'm going there tonight with my closest friends. Not a
Speaker 1: selfish question at all. Yeah, I would definitely recommend wearing
Speaker 1: a mask in Madison Square Garden. I think COVID rates
Speaker 1: are so high and we're seeing a lot of um
Speaker 1: I l I or influenza like illness all across the
Speaker 1: Northeast and and really all across the US, So it
Speaker 1: is a risky time to be in close quarters with people.
Speaker 1: Um and and we're seeing a lot of illness still
Speaker 1: so UM, I think there's a lot of people who
Speaker 1: are worried about an ongoing COVID surge and um and
Speaker 1: it's coupled with a respiratory virus season like we have
Speaker 1: not seen in several years. So it's not the safest
Speaker 1: time to be out in public. Uh, certainly without a mask.
Speaker 1: But but you know, just in those close quarters. Is
Speaker 1: it ever going to go away? Lauren? I mean, it's
Speaker 1: been almost three years, right, um, and now we're adding
Speaker 1: all of these other You've got the respiratory infection. People
Speaker 1: are worried about fluid pneumonia again, I've had I think
Speaker 1: six shots since March of Are we ever going to
Speaker 1: get over this? I don't think COVID is ever going
Speaker 1: to go away. We're not going to get to zero
Speaker 1: COVID and and and I think that's also part of
Speaker 1: what we're seeing in China right now. Um. One of
Speaker 1: the one of the things that we're hoping to see
Speaker 1: is that we get on a cadence similar to flu
Speaker 1: where UM, where we're getting vaccinated on a regular schedule,
Speaker 1: we're minimizing the impact of the disease on our life um,
Speaker 1: and we're reducing spread wherever possible. So I think we're
Speaker 1: still in this sort of Perry emergency phase where we're
Speaker 1: just figuring out how to live with covid um. It's
Speaker 1: still certainly quite dangerous. But as we get on that
Speaker 1: you know, routine vaccination schedule, as we get more and
Speaker 1: more data on how and when we need to vaccinate people,
Speaker 1: and as we come back to sort of believing in
Speaker 1: the science of vaccines and and all of the other
Speaker 1: tools we've built in a in a very short amount
Speaker 1: of time um that hopefully we will be able to
Speaker 1: live with it in a much less painful way. I
Speaker 1: hope it's not a strategy. And that's this is the
Speaker 1: reason why I say that, is because we're talking about masking.
Speaker 1: We're talking about how you should probably be careful congregating
Speaker 1: with your closest friends, and yet I can pretty much
Speaker 1: guarantee that Matt Miller will still be at that concert.
Speaker 1: You will not be wearing a mask, and neither will
Speaker 1: anybody else in there. I'm just going to suggest that
Speaker 1: if you take a look at a lot of airplanes,
Speaker 1: and you look at that very few people are masked,
Speaker 1: and those that are are given glances of what's wrong
Speaker 1: with you? Do you have the flu? Or? I mean,
Speaker 1: because we all want to get back to normal. So
Speaker 1: how do you change a culture that is absolutely opposed
Speaker 1: to masking and using some of the tools that you're
Speaker 1: talking about. Yeah, I completely agree with you. I think
Speaker 1: that it has become very divisive to even talk about,
Speaker 1: let alone use some of these important public health strategies.
Speaker 1: I think we have to go back to the roots
Speaker 1: of explaining what where the science comes from, why we
Speaker 1: use masks when we use them, and and maybe the
Speaker 1: culture won't change, And unfortunately that that is something we
Speaker 1: may have to deal with. But I think that it
Speaker 1: is it is, it is. It remains an option for
Speaker 1: people UM, and it certainly remains the recommendation UM, at
Speaker 1: least from me. And I think it's important to keep
Speaker 1: making that recommendation, sort of normalizing that this is a
Speaker 1: choice that is saying for people to make and is
Speaker 1: not a political statement. It is a statement where you're saying,
Speaker 1: I need to protect my health or I want to
Speaker 1: help protect the health of others, and I'm going to
Speaker 1: choose to do that. And so the more we can
Speaker 1: normalize that, the easier it gets to make that decision.
Speaker 1: I mean, I know, masks are not you know, they're
Speaker 1: not the place people want to be right now. And
Speaker 1: that's completely reasonable to to feel that way, UM, And
Speaker 1: many people are making that choice. UM. But but it
Speaker 1: certainly shouldn't be that the people who do make the
Speaker 1: choice to mask are judged or are looked upon as
Speaker 1: as making a poor choice. Lauren, just real quick here
Speaker 1: and to finish up, what is the chance in your
Speaker 1: view of our being subjected to a pandemic like the
Speaker 1: one that we just went through with another mutation of
Speaker 1: the COVID of virus. I think our chance of going
Speaker 1: through another pandemic is quite high. I'm not necessarily sure
Speaker 1: that it is it will be with a COVID mutation
Speaker 1: or you know, a co variant of concern um, but
Speaker 1: certainly we could see a pandemic with another virus or
Speaker 1: with a mutation of this same virus in our lives. Um.
Speaker 1: The risk associated with these new viruses coming into our
Speaker 1: population just continues to grow. And so if we don't
Speaker 1: implement the tools UM that we've developed during COVID and
Speaker 1: also some of the lessons learned. Making sure that there
Speaker 1: are lessons learned and not just lessons identified. Um, we
Speaker 1: will continue to be at risk for another pandemic. Lawrence Our,
Speaker 1: thank you, I guess, but also not thank you. I
Speaker 1: love talking with you. I love the insight that you bring.
Speaker 1: I hope that I hope that the worst case scenario
Speaker 1: does not come to pass. I'm sure we all do.
Speaker 1: Lawrence Our of the University of Nebraska Medical Center, thank
Speaker 1: you so much. It's the difference of year makes right.
Speaker 1: Because last holiday season we were talking about goods that
Speaker 1: were stuck on ships and on trucks and the supply
Speaker 1: chain that was a total mess. Therefore, there were such
Speaker 1: a limited quantity of going people were willing to pay
Speaker 1: up for them. Now it's entirely different. There's too much
Speaker 1: stuff that people frankly aren't trying to buy anymore, so
Speaker 1: they're less price tolerant. Let's get a take on this data.
Speaker 1: Telsa founder, CEO and chief Research officer at Telsey Advisory Group,
Speaker 1: and this is the exact dynamic that has led to
Speaker 1: an inventory glatt in retails retailers like Target. That meant
Speaker 1: Matt mentioned, do we have a sense of the progress
Speaker 1: they are making and doing that discounting and working that
Speaker 1: inventory down. Hi, how are you thank you for having me?
Speaker 1: I think overall what surprised people coming out of the
Speaker 1: third quarter is that the retailers did make progress in
Speaker 1: lowering their inventory. There should be more progress made by
Speaker 1: the end of the fourth quarter, and as retailers report
Speaker 1: their preliminary holiday sales results, many of them the end
Speaker 1: of next week the beginning of the following watch for
Speaker 1: those inventory numbers. I think they did make progress. I
Speaker 1: think some of these markedowns and discounts that they have
Speaker 1: even buy one get one off for some definitely helped
Speaker 1: to pave the way. But it will still be at
Speaker 1: least through the first quarter because don't forget, you need
Speaker 1: wholesale accounts to order, and wholesale accounts like the department
Speaker 1: stores are ordering very carefully down around ten to fift
Speaker 1: from what I hear for the spring selling season, with
Speaker 1: the goal for both the brands and the retailers to
Speaker 1: get back and focus to promote less, promote less. So
Speaker 1: you're saying that that doesn't need to continue, even if
Speaker 1: we are looking next year at an economy that if
Speaker 1: it doesn't fall into an out raper session could soften
Speaker 1: because in theory, that also brings down consumers spending power.
Speaker 1: Keep in mind a couple of things when you think
Speaker 1: about the bifurcation of the consumer. The middle to high
Speaker 1: end still has dollars. They have dollars to spend its
Speaker 1: product innovation that drives demand. They'll be looking for bargains,
Speaker 1: and the benefit is going to be the trade down
Speaker 1: to the off pricers, the lower to middle income consumer.
Speaker 1: You're gonna see the targets and the walmarts move through
Speaker 1: inventory and the focus on essentials will be even more
Speaker 1: for those consumers. So I think we should have not
Speaker 1: the same cadence of promotions, but the value offering will
Speaker 1: be even more dynamic than it was this year. They'll
Speaker 1: be able to get goods at more compelling prices because
Speaker 1: you're not going to have hopefully higher gas prices like
Speaker 1: what you had last year. Well, and the question also
Speaker 1: is whether how much people have shifted some of the
Speaker 1: supply chains away from China during this time, or whether
Speaker 1: the reopening of China will actually allow a lot of
Speaker 1: these retailers to buy goods at lower, more compelling pricing. Tana,
Speaker 1: how much have you seen a real rejiggering of where
Speaker 1: some of the clothing, where some of the items are
Speaker 1: being manufactured. Over the past three years, we've seen a
Speaker 1: lot of rejiggering, and I think the ability to diverse
Speaker 1: fight from China has been in place for a long time.
Speaker 1: I think the change for twenty three is going to
Speaker 1: be the cost of ocean freight rates, the cost of
Speaker 1: air freighting, and frankly not even air freighting as much
Speaker 1: goods in as they had in the past. What's gonna
Speaker 1: be sticky is higher labor us that is not going away.
Speaker 1: What is going to moderate is going to be those
Speaker 1: supply chain costs that should get retailers more flexibility. Promotions
Speaker 1: will be higher than they were in twenty one, they'll
Speaker 1: be higher than they were in the first half of
Speaker 1: twenty two, but hopefully we're not going back to two
Speaker 1: thou nineteen levels. It's interesting, you know, I was in
Speaker 1: Detroit a couple of months ago talking with Mark Royce,
Speaker 1: and obviously automotive is a little bit different than the
Speaker 1: retail that you're covering, but he was saying, look, we're
Speaker 1: not going to go back to the days of big discounts.
Speaker 1: We're not going to go back to the days of
Speaker 1: pack dealer lots. We're gonna keep selling these products at
Speaker 1: M S r P. And he has to be confident
Speaker 1: that um CEOs of other carmakers are going to act
Speaker 1: the same way, right UM can can retailers try and
Speaker 1: follow that same strategy or will they undercut each other?
Speaker 1: I think overall, when there is as much inventory glad
Speaker 1: as we've had, I think they're all being aggressive. You've
Speaker 1: seen after the holiday season what Target did with their
Speaker 1: clearance event. I think when Amazon had their second Prime
Speaker 1: Day in October, that basically opened this spigot for Target, Walmart,
Speaker 1: and Old Navy to discount aggressively. I think getting the
Speaker 1: inventor is more normalized. You're not going to no promotions,
Speaker 1: but you're not going to have the burst of promotions
Speaker 1: with seventy and eighty percent off that we saw in
Speaker 1: some instances this year. Dana Uh, we were talking yesterday
Speaker 1: a little bit pickleball. The rackets made in China are
Speaker 1: so much cheaper than the rackets made in the US,
Speaker 1: and today somebody on my Twitter feed mentioned snap on tools.
Speaker 1: They're also incredibly expensive made in the US compared to
Speaker 1: the husky tools you see at home deep home made
Speaker 1: in China. Is deglobalization really going to happen because the
Speaker 1: price differences are really pretty massive, and so I wonder,
Speaker 1: you know, if we go down that road, is it inflationary?
Speaker 1: You're absolutely right. I mean, what we've seen is we've
Speaker 1: seen the ability to produce goods in China and frankly,
Speaker 1: the quality of the speed that it takes in the
Speaker 1: cost is lower. We've seeing a focus on diversification, whether
Speaker 1: to South America, whether to Africa, whether whether to America.
Speaker 1: But managing prices key, whether it's raw materials, labor costs,
Speaker 1: or shipping. I think China will always remain relevant. I
Speaker 1: think the percentage coming from China will continue to be
Speaker 1: reduced Data Telsea. Thank you so much for being with us.
Speaker 1: Dana Telsey of Telsey Advisory Group. This is the Bloomberg
Speaker 1: Surveillance Podcast. Thanks for listening. Join us live weekdays from
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Speaker 1: Tom keene In. This is Bloomberg.