1 00:00:02,680 --> 00:00:05,360 Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul swing you, 2 00:00:05,400 --> 00:00:07,720 Speaker 1: along with my co host Lisa Brahma wits. Each day 3 00:00:07,760 --> 00:00:10,280 Speaker 1: we bring you the most noteworthy and useful interviews for 4 00:00:10,320 --> 00:00:12,560 Speaker 1: you and your money. Whether at the grocery store or 5 00:00:12,600 --> 00:00:15,480 Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple 6 00:00:15,560 --> 00:00:18,000 Speaker 1: podcast or wherever you listen to podcasts, as well as 7 00:00:18,000 --> 00:00:21,239 Speaker 1: that Bloomberg dot com. At least, it was reported just 8 00:00:21,320 --> 00:00:24,800 Speaker 1: recently that that three billion dollar program to help small 9 00:00:24,880 --> 00:00:28,080 Speaker 1: businesses reeling from the COVID nineteen outbreak that could actually 10 00:00:28,120 --> 00:00:31,800 Speaker 1: be exhausted by Thursday, a top White House advisor said, 11 00:00:31,800 --> 00:00:35,159 Speaker 1: but negotiations in Congress to replenish it remains stalled. They 12 00:00:35,200 --> 00:00:37,400 Speaker 1: get to lay us on what this means for small businesses. 13 00:00:37,440 --> 00:00:39,760 Speaker 1: We welcome our next guest, Karen Mills. She's a senior 14 00:00:39,760 --> 00:00:42,520 Speaker 1: fellow at the Harvard Business School, formerly a small business 15 00:00:42,520 --> 00:00:45,839 Speaker 1: administrator for President Obama from two thousand nine to two 16 00:00:45,840 --> 00:00:48,360 Speaker 1: thousand thirteen. Karen is so good to speak with you 17 00:00:48,960 --> 00:00:52,040 Speaker 1: talk to us about the state of the small business 18 00:00:52,080 --> 00:00:54,920 Speaker 1: owner out there, How tough is it and how quickly 19 00:00:55,000 --> 00:00:59,280 Speaker 1: can AID get to that small business owner? Nice to 20 00:00:59,360 --> 00:01:01,920 Speaker 1: talk to you. Well, you know, this is the worst 21 00:01:02,160 --> 00:01:05,680 Speaker 1: crisis for small businesses that I've ever seen. And as 22 00:01:05,720 --> 00:01:08,160 Speaker 1: you mentioned, I was in the seat two thousand nine 23 00:01:08,160 --> 00:01:10,880 Speaker 1: and we thought that was pretty bad. Um. You know, 24 00:01:10,920 --> 00:01:14,880 Speaker 1: we lost two million small businesses the first quarter. Well, 25 00:01:14,959 --> 00:01:18,320 Speaker 1: when we look at our unemployment numbers, we're seeing six 26 00:01:18,400 --> 00:01:22,959 Speaker 1: million last week. Most of those are small businesses, UH 27 00:01:23,000 --> 00:01:26,120 Speaker 1: and their employees. As you know, this has a critical 28 00:01:26,160 --> 00:01:29,319 Speaker 1: impact on the economy because half the people who work 29 00:01:29,360 --> 00:01:32,240 Speaker 1: in this country own or work for a small business. 30 00:01:32,319 --> 00:01:36,080 Speaker 1: It's actually forty seven percent of the jobs. And these 31 00:01:36,080 --> 00:01:39,520 Speaker 1: small businesses are now three or four weeks into a 32 00:01:39,600 --> 00:01:43,319 Speaker 1: crisis and they only have on average three or four 33 00:01:43,319 --> 00:01:45,960 Speaker 1: weeks worth of cash, so they have had to lay 34 00:01:45,959 --> 00:01:49,320 Speaker 1: off people. And the question is how are they going 35 00:01:49,320 --> 00:01:52,240 Speaker 1: to get the money from the p p P program 36 00:01:52,440 --> 00:01:56,160 Speaker 1: and the other government relief in time for them to 37 00:01:56,200 --> 00:01:59,800 Speaker 1: make a decision to keep operating, Because we know if 38 00:01:59,800 --> 00:02:04,200 Speaker 1: we lose them, it's a very long and slow recovery. 39 00:02:04,240 --> 00:02:07,240 Speaker 1: It's six months at least to get a new business 40 00:02:07,280 --> 00:02:09,960 Speaker 1: to start up if an old one failed. So the 41 00:02:10,040 --> 00:02:13,240 Speaker 1: next two weeks are critical. So these loans, let's talk 42 00:02:13,240 --> 00:02:15,680 Speaker 1: a little bit about them and the logistics of it. 43 00:02:15,840 --> 00:02:17,960 Speaker 1: We have heard that more than half of the three 44 00:02:18,000 --> 00:02:21,040 Speaker 1: hundred and fifty billion dollars so so far allocated to 45 00:02:21,080 --> 00:02:25,040 Speaker 1: the SBA program has been distributed. That program is expected 46 00:02:25,080 --> 00:02:27,840 Speaker 1: to run out of cash in the next couple of days. 47 00:02:28,480 --> 00:02:31,919 Speaker 1: What are the parameters around these loans? Do companies have 48 00:02:32,000 --> 00:02:35,480 Speaker 1: to make sure to keep their employees on staff, they 49 00:02:35,520 --> 00:02:39,880 Speaker 1: have to repay them? What do we know? So it's 50 00:02:39,919 --> 00:02:44,280 Speaker 1: an actually amazing number. Two hundred and sixty three billion 51 00:02:44,440 --> 00:02:47,480 Speaker 1: as of yesterday, which is seventy of the three hundred 52 00:02:47,880 --> 00:02:51,760 Speaker 1: nine billion has been approved. Now only a very small 53 00:02:51,800 --> 00:02:55,320 Speaker 1: percent of that apparently has been funded. So we'll come 54 00:02:55,320 --> 00:02:57,959 Speaker 1: back to that issue, because until you have the money, 55 00:02:58,600 --> 00:03:01,800 Speaker 1: doesn't really do you any good. But one thing that 56 00:03:02,080 --> 00:03:05,280 Speaker 1: is amazing in my tenure, the first year we were 57 00:03:05,280 --> 00:03:08,480 Speaker 1: in office, we did all kinds of UH increases in 58 00:03:08,520 --> 00:03:11,960 Speaker 1: the guarantees and we had a record year of thirty billion, 59 00:03:12,880 --> 00:03:16,320 Speaker 1: a record year. Now in one month we're trying to 60 00:03:16,360 --> 00:03:21,000 Speaker 1: get out ten times that much. So it's it's unbelievable 61 00:03:21,040 --> 00:03:25,480 Speaker 1: that banks have have been um actually able to get 62 00:03:25,520 --> 00:03:28,560 Speaker 1: this done. Now, why aren't we getting money into the 63 00:03:28,600 --> 00:03:32,840 Speaker 1: hands of small business owners from the s B a. 64 00:03:32,919 --> 00:03:36,600 Speaker 1: The banks actually have to fund this money into the 65 00:03:36,640 --> 00:03:39,680 Speaker 1: accounts of the small businesses, and they haven't yet been 66 00:03:39,720 --> 00:03:44,200 Speaker 1: doing that, in part because the Fed and Treasury have 67 00:03:44,360 --> 00:03:46,920 Speaker 1: said they will buy all these loans from the bank's 68 00:03:46,920 --> 00:03:49,920 Speaker 1: balance sheet. There are a hundred percent guaranteed by the government, 69 00:03:50,360 --> 00:03:53,640 Speaker 1: and that program has not gotten up and running. And 70 00:03:53,720 --> 00:03:57,320 Speaker 1: the second thing that hasn't quite gotten up yet is 71 00:03:57,400 --> 00:04:00,600 Speaker 1: that a bunch of the new fin techs like Square 72 00:04:00,840 --> 00:04:05,680 Speaker 1: and PayPal and quick books are only just getting their 73 00:04:05,720 --> 00:04:10,160 Speaker 1: approvals and they are really critical for the smallest small businesses. 74 00:04:10,720 --> 00:04:13,960 Speaker 1: You know, they still proprietorships that have been included here. 75 00:04:14,600 --> 00:04:18,760 Speaker 1: And folks who are looking for a forty dollar loan, 76 00:04:18,839 --> 00:04:21,760 Speaker 1: at ten thousand dollar loan, a six thousand dollar loan, well, 77 00:04:21,760 --> 00:04:24,920 Speaker 1: the banks don't do those small loans. So I am 78 00:04:24,960 --> 00:04:28,760 Speaker 1: hopeful that this week will be a turnaround for them. 79 00:04:28,800 --> 00:04:31,640 Speaker 1: Here's the problem. We're going to run out of money tomorrow, 80 00:04:32,279 --> 00:04:35,960 Speaker 1: so Congress has to get this pipe refilled so the 81 00:04:36,000 --> 00:04:40,440 Speaker 1: rest of the small businesses can get their money. So, Karen, 82 00:04:40,440 --> 00:04:42,800 Speaker 1: give us a sense of kind of what's really the 83 00:04:42,920 --> 00:04:46,119 Speaker 1: issue here for this next round of small business loans 84 00:04:46,120 --> 00:04:48,440 Speaker 1: that we've heard. It's two and fifty billion. Maybe the 85 00:04:48,440 --> 00:04:50,880 Speaker 1: Democrats would like to move it up to five billion, 86 00:04:51,279 --> 00:04:53,919 Speaker 1: include hospital funding and thinking things like that. How do 87 00:04:53,960 --> 00:04:57,000 Speaker 1: you think this is really going to play out? Well, 88 00:04:57,000 --> 00:04:59,480 Speaker 1: I'm talking to a lot of the Senators this afternoon. 89 00:04:59,560 --> 00:05:02,400 Speaker 1: I've been in touched with the House Offices, and you know, 90 00:05:02,480 --> 00:05:06,039 Speaker 1: they're having a fight over um, you know, a whole 91 00:05:06,080 --> 00:05:10,200 Speaker 1: set of things. But what I'm saying is the matter 92 00:05:10,440 --> 00:05:14,720 Speaker 1: is absolutely urgent. We've finally gotten the fire hose attached 93 00:05:14,760 --> 00:05:17,359 Speaker 1: to all the pipes. We have to get this in 94 00:05:17,400 --> 00:05:19,520 Speaker 1: the hands of small business owners. And you asked me 95 00:05:19,600 --> 00:05:22,960 Speaker 1: earlier how do they get it and what's it used for? 96 00:05:23,640 --> 00:05:26,920 Speaker 1: And the answer is the bill is actually pretty smartly 97 00:05:27,000 --> 00:05:31,960 Speaker 1: crafted to encourage small business owners to keep their people 98 00:05:32,080 --> 00:05:37,360 Speaker 1: on the payroll and instead of being alone. The p 99 00:05:37,560 --> 00:05:41,920 Speaker 1: p P program actually is a grant. It's a refundable 100 00:05:42,000 --> 00:05:45,760 Speaker 1: loan that, um, you don't owe if you use the 101 00:05:45,800 --> 00:05:49,560 Speaker 1: money to pay for eight weeks of payroll or other 102 00:05:49,600 --> 00:05:54,400 Speaker 1: permitted expenses. And the other permitted expenses are paying your rent, 103 00:05:54,600 --> 00:05:56,839 Speaker 1: which you know is going to come up May first, 104 00:05:56,960 --> 00:06:02,120 Speaker 1: so that's important, and mortgages and interest on your other loans. 105 00:06:02,240 --> 00:06:06,640 Speaker 1: So it's actually a good bill because it understands people 106 00:06:06,720 --> 00:06:09,080 Speaker 1: need money and they don't need a loan, they need 107 00:06:09,120 --> 00:06:12,240 Speaker 1: a grant, and that it's important that they keep their 108 00:06:13,080 --> 00:06:16,480 Speaker 1: folks on the payroll so that they can get healthcare 109 00:06:16,560 --> 00:06:20,120 Speaker 1: and that they can be there when hopefully businesses get 110 00:06:20,120 --> 00:06:22,960 Speaker 1: to reopen their doors whenever it's safe to do so. 111 00:06:24,160 --> 00:06:28,360 Speaker 1: Karen wouldn't just after Ray Dalio spoke. My mindset is 112 00:06:28,440 --> 00:06:31,920 Speaker 1: how will this world look after this scenario? And one 113 00:06:31,960 --> 00:06:36,160 Speaker 1: thing that you pointed to was that fintech lenders, into it, Square, 114 00:06:36,240 --> 00:06:40,640 Speaker 1: et cetera, have been instrumental in this whole effort to 115 00:06:40,720 --> 00:06:44,840 Speaker 1: extend credit to small businesses. How will they emerge from 116 00:06:45,080 --> 00:06:51,440 Speaker 1: this whole event in terms of providing finances going forward? Well, 117 00:06:51,520 --> 00:06:54,400 Speaker 1: Quick Books told me that they have spent the last 118 00:06:54,440 --> 00:06:56,400 Speaker 1: two or three weeks while they were waiting for their 119 00:06:56,560 --> 00:07:01,000 Speaker 1: SBA approval to you know, taking the turbo tax engine 120 00:07:01,400 --> 00:07:04,640 Speaker 1: and making a user friendly front end. I mean, these 121 00:07:04,640 --> 00:07:07,279 Speaker 1: poor small business owners are trying to figure out how 122 00:07:07,279 --> 00:07:10,120 Speaker 1: did they sell out the paperwork and even if it's easy, 123 00:07:10,200 --> 00:07:14,200 Speaker 1: they have to bring different documentation and banks didn't know 124 00:07:14,480 --> 00:07:19,640 Speaker 1: what documentation they needed for a while. Now this new 125 00:07:19,720 --> 00:07:23,080 Speaker 1: app is, you know, automated and it asked you a 126 00:07:23,160 --> 00:07:25,400 Speaker 1: bunch of questions. And if you use quick books that 127 00:07:25,560 --> 00:07:31,360 Speaker 1: uploads your documents, PayPal has a similar user friendly opening 128 00:07:31,520 --> 00:07:34,800 Speaker 1: for these small business owners. So I think this could 129 00:07:34,800 --> 00:07:38,600 Speaker 1: be a game changer for the smaller small businesses who 130 00:07:38,800 --> 00:07:43,120 Speaker 1: have been having trouble getting into their banks and you know, 131 00:07:43,200 --> 00:07:46,760 Speaker 1: getting in the line, because the bigger small businesses are 132 00:07:47,040 --> 00:07:49,120 Speaker 1: more prepared and they're they're getting to the front of 133 00:07:49,120 --> 00:07:52,440 Speaker 1: the line. And if you see if you have a 134 00:07:52,480 --> 00:07:56,800 Speaker 1: small business and suddenly a new fintech becomes a trusted 135 00:07:56,880 --> 00:08:01,040 Speaker 1: provider with a good consumer experience, you could see the 136 00:08:01,080 --> 00:08:03,520 Speaker 1: fin techs doing a lot of good but also ending 137 00:08:03,600 --> 00:08:06,560 Speaker 1: up with a lot of goodwill because all business customers 138 00:08:06,560 --> 00:08:08,920 Speaker 1: are going to remember who was there for them in 139 00:08:08,960 --> 00:08:11,800 Speaker 1: this crisis. Karen Mills, thank you so much for being 140 00:08:11,840 --> 00:08:15,280 Speaker 1: with us. Karen Mills, Senior Fellow at the Harvard Business School, 141 00:08:15,400 --> 00:08:18,840 Speaker 1: former Small Business Administrator for President Obama from two thousand 142 00:08:18,800 --> 00:08:22,760 Speaker 1: and nine two thou thirteen, overseeing the efforts during that 143 00:08:22,960 --> 00:08:29,800 Speaker 1: financial crisis, with some valuable insights into this one. David 144 00:08:29,880 --> 00:08:33,480 Speaker 1: cast joining us now chief Investment Officer of Matrix Asset Advisors, 145 00:08:34,080 --> 00:08:37,559 Speaker 1: joining by phone from New York David. When we look 146 00:08:37,600 --> 00:08:41,440 Speaker 1: at the bank loan loss provisions totaling twenty four billion 147 00:08:41,520 --> 00:08:45,600 Speaker 1: dollars so far from Bank of America, Wells Fargo, JP, Morgan, 148 00:08:45,800 --> 00:08:49,240 Speaker 1: as well as City Group, do you feel like the 149 00:08:49,320 --> 00:08:52,560 Speaker 1: market is inadequately pricing in the carnage that we're expecting 150 00:08:52,559 --> 00:08:56,960 Speaker 1: in this earning season. Uh, we actually don't. We think 151 00:08:57,000 --> 00:09:00,720 Speaker 1: that the banks are the bank prices are far more 152 00:09:00,800 --> 00:09:03,840 Speaker 1: sensitive to the current trends than most other companies will be. 153 00:09:04,360 --> 00:09:06,400 Speaker 1: And the reason behind that is when you're looking at 154 00:09:06,480 --> 00:09:11,400 Speaker 1: industrial companies or corporate general corporations, the real concern is 155 00:09:11,440 --> 00:09:13,400 Speaker 1: not how they did this quarter, but are they going 156 00:09:13,440 --> 00:09:15,040 Speaker 1: to be able to survive it? And where are they 157 00:09:15,080 --> 00:09:17,240 Speaker 1: going to be in six months. When you're looking at 158 00:09:17,280 --> 00:09:20,600 Speaker 1: the banks, there's a concern that they're leveraged, and if 159 00:09:20,679 --> 00:09:23,080 Speaker 1: the loans are this bad now and they get worse later, 160 00:09:23,080 --> 00:09:24,640 Speaker 1: are they going to be able to pay the dividends? 161 00:09:24,640 --> 00:09:26,600 Speaker 1: Are they going to be able to survive? Is it 162 00:09:26,640 --> 00:09:28,480 Speaker 1: going to be two thousand and eight, two thousand nine? 163 00:09:28,559 --> 00:09:31,680 Speaker 1: So number one, we'd make that distinction. We don't expect 164 00:09:31,720 --> 00:09:34,880 Speaker 1: other stocks and other industries and sectors to react like 165 00:09:34,920 --> 00:09:38,600 Speaker 1: the banks that's first number two. We actually think when 166 00:09:38,640 --> 00:09:41,040 Speaker 1: the dust settles, the banks are going to start to 167 00:09:41,040 --> 00:09:44,520 Speaker 1: do much better. We've been on all of these calls 168 00:09:44,559 --> 00:09:47,040 Speaker 1: and and basically what the banks did is they were 169 00:09:47,040 --> 00:09:50,520 Speaker 1: in a pretty draconian way, uh said, these loans. You know, 170 00:09:50,520 --> 00:09:53,520 Speaker 1: there's going to be an enormous uptick in negative loans 171 00:09:53,600 --> 00:09:56,160 Speaker 1: or non paying loans. They took a big hit now 172 00:09:56,200 --> 00:09:59,079 Speaker 1: And because the banks don't want to over promise and 173 00:09:59,160 --> 00:10:01,720 Speaker 1: under deliver, they and said and if things get worse, 174 00:10:01,800 --> 00:10:03,800 Speaker 1: these numbers are going to get a lot worse. So 175 00:10:04,160 --> 00:10:06,760 Speaker 1: everyone is looking at the bank numbers and assuming the worst. 176 00:10:07,120 --> 00:10:09,600 Speaker 1: We think that they've taken a significant reserve. One thing 177 00:10:09,600 --> 00:10:12,120 Speaker 1: that they did say is that they will get through this. 178 00:10:12,240 --> 00:10:15,000 Speaker 1: At their balance sheets are in very good shape. They're 179 00:10:15,040 --> 00:10:17,360 Speaker 1: over reserved. You know. One of the things people are 180 00:10:17,400 --> 00:10:19,679 Speaker 1: trying to get a sense of is is this big 181 00:10:19,720 --> 00:10:22,240 Speaker 1: move up off the bottom. Is it a head fake? 182 00:10:22,440 --> 00:10:25,640 Speaker 1: Is it real? Are we're gonna retest lows because there's 183 00:10:25,640 --> 00:10:28,600 Speaker 1: gonna be a lot of dire data coming out over 184 00:10:28,600 --> 00:10:31,040 Speaker 1: the next several months. Well, we think that the last 185 00:10:31,600 --> 00:10:34,320 Speaker 1: three weeks is a great lesson in teaching people that 186 00:10:34,360 --> 00:10:37,640 Speaker 1: you simply can't time the market on a short term basis, 187 00:10:37,720 --> 00:10:39,520 Speaker 1: and you really shouldn't spend a whole heck of a 188 00:10:39,559 --> 00:10:42,080 Speaker 1: lot of time trying to call a bottom, because the 189 00:10:42,080 --> 00:10:43,679 Speaker 1: people that were trying to call a bottom all of 190 00:10:43,720 --> 00:10:46,960 Speaker 1: a sudden missed the first. So we think the key 191 00:10:47,000 --> 00:10:50,480 Speaker 1: for investors is take a nine to twelve month time horizon, 192 00:10:50,600 --> 00:10:53,199 Speaker 1: look at what's going to be happening. By the end 193 00:10:53,240 --> 00:10:54,960 Speaker 1: of this year. The market is going to be looking 194 00:10:54,960 --> 00:10:57,960 Speaker 1: at two thousand and twenty one earnings, and on that basis, 195 00:10:58,000 --> 00:11:00,920 Speaker 1: we think stocks are pretty cheap and a that's your mindset, 196 00:11:01,000 --> 00:11:02,920 Speaker 1: and you're able to do that. You're able to buy 197 00:11:02,920 --> 00:11:06,160 Speaker 1: some pretty decent companies at very attractive prices that are 198 00:11:06,200 --> 00:11:08,600 Speaker 1: going to get through this period, and we think that's 199 00:11:08,640 --> 00:11:11,760 Speaker 1: the most important question. We expect a lot of volatility. 200 00:11:12,280 --> 00:11:14,679 Speaker 1: We would be buying in days like today, We would 201 00:11:14,679 --> 00:11:17,000 Speaker 1: not be chasing the rallies of the last few weeks. 202 00:11:17,520 --> 00:11:20,720 Speaker 1: But today the newsflow feels horrible. Two days ago, you know, 203 00:11:20,760 --> 00:11:23,160 Speaker 1: one day ago the news flow felt great. Don't get 204 00:11:23,160 --> 00:11:25,240 Speaker 1: caught up in the daily news flow because it'll make 205 00:11:25,280 --> 00:11:28,440 Speaker 1: you crazy. But if you can buy a good business 206 00:11:28,440 --> 00:11:31,040 Speaker 1: that's paying a four percent yield that is going to 207 00:11:31,160 --> 00:11:33,400 Speaker 1: live to fight another day, is going to get through 208 00:11:33,400 --> 00:11:37,120 Speaker 1: this with pretty good economics. You do that, uh, and 209 00:11:37,120 --> 00:11:38,880 Speaker 1: and try not to focus as much on the day 210 00:11:38,880 --> 00:11:41,640 Speaker 1: to day volatility. When you say it's a good time 211 00:11:41,679 --> 00:11:45,120 Speaker 1: to buy certain companies that you think that can withstand this. 212 00:11:45,360 --> 00:11:48,280 Speaker 1: Other people seem to think big tech is the place 213 00:11:48,320 --> 00:11:50,800 Speaker 1: to go. We've seen those shares rally with the exceptions, 214 00:11:50,800 --> 00:11:54,280 Speaker 1: say of Alphabet due to the advertising revenue, which is 215 00:11:54,360 --> 00:11:57,640 Speaker 1: like behind which companies are you really focusing on here? 216 00:11:58,280 --> 00:12:01,600 Speaker 1: So we're looking at companies like V or Comcast, or 217 00:12:01,679 --> 00:12:05,520 Speaker 1: CVS or A T and T. All are paying very 218 00:12:05,679 --> 00:12:09,280 Speaker 1: very healthy dividends. They absolutely will get through this. CVS 219 00:12:09,360 --> 00:12:13,120 Speaker 1: is business has been pretty good. Abby has reaffirmed the dividend. 220 00:12:13,120 --> 00:12:16,200 Speaker 1: They'll be growing the dividend. Their earnings are very good. Uh. 221 00:12:16,360 --> 00:12:18,199 Speaker 1: A T and T is paying over a six and 222 00:12:18,200 --> 00:12:21,040 Speaker 1: a half percent yield while you wait, we think they're 223 00:12:21,040 --> 00:12:22,960 Speaker 1: gonna get through this in pretty good form. All of 224 00:12:22,960 --> 00:12:26,120 Speaker 1: those are pretty good businesses. We also if again we 225 00:12:26,120 --> 00:12:28,920 Speaker 1: wouldn't put too much in, but we also think that 226 00:12:29,040 --> 00:12:31,240 Speaker 1: banks are going to come through this in very good form. 227 00:12:31,280 --> 00:12:34,360 Speaker 1: And if you don't mind the additional volatility. Uh, that 228 00:12:34,440 --> 00:12:36,920 Speaker 1: you can buy companies like a Wells Fargo or p 229 00:12:37,120 --> 00:12:40,040 Speaker 1: n C. P n C announced earnings today. Uh, it 230 00:12:40,200 --> 00:12:42,920 Speaker 1: was it was actually a pretty good call. They really 231 00:12:43,000 --> 00:12:45,720 Speaker 1: have their arms around this. They said that one thing 232 00:12:45,800 --> 00:12:47,320 Speaker 1: that's going to come out of this when all said 233 00:12:47,360 --> 00:12:50,120 Speaker 1: and done, is the quality of their loan portfolio, and 234 00:12:50,480 --> 00:12:53,679 Speaker 1: it's paying over almost a five percent dividend. Uh. So 235 00:12:53,800 --> 00:12:55,839 Speaker 1: those are the type of companies you can buy a 236 00:12:55,960 --> 00:12:57,920 Speaker 1: year from now. We think you're gonna be pretty happy 237 00:12:57,960 --> 00:13:01,000 Speaker 1: and feel that you're pretty smart. How concerned are you 238 00:13:01,080 --> 00:13:03,840 Speaker 1: about balance sheets? A couple of companies you mentioned, most 239 00:13:03,880 --> 00:13:06,800 Speaker 1: notably A T and T and Comcast carrying a tremendous 240 00:13:06,920 --> 00:13:09,120 Speaker 1: amount of debt. Now they've got good cash flows, but 241 00:13:09,600 --> 00:13:13,840 Speaker 1: if this thing gets really ugly and for longer, how 242 00:13:13,880 --> 00:13:17,040 Speaker 1: concerned are you about credit and balance sheets? We're very 243 00:13:17,080 --> 00:13:20,640 Speaker 1: concerned about balance sheets. If you're in a leveraged business 244 00:13:20,720 --> 00:13:23,160 Speaker 1: or business is going to be impacted by the coronavirus. 245 00:13:23,200 --> 00:13:26,000 Speaker 1: So what would that include? That would include the automobile companies, 246 00:13:26,360 --> 00:13:32,720 Speaker 1: hotel chains, restaurants, the cruise lines, airlines. Those companies, if 247 00:13:32,760 --> 00:13:34,840 Speaker 1: they've got too much debt, are going to have no revenues. 248 00:13:34,920 --> 00:13:37,520 Speaker 1: In terms of Comcast, their revenues are going to be 249 00:13:37,559 --> 00:13:40,200 Speaker 1: absolutely solid. They're going to come through this. They've got 250 00:13:40,280 --> 00:13:43,760 Speaker 1: great cash flow. People are not going to be cutting 251 00:13:43,760 --> 00:13:46,199 Speaker 1: off their services. Same with a T and T. We 252 00:13:46,280 --> 00:13:48,960 Speaker 1: think that, um, you know people right now, we're all 253 00:13:49,000 --> 00:13:51,439 Speaker 1: working from home, so they either need their wireless or 254 00:13:51,520 --> 00:13:54,439 Speaker 1: they need Internet connections. Uh So A T T will 255 00:13:54,480 --> 00:13:57,000 Speaker 1: get through this. Uh So in both of those cases, 256 00:13:57,160 --> 00:13:59,800 Speaker 1: you know, we're very, very comfortable that the companies have 257 00:14:00,080 --> 00:14:02,360 Speaker 1: the cash flow to get through this. But your point 258 00:14:02,440 --> 00:14:05,599 Speaker 1: is exactly right. We would avoid companies and industries that 259 00:14:05,640 --> 00:14:08,839 Speaker 1: are going to see a cut in revenues and have 260 00:14:09,040 --> 00:14:12,280 Speaker 1: debt because they can get caught and really hurt. David, 261 00:14:12,360 --> 00:14:16,679 Speaker 1: I'm struggling with the historical reference point to this moment, 262 00:14:16,960 --> 00:14:19,360 Speaker 1: and people talk about the numbers and how you can't 263 00:14:19,400 --> 00:14:22,000 Speaker 1: really look at the numbers. Right now. We're getting, you know, 264 00:14:22,080 --> 00:14:26,680 Speaker 1: horrible retail sales. The Empire Manufacturing Survey dreadful record lows, 265 00:14:26,760 --> 00:14:30,640 Speaker 1: record plunges, record job losses, record this, record that, and 266 00:14:30,840 --> 00:14:33,520 Speaker 1: and how do you sort of create a compass forward. 267 00:14:33,960 --> 00:14:36,160 Speaker 1: It's faith, it's faith that we're going to recover. On 268 00:14:36,240 --> 00:14:38,920 Speaker 1: the other side is there anything that you're clinging to 269 00:14:39,120 --> 00:14:42,840 Speaker 1: that's beyond faith that things will revert to normal in 270 00:14:43,080 --> 00:14:46,840 Speaker 1: terms of data. That underscore your point, which is things 271 00:14:46,920 --> 00:14:50,240 Speaker 1: will essentially eventually go back to the way that they were, 272 00:14:50,440 --> 00:14:53,200 Speaker 1: and you can count on these previous ideas of stable 273 00:14:53,240 --> 00:14:56,400 Speaker 1: balance sheets and companies that seem to have a viable 274 00:14:56,440 --> 00:15:00,840 Speaker 1: business model. That's that's exactly the point. So basically, the 275 00:15:01,160 --> 00:15:03,880 Speaker 1: vast majority of the time, the market looks out at 276 00:15:03,920 --> 00:15:06,880 Speaker 1: earnings twelve to fifteen months out, So if you do that, 277 00:15:07,040 --> 00:15:09,400 Speaker 1: you're really talking about two thousand and twenty one earnings, 278 00:15:09,680 --> 00:15:12,480 Speaker 1: and that's how financial markets work. So the part of 279 00:15:12,640 --> 00:15:16,520 Speaker 1: faith that our analysis relies on is that right now 280 00:15:16,640 --> 00:15:20,320 Speaker 1: the pharmaceutical companies are spending tens of billions of dollars 281 00:15:20,400 --> 00:15:23,240 Speaker 1: to find a solution to the coronavirus. So we think 282 00:15:23,280 --> 00:15:25,960 Speaker 1: at some point, whether it's three months from now or 283 00:15:26,040 --> 00:15:28,640 Speaker 1: six months from now or nine months from now, we're 284 00:15:28,680 --> 00:15:31,640 Speaker 1: going to be in a more normal environment. There will 285 00:15:31,720 --> 00:15:35,600 Speaker 1: be either a treatment for the coronavirus. Uh hopefully Johnson 286 00:15:35,640 --> 00:15:36,960 Speaker 1: and Johnson that said that they're going to have a 287 00:15:37,040 --> 00:15:41,440 Speaker 1: vaccine by next um February or March is successful in 288 00:15:41,480 --> 00:15:44,000 Speaker 1: that endeavor. And if something like that happens, all of 289 00:15:44,040 --> 00:15:47,320 Speaker 1: a sudden, people will start to behave more normally. They'll 290 00:15:47,360 --> 00:15:49,600 Speaker 1: be less scared about getting something and dying, which is 291 00:15:49,640 --> 00:15:53,640 Speaker 1: a perfectly rational fear right now. And then the economy 292 00:15:53,720 --> 00:15:56,000 Speaker 1: starts to open up. And at that point the market 293 00:15:56,120 --> 00:16:00,720 Speaker 1: looks beyond current earnings and current horrific economic ends, and 294 00:16:00,960 --> 00:16:03,360 Speaker 1: the surviving companies are going to be valued on two 295 00:16:03,440 --> 00:16:06,160 Speaker 1: thousand and twenty one earnings, and on that basis you're 296 00:16:06,160 --> 00:16:08,200 Speaker 1: able to get a lot of really good businesses at 297 00:16:08,240 --> 00:16:11,040 Speaker 1: twelve times earnings. And the other part of the equation 298 00:16:11,280 --> 00:16:14,200 Speaker 1: is when the fear factors at and when the world 299 00:16:14,280 --> 00:16:17,840 Speaker 1: returns to normal, interest rates are essentially at zero, the 300 00:16:17,920 --> 00:16:21,920 Speaker 1: federal government will have spent trillions of dollars, whether it's 301 00:16:21,960 --> 00:16:24,680 Speaker 1: two trillion or five trillion dollars, all that money will 302 00:16:24,720 --> 00:16:27,480 Speaker 1: be at their interest rates will be at zero, bonds 303 00:16:27,480 --> 00:16:32,320 Speaker 1: are not offering any reasonable alternative. Stocks will become pretty attractive. Uh. 304 00:16:32,520 --> 00:16:35,560 Speaker 1: And that again leads to looking at IT earnings, looking 305 00:16:35,600 --> 00:16:38,800 Speaker 1: at its companies, and valuations based on the last one 306 00:16:39,240 --> 00:16:44,240 Speaker 1: years evaluations. David Kat's President and chief investment officer Matrix 307 00:16:44,800 --> 00:16:47,920 Speaker 1: Asset Advisors, David Thanks so much for staying on the 308 00:16:48,000 --> 00:16:54,880 Speaker 1: line with us. Well, the horrendous economic data just keeps 309 00:16:55,080 --> 00:16:58,040 Speaker 1: rolling in this morning. In addition to the Empire manufacturing 310 00:16:58,160 --> 00:17:01,480 Speaker 1: data that fell u gird at Pace, we also saw 311 00:17:01,600 --> 00:17:05,159 Speaker 1: a record decline in retail sales and joining us to 312 00:17:05,240 --> 00:17:07,800 Speaker 1: really put this in their perspective at a time when 313 00:17:07,880 --> 00:17:10,800 Speaker 1: people don't know what numbers to cling to a Smasha, 314 00:17:11,160 --> 00:17:15,080 Speaker 1: director of consumer and Retail Trends at Credit Intel joining 315 00:17:15,200 --> 00:17:17,880 Speaker 1: us on the phone from Long Island, Seema, so glad 316 00:17:17,960 --> 00:17:21,200 Speaker 1: to have you on the phone here. I'm wondering what 317 00:17:21,320 --> 00:17:23,840 Speaker 1: are you looking at in terms of the retail numbers 318 00:17:23,920 --> 00:17:26,440 Speaker 1: to give you some gauge of how bad this is 319 00:17:26,480 --> 00:17:29,440 Speaker 1: going to get. I think the biggest and those obvious 320 00:17:29,880 --> 00:17:31,840 Speaker 1: trend that came out of the numbers, it just sort 321 00:17:31,840 --> 00:17:35,680 Speaker 1: of highlights the shift away from discretionary spending and two essentials. 322 00:17:35,760 --> 00:17:38,440 Speaker 1: You saw grocery stores at a really strong number and 323 00:17:38,520 --> 00:17:41,480 Speaker 1: ends up. But if you look at what happened to clothing, 324 00:17:42,160 --> 00:17:47,920 Speaker 1: furniture department stores, I think that just at that risk 325 00:17:47,960 --> 00:17:50,440 Speaker 1: will continue to grow the longer we're in this shelter 326 00:17:50,640 --> 00:17:53,800 Speaker 1: in place situation. Then it begs the question what happens 327 00:17:53,840 --> 00:17:56,840 Speaker 1: when we come out, how will these discretionary retailers be 328 00:17:56,880 --> 00:17:58,840 Speaker 1: able to perform, Like what do they need to do 329 00:17:58,960 --> 00:18:01,160 Speaker 1: and what does that mean for them? I think that's 330 00:18:01,520 --> 00:18:04,600 Speaker 1: the biggest takeaway I'm seeing right now. Yeah, it's interesting 331 00:18:04,600 --> 00:18:05,960 Speaker 1: to seem I think the you know, one of the 332 00:18:06,040 --> 00:18:08,639 Speaker 1: questions that we we've been one of the areas of 333 00:18:08,680 --> 00:18:11,640 Speaker 1: discussion most we've had today and over the last several days, 334 00:18:11,720 --> 00:18:14,360 Speaker 1: is how do we think the consumer will change, if 335 00:18:14,520 --> 00:18:16,800 Speaker 1: at all. On the other side of this is is 336 00:18:16,800 --> 00:18:18,600 Speaker 1: there any data that you've seen that suggesting that there 337 00:18:18,640 --> 00:18:21,000 Speaker 1: will be a fundamental change, or if any of the 338 00:18:21,080 --> 00:18:23,760 Speaker 1: retailers you've spoken to, if they suggested that they expect 339 00:18:24,080 --> 00:18:26,880 Speaker 1: a fundamental change, or will the consumer on the other 340 00:18:26,920 --> 00:18:29,200 Speaker 1: side of this just kind of go back to kind 341 00:18:29,280 --> 00:18:33,080 Speaker 1: of normal. I think it's more likely you'll see a 342 00:18:33,160 --> 00:18:35,000 Speaker 1: change in the consumer because now we're going to be 343 00:18:35,119 --> 00:18:39,600 Speaker 1: going on almost two months pretty soon of sheltering in place, 344 00:18:39,720 --> 00:18:43,080 Speaker 1: changing your behavior, having six feet between you and anybody 345 00:18:43,119 --> 00:18:45,280 Speaker 1: else when you go to the grocery store. So I 346 00:18:45,320 --> 00:18:48,200 Speaker 1: feel like some of those habits will be hard to change, 347 00:18:48,240 --> 00:18:51,240 Speaker 1: and it might require retailers to change how they are 348 00:18:51,320 --> 00:18:54,280 Speaker 1: running their stores. How restaurants. We know that in Hong 349 00:18:54,359 --> 00:18:56,560 Speaker 1: Kong they've set up table six ft away from each 350 00:18:56,560 --> 00:18:59,960 Speaker 1: other and they're sanitizer everywhere. So I think people be 351 00:19:00,000 --> 00:19:03,160 Speaker 1: behavior will change, certainly, But I think the bigger question 352 00:19:03,280 --> 00:19:05,239 Speaker 1: is how when their finances will change and what does 353 00:19:05,280 --> 00:19:08,560 Speaker 1: that mean for discretionary retailers When you know over seventeen 354 00:19:08,600 --> 00:19:12,680 Speaker 1: million people are filing for unemployment claims, retailers across the 355 00:19:12,720 --> 00:19:14,640 Speaker 1: board have for a loowed many many, if not all, 356 00:19:14,720 --> 00:19:17,959 Speaker 1: of their employees. Other companies are also struggling, So how 357 00:19:18,000 --> 00:19:20,720 Speaker 1: do these people come back right? And I don't think 358 00:19:20,800 --> 00:19:22,680 Speaker 1: that the stimulus that they're going to get at some 359 00:19:22,840 --> 00:19:25,960 Speaker 1: point one time check is going to be enough for 360 00:19:26,080 --> 00:19:28,440 Speaker 1: them to shift their spending back to the way that 361 00:19:28,520 --> 00:19:31,840 Speaker 1: it was. But is actually what I'm concerned about. Well, 362 00:19:31,920 --> 00:19:34,280 Speaker 1: when people talk about the retail sector, they've talked about 363 00:19:34,280 --> 00:19:37,040 Speaker 1: how Amazon has really consolidated share, and we've seen a 364 00:19:37,119 --> 00:19:40,920 Speaker 1: shift that's just accelerated to online ordering just because nobody 365 00:19:41,040 --> 00:19:42,960 Speaker 1: is allowed to go out and the stores were all closed. 366 00:19:43,520 --> 00:19:45,800 Speaker 1: It was interesting in your notes you said that actually 367 00:19:46,119 --> 00:19:49,119 Speaker 1: there is a potential positive outcome from this, that there 368 00:19:49,160 --> 00:19:52,239 Speaker 1: will be a re emphasis on brick and mortar. Can 369 00:19:52,280 --> 00:19:55,440 Speaker 1: you talk a little bit about that. Yeah. Absolutely. I 370 00:19:55,520 --> 00:19:57,320 Speaker 1: think one of the things that you notice when you 371 00:19:57,520 --> 00:20:01,040 Speaker 1: come away from this is like when people really need something, 372 00:20:01,119 --> 00:20:03,520 Speaker 1: they want something, they want to go and get it themselves. 373 00:20:04,119 --> 00:20:07,800 Speaker 1: And you saw with Amazon having these huge supply chain issues, 374 00:20:07,840 --> 00:20:10,480 Speaker 1: despite having one of the best supply chains out there, 375 00:20:10,880 --> 00:20:13,560 Speaker 1: they just could not bring in the essential product on time. 376 00:20:14,040 --> 00:20:16,800 Speaker 1: They're not even taking new grocery deliveries. You cannot get 377 00:20:16,840 --> 00:20:20,160 Speaker 1: a spot to get Amazon fresh delivery. Even regular goods 378 00:20:20,200 --> 00:20:22,280 Speaker 1: were taking a long time up until recently, and they 379 00:20:22,320 --> 00:20:26,400 Speaker 1: halted essential you know, non essential sales, and I think 380 00:20:26,480 --> 00:20:28,959 Speaker 1: that's a huge risk, and it it was a benefit 381 00:20:29,040 --> 00:20:31,159 Speaker 1: to people like Target and Walmart who are selling some 382 00:20:31,240 --> 00:20:33,640 Speaker 1: of those merchandise, but that you could go and get 383 00:20:33,720 --> 00:20:36,520 Speaker 1: it right away, and I think for them it was 384 00:20:36,600 --> 00:20:40,800 Speaker 1: even better economically because it's cheaper for a client or 385 00:20:40,840 --> 00:20:43,480 Speaker 1: customer to go pick up a product from the store 386 00:20:43,520 --> 00:20:46,359 Speaker 1: than having the retailer ship that product to them. And 387 00:20:46,440 --> 00:20:50,639 Speaker 1: I think that type of that was really highlighted, I 388 00:20:50,720 --> 00:20:53,840 Speaker 1: think in this crisis, and it shows why you need 389 00:20:53,880 --> 00:20:56,440 Speaker 1: to have an omni channel strategy, not an online strategy, 390 00:20:56,480 --> 00:20:59,399 Speaker 1: and not a brick and mortar only strategy seem a 391 00:21:00,040 --> 00:21:02,960 Speaker 1: bit about the balance sheets some of the retailers you 392 00:21:03,080 --> 00:21:05,160 Speaker 1: look at. I mean, you know a lot of retailers 393 00:21:05,200 --> 00:21:08,520 Speaker 1: they operate on you know, very tight margins. I'm not 394 00:21:08,600 --> 00:21:10,800 Speaker 1: sure how much cash they carry. How are you thinking 395 00:21:10,840 --> 00:21:14,520 Speaker 1: about that? Yeah, so credit until we put out a 396 00:21:14,560 --> 00:21:17,080 Speaker 1: couple of reports recently which we keep updating, and one 397 00:21:17,080 --> 00:21:20,720 Speaker 1: of those the retailers at risk. And you know why 398 00:21:20,760 --> 00:21:22,280 Speaker 1: are they at risk? Well, first of all, they have 399 00:21:22,480 --> 00:21:24,840 Speaker 1: most of them with through their guidance. They closed their stores, 400 00:21:25,000 --> 00:21:28,040 Speaker 1: they furloughed their employees, most if not all of them 401 00:21:28,119 --> 00:21:30,359 Speaker 1: have drawn down and on their revolvers just to make 402 00:21:30,400 --> 00:21:32,119 Speaker 1: sure they have a bit of a cap cushion, and 403 00:21:32,800 --> 00:21:37,000 Speaker 1: suspended uh their operating expensive including in some cases not 404 00:21:37,119 --> 00:21:39,960 Speaker 1: paying their rent for the month of April. And we'll 405 00:21:39,960 --> 00:21:42,400 Speaker 1: see how long this goes. But the way we're looking 406 00:21:42,480 --> 00:21:46,560 Speaker 1: at it is just like, how long can these companies, uh, 407 00:21:46,920 --> 00:21:48,399 Speaker 1: when we look at the credit r how long can 408 00:21:48,440 --> 00:21:51,000 Speaker 1: they sustain in this type of environment when you don't 409 00:21:51,400 --> 00:21:55,680 Speaker 1: have a zero revenue environment based on your balance sheet 410 00:21:55,720 --> 00:21:57,879 Speaker 1: and how much cash you're able to get, right, And 411 00:21:57,960 --> 00:22:00,600 Speaker 1: so there are retailers, you know, we're hearing a lot 412 00:22:00,640 --> 00:22:03,639 Speaker 1: about J C. Penny and we Credit Hill had a 413 00:22:03,720 --> 00:22:07,080 Speaker 1: cash burn analysis on it that, based on certain assumptions, 414 00:22:07,119 --> 00:22:10,880 Speaker 1: if they cut their capital spending by uh, they wind 415 00:22:10,960 --> 00:22:14,960 Speaker 1: down accounts payable and accrude libilities by and a couple 416 00:22:15,000 --> 00:22:17,720 Speaker 1: of other assumptions, including the fact that they paid rent 417 00:22:17,840 --> 00:22:21,960 Speaker 1: that in a good scenario they have liquidity for five 418 00:22:22,000 --> 00:22:25,159 Speaker 1: point one month. Right, So this has certain assumptions, but 419 00:22:25,320 --> 00:22:27,480 Speaker 1: you have to think about we're doing this many of 420 00:22:27,560 --> 00:22:30,400 Speaker 1: our retailers to see who is at most at risk, 421 00:22:30,520 --> 00:22:33,919 Speaker 1: and so retailers like J. C. Penny who were already 422 00:22:34,000 --> 00:22:36,399 Speaker 1: sort of struggling, and then you also have like the 423 00:22:36,480 --> 00:22:39,240 Speaker 1: Stage Doors or a g n C or those type 424 00:22:39,280 --> 00:22:42,320 Speaker 1: of players, how did they come out of this um 425 00:22:42,400 --> 00:22:44,200 Speaker 1: In many cases, I think it's going to be really 426 00:22:44,280 --> 00:22:46,920 Speaker 1: hard for them because if even you can't even go 427 00:22:47,000 --> 00:22:50,080 Speaker 1: to bankruptcy at this point because you can't liquidate your inventory, 428 00:22:50,320 --> 00:22:53,840 Speaker 1: right so models and pure One even that is on hold. 429 00:22:54,480 --> 00:22:56,679 Speaker 1: So I think that it just makes it a lot 430 00:22:56,800 --> 00:23:00,560 Speaker 1: more difficult for these guys. Take this to back though, 431 00:23:00,960 --> 00:23:03,840 Speaker 1: I mean trying to find a silver lining, just because 432 00:23:04,320 --> 00:23:06,879 Speaker 1: right now everything looks pretty dismal, and I'm trying to 433 00:23:07,920 --> 00:23:10,399 Speaker 1: I'm trying to be more optimistic here, but I mean, 434 00:23:10,480 --> 00:23:13,480 Speaker 1: some of these retail chains have been struggling for a 435 00:23:13,520 --> 00:23:15,840 Speaker 1: long time. You talk about J. C. Petty, it's been 436 00:23:16,040 --> 00:23:18,040 Speaker 1: on the chopping block for a long time, with a 437 00:23:18,119 --> 00:23:20,280 Speaker 1: lot of traders betting against that company. There are a 438 00:23:20,359 --> 00:23:22,320 Speaker 1: number of other retailers as well that have been sort 439 00:23:22,320 --> 00:23:24,560 Speaker 1: of the slow burn, and it's been accelerating in the 440 00:23:24,640 --> 00:23:27,800 Speaker 1: burn over the past few years. We'll just wash out 441 00:23:27,920 --> 00:23:30,280 Speaker 1: some of the weaker players and allow some of the 442 00:23:30,400 --> 00:23:34,280 Speaker 1: stronger retailers to actually consolidate share and put up a 443 00:23:34,320 --> 00:23:39,119 Speaker 1: bitter fight against Amazon and other retailers. I think so. 444 00:23:39,320 --> 00:23:41,240 Speaker 1: And it's hard to say exactly who will make it 445 00:23:41,320 --> 00:23:45,000 Speaker 1: out because companies don't want to fail and people protect 446 00:23:45,080 --> 00:23:48,280 Speaker 1: them to extend. But I think, yeah, you're gonna see, uh, 447 00:23:48,600 --> 00:23:51,280 Speaker 1: those that have been struggling and sort of being able 448 00:23:51,359 --> 00:23:54,199 Speaker 1: to muddle along for the last couple of years when 449 00:23:54,240 --> 00:23:56,760 Speaker 1: the you know, the consumers quote unquote strong and they 450 00:23:56,800 --> 00:23:59,040 Speaker 1: were still struggling. Yeah, I think you'll see a shakeout 451 00:23:59,119 --> 00:24:02,800 Speaker 1: and you'll see the longer retailers take that share, and 452 00:24:03,119 --> 00:24:06,080 Speaker 1: you know, and I think that will also include Amazon, right, 453 00:24:06,119 --> 00:24:08,640 Speaker 1: I think that gives them more leverage because they continue 454 00:24:08,640 --> 00:24:11,480 Speaker 1: to take share as well. So even though they have 455 00:24:11,600 --> 00:24:14,359 Speaker 1: their own share of problems, they have the whole foods, 456 00:24:14,440 --> 00:24:16,359 Speaker 1: they have the relationship with colds and right aids, so 457 00:24:16,400 --> 00:24:19,480 Speaker 1: they are building sort of an omnichannel strategy. So I 458 00:24:19,600 --> 00:24:22,240 Speaker 1: definitely think you'll see that trend. So it's not like 459 00:24:22,320 --> 00:24:24,719 Speaker 1: all retail go away or everything is going to go online, 460 00:24:24,760 --> 00:24:27,760 Speaker 1: but you'll definitely see who the winners are, and it 461 00:24:27,800 --> 00:24:30,960 Speaker 1: will be most difficult for the smaller retailers who maybe 462 00:24:31,000 --> 00:24:33,840 Speaker 1: didn't have any omni channel strategy to begin with, or 463 00:24:34,359 --> 00:24:36,960 Speaker 1: you know, just don't have the balance sheet to sort 464 00:24:37,000 --> 00:24:41,240 Speaker 1: of sustain a zero revenue environment for multiple months. See Michew, 465 00:24:41,320 --> 00:24:43,280 Speaker 1: thank you so much for joining us, who really appreciate 466 00:24:43,400 --> 00:24:46,920 Speaker 1: your insight. As always seems. She's a director of Consumer 467 00:24:46,960 --> 00:24:53,159 Speaker 1: and Retail Trends at Credit Intel. The focus today, in 468 00:24:53,280 --> 00:24:57,440 Speaker 1: addition to just see incredibly terrible economic data, has been 469 00:24:57,640 --> 00:25:00,879 Speaker 1: on the banks reporting earnings kicking off the earning season 470 00:25:01,400 --> 00:25:04,600 Speaker 1: and loan lost provisions have been the key indicator of 471 00:25:04,720 --> 00:25:08,280 Speaker 1: how steep the recession, maybe at least in the eyes 472 00:25:08,440 --> 00:25:10,159 Speaker 1: of the major banks. And there's no one better to 473 00:25:10,240 --> 00:25:13,159 Speaker 1: talk to about this than Alison Williams, Senior analyst for 474 00:25:13,480 --> 00:25:18,160 Speaker 1: the Global Investment Banks for Bloomberg Intelligence. She joins us. Now, Allison, 475 00:25:18,640 --> 00:25:20,800 Speaker 1: now that we've had a couple of hours to process 476 00:25:20,880 --> 00:25:24,120 Speaker 1: the earnings and the twenty four billion dollars of loan 477 00:25:24,240 --> 00:25:27,520 Speaker 1: loss provisions set aside for souring loans in the in 478 00:25:27,600 --> 00:25:30,080 Speaker 1: the weeks and months ahead by City Group, JP Morgan 479 00:25:30,200 --> 00:25:34,000 Speaker 1: at Wells Fargo, UH and and City Group, what's your 480 00:25:34,040 --> 00:25:38,760 Speaker 1: big takeaway here? So the takeaway, UM, I think my 481 00:25:38,840 --> 00:25:40,639 Speaker 1: big takeaway from the border is that we've sort of 482 00:25:40,720 --> 00:25:44,480 Speaker 1: only just begun, and I think, um, you know, that's 483 00:25:45,040 --> 00:25:48,399 Speaker 1: probably the main concern among investors. So as you said, 484 00:25:49,000 --> 00:25:51,960 Speaker 1: you know, we've had twenty four billion provisions twenty five 485 00:25:52,000 --> 00:25:56,359 Speaker 1: if you include UM Goldman UM, that's an increase of 486 00:25:56,440 --> 00:26:01,119 Speaker 1: about twenty billion compared with a year ago. And you know, 487 00:26:01,240 --> 00:26:05,639 Speaker 1: when the managements are talking, uh, you know, yesterday's managements 488 00:26:05,680 --> 00:26:08,200 Speaker 1: were quite negatives. You're sort of hearing some mixed comments. 489 00:26:08,680 --> 00:26:10,600 Speaker 1: But when we look at some of the expectations that 490 00:26:10,680 --> 00:26:13,840 Speaker 1: are built in and also just hearing from these managements 491 00:26:13,840 --> 00:26:16,639 Speaker 1: that we're only at the beginning, it's it's qualitative in 492 00:26:16,680 --> 00:26:19,520 Speaker 1: a way. It's just a guestiment, so we really, you know, 493 00:26:19,680 --> 00:26:23,080 Speaker 1: have no idea how bad this can get. Yeah, that's 494 00:26:23,119 --> 00:26:25,879 Speaker 1: interesting because you can't really go back to the playbook 495 00:26:25,920 --> 00:26:29,720 Speaker 1: of two thousand eight two thousand nine eight very different situations. 496 00:26:29,800 --> 00:26:32,960 Speaker 1: So we're the management team saying, listen, we're kind of 497 00:26:33,080 --> 00:26:36,520 Speaker 1: taking a best guess here. We're probably gonna you may 498 00:26:36,640 --> 00:26:38,960 Speaker 1: even see us come back in future quarters with even 499 00:26:39,080 --> 00:26:41,120 Speaker 1: more Is that kind of the message they're trying to send. 500 00:26:41,720 --> 00:26:46,119 Speaker 1: So JP morgan Um to begin with said very distinctly 501 00:26:46,720 --> 00:26:49,560 Speaker 1: that we were definitely or we're probably going to have 502 00:26:49,720 --> 00:26:53,520 Speaker 1: more reserves in two CUE, being that you know today's reserves, 503 00:26:54,160 --> 00:26:59,760 Speaker 1: yesterday's reserves took into account, you know, their economic forecast 504 00:27:00,200 --> 00:27:07,040 Speaker 1: um from their firm of unemployment and over ten percent 505 00:27:07,800 --> 00:27:13,440 Speaker 1: i'm sorry over drop in g d P over ten 506 00:27:13,520 --> 00:27:19,720 Speaker 1: percent unemployment rate. Those estimates already are worse down g 507 00:27:19,880 --> 00:27:23,800 Speaker 1: B g d P unemployment expected for two QUE. So 508 00:27:23,960 --> 00:27:27,960 Speaker 1: already their estimates are stale. And then the second part 509 00:27:28,000 --> 00:27:30,720 Speaker 1: of it is the government programs. As you said, you 510 00:27:30,800 --> 00:27:33,680 Speaker 1: know that the OH nine playbook doesn't work, but even 511 00:27:33,760 --> 00:27:37,359 Speaker 1: at other cycles, we don't really know what the impact 512 00:27:37,480 --> 00:27:39,639 Speaker 1: is going to be of these government programs of all 513 00:27:39,680 --> 00:27:42,600 Speaker 1: these deferrals, how much of these deferrals you know we'll 514 00:27:42,720 --> 00:27:46,239 Speaker 1: end up going back to good and how much UM 515 00:27:46,480 --> 00:27:48,760 Speaker 1: will end up having to get charged off. And so 516 00:27:48,920 --> 00:27:52,080 Speaker 1: we really won't know that until we start to move 517 00:27:52,200 --> 00:27:55,399 Speaker 1: throughout this quarter. So you know, ten ques, we might 518 00:27:55,440 --> 00:27:59,639 Speaker 1: get some update may conferences if they go virtual, we 519 00:27:59,760 --> 00:28:02,240 Speaker 1: make at some update, UM, but we really just don't know. 520 00:28:03,040 --> 00:28:05,560 Speaker 1: So one, JP Morgan and Bank of America leading the 521 00:28:05,600 --> 00:28:07,920 Speaker 1: declines that we're seeing today in the major US banks. 522 00:28:09,160 --> 00:28:11,199 Speaker 1: So I think you know, when we saw the numbers 523 00:28:11,440 --> 00:28:14,960 Speaker 1: come out yesterday, UM, I think some investors just sort 524 00:28:15,000 --> 00:28:17,080 Speaker 1: of looked at the top line of reserves and with 525 00:28:17,280 --> 00:28:21,159 Speaker 1: those numbers, perhaps thought JP Morgan is conservative. Look at 526 00:28:21,200 --> 00:28:24,159 Speaker 1: Wells They're much lower, you know they we take we 527 00:28:24,240 --> 00:28:26,200 Speaker 1: look at the dollar provisions, but we look at those 528 00:28:26,240 --> 00:28:30,440 Speaker 1: provisions versus their loan book. JP Morgan with the two 529 00:28:30,440 --> 00:28:33,480 Speaker 1: and a half percent ratio, you know, Wells Fargo sort 530 00:28:33,520 --> 00:28:35,800 Speaker 1: of less than half of that. But then we saw 531 00:28:35,840 --> 00:28:39,200 Speaker 1: a city group come out today UM with granted less 532 00:28:39,280 --> 00:28:44,520 Speaker 1: dollar provision number, but their ratio UM while exceeding that 533 00:28:44,640 --> 00:28:48,960 Speaker 1: now of JP Morgan, perhaps making JP Morgan who appeared 534 00:28:49,000 --> 00:28:53,560 Speaker 1: conservative now seeming less so and um, you know a 535 00:28:53,640 --> 00:28:57,760 Speaker 1: Bank of America as well. You know, again the question 536 00:28:57,920 --> 00:29:00,360 Speaker 1: is sort of sort of how bad they are going 537 00:29:00,400 --> 00:29:03,320 Speaker 1: to get from here? How all you prepared the card 538 00:29:03,440 --> 00:29:05,640 Speaker 1: business where all the all three of the banks that 539 00:29:05,720 --> 00:29:07,960 Speaker 1: we just discussed are very big in this wells Fargo 540 00:29:08,200 --> 00:29:11,160 Speaker 1: is less big. Um. You know, that's where we're seeing 541 00:29:11,160 --> 00:29:14,920 Speaker 1: the majority of the provisions that that product tends to 542 00:29:15,000 --> 00:29:17,720 Speaker 1: have the highest class rate. It's unsecured, the thing that 543 00:29:17,800 --> 00:29:20,680 Speaker 1: people don't pay first. Um. And so I think that's 544 00:29:21,040 --> 00:29:22,680 Speaker 1: you know, going to be the area of focus in 545 00:29:22,720 --> 00:29:24,840 Speaker 1: the coming month or so. So Alis and I know 546 00:29:24,920 --> 00:29:27,200 Speaker 1: you listen to all these conference calls in these big 547 00:29:27,320 --> 00:29:30,360 Speaker 1: bank ceo s, they really have great visibility in terms 548 00:29:30,440 --> 00:29:34,120 Speaker 1: of they see lots of the global economy around the 549 00:29:34,200 --> 00:29:39,160 Speaker 1: world that they suggest how long they anticipate a downturn 550 00:29:39,280 --> 00:29:41,520 Speaker 1: to last. I think most people kind of dropped the 551 00:29:41,560 --> 00:29:43,920 Speaker 1: discussion of a V shaped but now more of a 552 00:29:44,000 --> 00:29:46,080 Speaker 1: you or an L What are they kind of thinking 553 00:29:46,120 --> 00:29:48,960 Speaker 1: at this point? Well, I think, um, you know, one 554 00:29:49,240 --> 00:29:51,360 Speaker 1: contrast maybe and again I think a lot of these 555 00:29:51,520 --> 00:29:54,880 Speaker 1: managements are sort of calling on their research departments. Um. 556 00:29:55,200 --> 00:29:57,680 Speaker 1: And again this goes to the quality of their reserves. 557 00:29:57,760 --> 00:30:01,840 Speaker 1: So Bank of America, you know, expecting a big drop 558 00:30:01,920 --> 00:30:06,000 Speaker 1: into Q like everyone else, but also expecting negative um 559 00:30:06,440 --> 00:30:09,920 Speaker 1: growth or declines in GDP for several quarters to come 560 00:30:10,480 --> 00:30:15,160 Speaker 1: versus JP morgan um that is currently factoring in more 561 00:30:15,160 --> 00:30:18,400 Speaker 1: of a rebound in the back half. That being said, 562 00:30:18,440 --> 00:30:22,040 Speaker 1: I think all managements do sort of acknowledge um that 563 00:30:22,160 --> 00:30:24,920 Speaker 1: we don't necessarily know how long this is going to 564 00:30:25,000 --> 00:30:27,040 Speaker 1: go on, and so the key risk I think they're 565 00:30:27,080 --> 00:30:31,240 Speaker 1: two investors. Obviously, yes, it's it's the provisions, but it's 566 00:30:31,280 --> 00:30:34,720 Speaker 1: the dividends where managements are committed. The FED said they 567 00:30:34,720 --> 00:30:37,000 Speaker 1: don't see any need for cuts at this time, but 568 00:30:37,200 --> 00:30:40,360 Speaker 1: to the extent that this downturn is unprecedented and we 569 00:30:40,480 --> 00:30:42,400 Speaker 1: don't know how long it's going to go on. We 570 00:30:42,480 --> 00:30:46,160 Speaker 1: don't know if there will um become more pressure, if 571 00:30:46,360 --> 00:30:50,320 Speaker 1: this becomes a prolonged situation. Alison Williams, thanks so much 572 00:30:50,320 --> 00:30:52,200 Speaker 1: for joining us. Really appreciate it. We know you're busy 573 00:30:52,280 --> 00:30:54,440 Speaker 1: with all these big bank earnings, but we appreciate it 574 00:30:54,520 --> 00:30:57,200 Speaker 1: taking the time. Alison Williams, she's a senior annals covering 575 00:30:57,240 --> 00:31:01,520 Speaker 1: all things financials for Bloomberg Intelligence, giving us her perspective 576 00:31:01,560 --> 00:31:04,360 Speaker 1: and kind of Lisa frankly sharing that the management teams 577 00:31:04,440 --> 00:31:06,680 Speaker 1: really don't know. These are the provisions we have as 578 00:31:06,760 --> 00:31:09,480 Speaker 1: of right now, but there could be more. Yeah, and 579 00:31:09,640 --> 00:31:12,600 Speaker 1: and typically banks do take a conservative approach. The question 580 00:31:12,720 --> 00:31:14,720 Speaker 1: is just how do you even know what a conservative 581 00:31:14,800 --> 00:31:17,600 Speaker 1: of approaches when you have no idea what we're heading into. Yeah, 582 00:31:17,640 --> 00:31:20,239 Speaker 1: exactly right. And I think they're just trying to simply say, um, 583 00:31:20,400 --> 00:31:22,600 Speaker 1: this is kind of what we know now. We're relying 584 00:31:22,720 --> 00:31:24,960 Speaker 1: upon the data we have now. But to the extent 585 00:31:25,040 --> 00:31:27,720 Speaker 1: this thing goes even longer, it could be even worse. 586 00:31:29,720 --> 00:31:31,920 Speaker 1: Thanks for listening to the Bloomberg P and L podcast. 587 00:31:32,120 --> 00:31:34,720 Speaker 1: You can subscribe and listen to interviews at Apple Podcasts 588 00:31:34,800 --> 00:31:37,800 Speaker 1: or whatever podcast platform you prefer. M Paul Sweeney, I'm 589 00:31:37,800 --> 00:31:40,520 Speaker 1: on Twitter at pt Sweeney. I'm Lisa Abram Woyd's I'm 590 00:31:40,520 --> 00:31:43,360 Speaker 1: on Twitter at Lisa Abram woits one before the podcast, 591 00:31:43,440 --> 00:31:46,000 Speaker 1: you can always catch us worldwide. I'm Bloomberg Radio