1 00:00:02,640 --> 00:00:05,320 Speaker 1: Welcome to the Bloomberg Penel podcast. I'm Paul swing you 2 00:00:05,360 --> 00:00:07,760 Speaker 1: along with my co host Lisa Brahmas. Each day we 3 00:00:07,880 --> 00:00:10,399 Speaker 1: bring you the most noteworthy and useful interviews for you 4 00:00:10,520 --> 00:00:12,640 Speaker 1: and your money. Whether at the grocery store or the 5 00:00:12,640 --> 00:00:15,960 Speaker 1: trading floor. Find a Bloomberg Penl podcast on Apple podcast 6 00:00:16,120 --> 00:00:18,040 Speaker 1: or wherever you listen to podcasts, as well as at 7 00:00:18,079 --> 00:00:21,960 Speaker 1: Bloomberg dot com. We're sitting here in our Bloomberg ter 8 00:00:21,960 --> 00:00:25,319 Speaker 1: Active Broger Studios trying to peg what my co host 9 00:00:25,440 --> 00:00:28,960 Speaker 1: and colleague very correctly called the smoking gun or the 10 00:00:28,960 --> 00:00:32,280 Speaker 1: red flag with the smoking talking the smoking gun, smoking 11 00:00:32,280 --> 00:00:36,920 Speaker 1: flag for why markets are feeling so low today. A 12 00:00:36,920 --> 00:00:40,600 Speaker 1: lot of people pointing their fingers at the ADP report. Carracadana, 13 00:00:41,120 --> 00:00:44,800 Speaker 1: who is the chief US economist for Bloomberg Economics, sitting 14 00:00:44,880 --> 00:00:47,800 Speaker 1: here maybe agreeing right, I mean, is this is this 15 00:00:47,840 --> 00:00:52,040 Speaker 1: a surprise? The disappointing ADP reproach showing the payrolls at 16 00:00:52,120 --> 00:00:54,680 Speaker 1: US employers cooled in September. I don't think it is 17 00:00:54,720 --> 00:00:56,279 Speaker 1: a surprise. I mean it's a little bit weaker than 18 00:00:56,320 --> 00:00:59,160 Speaker 1: what the consensus was looking for, but not materially just 19 00:00:59,320 --> 00:01:01,800 Speaker 1: a five thou in or so, but we are slowing 20 00:01:01,840 --> 00:01:04,479 Speaker 1: down relative to what we saw earlier in the year. 21 00:01:04,920 --> 00:01:08,520 Speaker 1: That being said, this kind of negative sentiment in the market, 22 00:01:08,959 --> 00:01:14,360 Speaker 1: it was evident during Asia hours, intensified during europe trading hours, 23 00:01:14,400 --> 00:01:17,120 Speaker 1: and then now what spreads into the US, although not 24 00:01:17,240 --> 00:01:19,520 Speaker 1: quite to the same degree as what we saw in Europe. 25 00:01:19,560 --> 00:01:22,360 Speaker 1: So I don't know that there's a single smoking gun. 26 00:01:22,480 --> 00:01:25,119 Speaker 1: It's more of a confluence of events. So a DP 27 00:01:25,319 --> 00:01:28,360 Speaker 1: tells us to labor markets a little weaker. Boris Johnson, 28 00:01:28,400 --> 00:01:36,160 Speaker 1: continuing to try to wrangle hard break for today's everyone 29 00:01:36,360 --> 00:01:39,760 Speaker 1: sings a few bars in this song. Right, you have 30 00:01:40,360 --> 00:01:44,559 Speaker 1: W t O talking about trade sanctions with Europe over 31 00:01:44,880 --> 00:01:48,360 Speaker 1: you know, squabbling over airbus and bowing and whatnot. So 32 00:01:48,840 --> 00:01:50,960 Speaker 1: there's just a lot of little things adding up which 33 00:01:51,000 --> 00:01:53,280 Speaker 1: kind of build on what we saw in yesterday, which 34 00:01:53,320 --> 00:01:56,560 Speaker 1: was a big surprise in the manufacturing. I s m alright, Paul, 35 00:01:56,680 --> 00:01:59,280 Speaker 1: some blame Boris Johnson, Yes, exactly. I always like to 36 00:01:59,320 --> 00:02:02,720 Speaker 1: blame break another among others among others. So Carl, is 37 00:02:02,720 --> 00:02:05,400 Speaker 1: this change you good folks down in Bloomber economics. You're 38 00:02:05,400 --> 00:02:09,120 Speaker 1: crunching the numbers. You've seen the you know, the manufacturing 39 00:02:09,120 --> 00:02:11,160 Speaker 1: are you know, the I s M for the latest 40 00:02:11,160 --> 00:02:14,160 Speaker 1: month was weaker than expected. So we know that manufacturing 41 00:02:14,680 --> 00:02:17,240 Speaker 1: UH is weak and probably weakening, certainly in the US, 42 00:02:17,280 --> 00:02:20,639 Speaker 1: and we know what's happening internationally. Um. Sorry, you kind 43 00:02:20,639 --> 00:02:23,320 Speaker 1: of taken down your outlook or preparing to take down 44 00:02:23,360 --> 00:02:27,240 Speaker 1: your outlook is maybe the consumer isn't quite as strong 45 00:02:27,280 --> 00:02:29,640 Speaker 1: as we thought. Well, we took our outlook down on 46 00:02:30,120 --> 00:02:34,000 Speaker 1: August one when the next round of tariffs were announced 47 00:02:34,160 --> 00:02:36,239 Speaker 1: back after the July FED meeting. The very next day, 48 00:02:36,400 --> 00:02:38,840 Speaker 1: President Trump announced that the tariffs would go into effect 49 00:02:38,840 --> 00:02:41,680 Speaker 1: at the start of August, start of October, excuse me, uh, 50 00:02:41,680 --> 00:02:45,760 Speaker 1: and also again in in December, they moved that October 51 00:02:45,800 --> 00:02:49,200 Speaker 1: first deadline back to October. But it does look like 52 00:02:49,240 --> 00:02:52,920 Speaker 1: the tariffs will go up to in the middle of 53 00:02:52,960 --> 00:02:54,840 Speaker 1: this month, it doesn't. You know, there've been very little 54 00:02:54,840 --> 00:02:57,040 Speaker 1: indication that we're actually moving away from that at this 55 00:02:57,080 --> 00:02:59,360 Speaker 1: point in time, and you see the impact of those 56 00:02:59,400 --> 00:03:01,440 Speaker 1: trade for action showing up in things like the I 57 00:03:01,560 --> 00:03:05,679 Speaker 1: s M survey yesterday. Additionally, another roughly a hundred and 58 00:03:05,760 --> 00:03:09,320 Speaker 1: fifty billion of product subject to tariff in the middle 59 00:03:09,320 --> 00:03:12,160 Speaker 1: of December, so the price tag on tariffs is about 60 00:03:12,240 --> 00:03:16,400 Speaker 1: two and a half times larger in twenty nineteen compared 61 00:03:16,440 --> 00:03:19,000 Speaker 1: to eighteen and so that does move the needle on growth. 62 00:03:19,080 --> 00:03:22,160 Speaker 1: And we're in a slower moving economy already, so when 63 00:03:22,160 --> 00:03:25,560 Speaker 1: you have slower growth, the economy is more susceptible to 64 00:03:25,600 --> 00:03:27,600 Speaker 1: those types of shocks. That being said, I know there's 65 00:03:27,639 --> 00:03:31,160 Speaker 1: been talked this morning about one handle on GDP and whatnot. 66 00:03:31,720 --> 00:03:35,360 Speaker 1: We have been looking for about one point eight one 67 00:03:35,360 --> 00:03:37,920 Speaker 1: point seven percent to GDP growth in the back half 68 00:03:37,920 --> 00:03:39,320 Speaker 1: of the year, and we moved to that call back 69 00:03:39,360 --> 00:03:42,200 Speaker 1: on August first, when the tariffs went into effect. So, uh, 70 00:03:43,520 --> 00:03:46,160 Speaker 1: the tone we were seeing in the market was not 71 00:03:46,320 --> 00:03:49,440 Speaker 1: consistent with sub two percent GDP growth. Now we're starting 72 00:03:49,440 --> 00:03:52,960 Speaker 1: to see that reality set in as job creation, manufacturing 73 00:03:53,000 --> 00:03:56,720 Speaker 1: activity all looks more consistent with US sub two percent number. 74 00:03:56,760 --> 00:03:59,920 Speaker 1: But to answer your question, stall speed for the US economy, 75 00:04:00,000 --> 00:04:03,080 Speaker 1: it's about one point four one point five percent growth, 76 00:04:03,120 --> 00:04:05,480 Speaker 1: So we are closer to stall speed, but we're not 77 00:04:05,520 --> 00:04:07,640 Speaker 1: there yet. And that's why my team thinks that we 78 00:04:07,680 --> 00:04:11,440 Speaker 1: can actually muddle through this soft patch, thanks very much 79 00:04:11,480 --> 00:04:15,200 Speaker 1: to consumers remaining resilient. So that was my question, right, 80 00:04:15,240 --> 00:04:17,320 Speaker 1: at what point do you reach a tipping point. How 81 00:04:17,400 --> 00:04:19,719 Speaker 1: much pessimism should be baked in right now. Is it 82 00:04:19,800 --> 00:04:23,120 Speaker 1: a recession that we're facing, or is it simply uh, 83 00:04:23,320 --> 00:04:28,720 Speaker 1: lower inflation, lower growth, and just lower asset increases. Well, 84 00:04:29,120 --> 00:04:32,120 Speaker 1: it's not recession, uh, And it's not even growth recession. 85 00:04:32,120 --> 00:04:35,720 Speaker 1: And there's a distinction between recession and growth recession. Everyone 86 00:04:35,720 --> 00:04:38,560 Speaker 1: knows what recession is. Growth recession is a period where 87 00:04:38,560 --> 00:04:42,160 Speaker 1: growth slows down so much, not that we fall into contraction, 88 00:04:42,400 --> 00:04:45,440 Speaker 1: but actually that things start to unravel, like the unemployment 89 00:04:45,520 --> 00:04:48,640 Speaker 1: rate starts to drift higher. I don't think we'll even 90 00:04:48,680 --> 00:04:51,039 Speaker 1: get to a growth recession in the back half of 91 00:04:51,080 --> 00:04:54,839 Speaker 1: this year. So labor market continues to produce job gains 92 00:04:54,880 --> 00:04:58,880 Speaker 1: in excess of eighty five thousand per month, that will 93 00:04:58,920 --> 00:05:02,799 Speaker 1: keep the unemployment rate out relatively steady at the current levels. 94 00:05:02,800 --> 00:05:05,880 Speaker 1: So I think we're just accepting a reality of a 95 00:05:06,120 --> 00:05:09,280 Speaker 1: of a much more sluggish profile to the economy here 96 00:05:09,320 --> 00:05:12,800 Speaker 1: in the US, and then much weaker conditions abroad Germany 97 00:05:12,800 --> 00:05:16,679 Speaker 1: probably slipping into technical recession uh UK on the cusp 98 00:05:16,760 --> 00:05:21,839 Speaker 1: of recession once Brexit is executed. Boom Brick Economics have 99 00:05:21,839 --> 00:05:26,359 Speaker 1: a GDP forecast. GDP growth will be about two to 100 00:05:26,440 --> 00:05:29,120 Speaker 1: two and a quarter percent, So we're kind of refining 101 00:05:29,120 --> 00:05:31,480 Speaker 1: things as we look at that. Um. That being said, 102 00:05:31,560 --> 00:05:33,400 Speaker 1: one thing we should keep in mind here right everyone's 103 00:05:33,400 --> 00:05:36,760 Speaker 1: talking about the R word. Uh. The ground is very 104 00:05:36,880 --> 00:05:41,440 Speaker 1: fertile for a significant rebounded activity if these trade headwinds 105 00:05:41,440 --> 00:05:44,400 Speaker 1: are removed. So the Fed has policy rates set in 106 00:05:44,680 --> 00:05:48,599 Speaker 1: a very accommodative stance right there, giving the economy steroids, 107 00:05:49,040 --> 00:05:52,320 Speaker 1: so to speak. So rates are accommodative, Corporate profit growth 108 00:05:52,400 --> 00:05:55,760 Speaker 1: is positive, corporate balance sheets are in good condition. In 109 00:05:55,800 --> 00:05:58,200 Speaker 1: the unemployment rate is the lowest sense of Vietnam Draft 110 00:05:58,279 --> 00:06:00,359 Speaker 1: was in effect, So things are well posed. Issue that 111 00:06:00,400 --> 00:06:02,960 Speaker 1: if we don't just squandered this all with increase in 112 00:06:03,000 --> 00:06:06,080 Speaker 1: tariff after increase and tariff now the economy could rebound 113 00:06:06,320 --> 00:06:11,159 Speaker 1: quite nicely and beyond. Carraco Donna, Chief economists for a 114 00:06:11,160 --> 00:06:13,520 Speaker 1: Bloomberg Economics, thanks so much for joining us here on 115 00:06:13,520 --> 00:06:33,040 Speaker 1: our Bloomberg Interactive Brokers studio. Today we're joined by opinion 116 00:06:33,080 --> 00:06:37,400 Speaker 1: columnists Terres Rafael. She joins us from the London Bureau. 117 00:06:37,480 --> 00:06:40,440 Speaker 1: So Terres, it looks like bars. Johnson today outlined his 118 00:06:40,480 --> 00:06:43,840 Speaker 1: plan for new Brexit agreement and warned the European Union 119 00:06:43,920 --> 00:06:46,560 Speaker 1: to compromise or watch the UK walk away from the 120 00:06:46,600 --> 00:06:49,200 Speaker 1: talks and leave the block with added deal. How did 121 00:06:49,200 --> 00:06:52,200 Speaker 1: that go over? Well, we're still waiting to hear an 122 00:06:52,240 --> 00:06:57,160 Speaker 1: official EU response. UM the the EU said it wants 123 00:06:57,160 --> 00:07:00,960 Speaker 1: to examine the details of the proposal, but the kind 124 00:07:00,960 --> 00:07:04,960 Speaker 1: of early indications uh were that, uh, you know, we're 125 00:07:05,000 --> 00:07:08,599 Speaker 1: not that warm to the deal because it's proposing what 126 00:07:08,839 --> 00:07:12,240 Speaker 1: looks like a breach of the EU's read lines in 127 00:07:12,280 --> 00:07:15,400 Speaker 1: that there is no way to do the Johnson uh 128 00:07:15,560 --> 00:07:19,240 Speaker 1: deal without putting customs checks somewhere. Now he said they 129 00:07:19,280 --> 00:07:21,960 Speaker 1: wouldn't be and we're talking about Ireland in the border 130 00:07:21,960 --> 00:07:24,680 Speaker 1: between Northern Ireland the Republic of Ireland, which is the 131 00:07:24,800 --> 00:07:28,760 Speaker 1: key to sort of unlocking this whole Brexit problem and 132 00:07:29,000 --> 00:07:30,800 Speaker 1: getting a deal. And Johnson has said there will be 133 00:07:30,840 --> 00:07:33,560 Speaker 1: no checks at the border. Um, they will honor the 134 00:07:33,560 --> 00:07:36,400 Speaker 1: Good Friday peace agreement. However, he's also said they will 135 00:07:36,440 --> 00:07:38,760 Speaker 1: have to be checked somewhere, and so I think the 136 00:07:38,800 --> 00:07:42,560 Speaker 1: sticking point is how you actually do that. The other 137 00:07:42,600 --> 00:07:45,200 Speaker 1: sticking point is that Boris Johnson is quickly losing support 138 00:07:45,240 --> 00:07:47,239 Speaker 1: even from his own party. I mean, how much power 139 00:07:47,280 --> 00:07:50,920 Speaker 1: does he have in setting this this this proposal over 140 00:07:50,960 --> 00:07:55,840 Speaker 1: to EU. Well, he doesn't have power if you look 141 00:07:55,880 --> 00:07:58,760 Speaker 1: at the number of sort of MPs that he commands 142 00:07:58,840 --> 00:08:03,040 Speaker 1: in parliament. Um. However, the real, uh, you know, question 143 00:08:03,160 --> 00:08:05,280 Speaker 1: is whether he would have enough support to get his 144 00:08:05,360 --> 00:08:10,920 Speaker 1: deal through before October nineteenth, when parliamentary legislation requires him 145 00:08:10,960 --> 00:08:13,920 Speaker 1: to seek an extension. Now, if the Northern Ireland Land 146 00:08:14,160 --> 00:08:17,880 Speaker 1: Democratic Unionist Party go along with Johnson is say, has 147 00:08:18,200 --> 00:08:21,760 Speaker 1: indicated so far they're open to doing, and he can 148 00:08:21,800 --> 00:08:26,200 Speaker 1: reclaim Tory MPs that he expelled from the party, whip 149 00:08:26,240 --> 00:08:28,960 Speaker 1: from from the sort of the voting part of the party. 150 00:08:29,160 --> 00:08:31,320 Speaker 1: If he can get their support and a few Labor 151 00:08:31,440 --> 00:08:34,040 Speaker 1: MPs on side, then he gets a deal through and 152 00:08:34,040 --> 00:08:36,520 Speaker 1: then we're in very very different territory because he can 153 00:08:36,520 --> 00:08:41,000 Speaker 1: then call an election claiming he's delivered Brexit and uh, 154 00:08:41,200 --> 00:08:43,319 Speaker 1: you know, and then it's really game on for Johnson. 155 00:08:43,360 --> 00:08:45,640 Speaker 1: But whether you know, the Labor Party is going to 156 00:08:45,760 --> 00:08:48,880 Speaker 1: give him that you know, gift, whether the EU is 157 00:08:48,920 --> 00:08:51,679 Speaker 1: going to give him enough to allow him to recommend 158 00:08:51,679 --> 00:08:54,520 Speaker 1: the deal to Parliament, all those are unclear right now. 159 00:08:54,920 --> 00:08:57,600 Speaker 1: So tre's can you just update this on the timing. 160 00:08:57,600 --> 00:09:00,120 Speaker 1: I know we're kind of getting towards the thin at 161 00:09:00,160 --> 00:09:03,040 Speaker 1: the end of this process, and somehow the Halloween holiday 162 00:09:03,120 --> 00:09:07,480 Speaker 1: kind of is stuck in my mind. So okay, it's 163 00:09:07,520 --> 00:09:10,320 Speaker 1: incredibly confusing, But you know, let's start by saying the 164 00:09:10,320 --> 00:09:12,960 Speaker 1: next forty eight hours or key to find out how 165 00:09:13,000 --> 00:09:17,840 Speaker 1: the EU responds to uh to Johnson's proposals. If they 166 00:09:18,040 --> 00:09:20,360 Speaker 1: agree to negotiate, then we've got a sort of ten 167 00:09:20,440 --> 00:09:23,720 Speaker 1: day period before the EU summit, which is happening on 168 00:09:23,760 --> 00:09:28,840 Speaker 1: the seventeenth of October. Now, legislation passed in Parliament requires Johnson, 169 00:09:28,880 --> 00:09:30,960 Speaker 1: if he cannot get a deal, to ask the EU 170 00:09:31,000 --> 00:09:35,359 Speaker 1: for an extension by October nineteen. October thirty one, Halloween 171 00:09:35,880 --> 00:09:39,959 Speaker 1: is Brexit Day. If nothing else happens. If there's no extension, 172 00:09:40,280 --> 00:09:43,599 Speaker 1: the UK leaves the EU without a deal on October one. 173 00:09:43,679 --> 00:09:48,280 Speaker 1: The parliamentary legislation is designed to make that impossible. It's 174 00:09:48,320 --> 00:09:51,200 Speaker 1: triggered this request for an extension. Johnson is vowed that 175 00:09:51,280 --> 00:09:53,840 Speaker 1: he will not seek that extension. He said it would 176 00:09:53,880 --> 00:09:56,400 Speaker 1: signal the extinction of the Tory Party. So don't be 177 00:09:56,440 --> 00:09:59,440 Speaker 1: surprised if this ends up where else but in court. Again. 178 00:10:00,200 --> 00:10:03,679 Speaker 1: The other thing it could do, what about a second referendum, right. 179 00:10:03,679 --> 00:10:06,199 Speaker 1: I mean, are we still talking about that or does 180 00:10:06,240 --> 00:10:08,679 Speaker 1: that seem less likely more likely? Now I'll tell you 181 00:10:08,720 --> 00:10:11,200 Speaker 1: who's talking about it. The Labor Party is talking about it. 182 00:10:11,240 --> 00:10:14,120 Speaker 1: So at their conference which was a week ago, they 183 00:10:14,160 --> 00:10:17,680 Speaker 1: agreed that the official Labor policy would be to win 184 00:10:17,760 --> 00:10:23,840 Speaker 1: an election, uh, renegotiate a deal or renegotiate Theresa May's deal, 185 00:10:23,920 --> 00:10:26,000 Speaker 1: so they would would be a Labor deal and then 186 00:10:26,040 --> 00:10:29,800 Speaker 1: put it to the people in a referendum, with the 187 00:10:29,880 --> 00:10:33,080 Speaker 1: Labor Party not specifying which way it would urge people 188 00:10:33,120 --> 00:10:35,680 Speaker 1: to vote. So you could have a situation which they've 189 00:10:35,720 --> 00:10:39,640 Speaker 1: negotiated the deal but but you know, campaign against it. 190 00:10:39,800 --> 00:10:42,319 Speaker 1: So the Labor Party wants a referendum, that's very clear. 191 00:10:42,360 --> 00:10:46,280 Speaker 1: The other two sort of major parties, mainly the Conservatives, 192 00:10:46,320 --> 00:10:48,280 Speaker 1: they want to just get Brexit done is we've heard 193 00:10:48,280 --> 00:10:50,960 Speaker 1: in their party conference. And the Liberal Democrats, who have 194 00:10:51,360 --> 00:10:56,160 Speaker 1: been revived are campaigning to revoke Article fifty, that is 195 00:10:56,200 --> 00:10:59,800 Speaker 1: canceled Brexit all together. So just real quickly, I know 196 00:10:59,840 --> 00:11:01,360 Speaker 1: you said we're gonna were waiting on the EU, but 197 00:11:01,360 --> 00:11:04,840 Speaker 1: they haven't given any indication that they're going to budge. Right, Well, 198 00:11:04,840 --> 00:11:06,920 Speaker 1: I think the for the EU it's a very delicate 199 00:11:07,360 --> 00:11:10,520 Speaker 1: UH point in this process. They don't want to be 200 00:11:10,960 --> 00:11:13,640 Speaker 1: blamed for allowing a no deal Brexit to go ahead. 201 00:11:13,640 --> 00:11:16,000 Speaker 1: Of course, they will be blamed if it happens. Johnson 202 00:11:16,040 --> 00:11:18,800 Speaker 1: made very clear in his speech today and in his 203 00:11:18,960 --> 00:11:22,719 Speaker 1: letter to UH European Commissioned President Jean claud Yonker. He 204 00:11:22,720 --> 00:11:24,679 Speaker 1: says it would be a failure of state craft. So 205 00:11:24,760 --> 00:11:27,839 Speaker 1: the EU wants to avoid the blame, which means so 206 00:11:28,240 --> 00:11:31,640 Speaker 1: I think they're likely to engage to some extent um 207 00:11:31,800 --> 00:11:35,840 Speaker 1: in negotiations. But this is a very big ask for them, 208 00:11:35,920 --> 00:11:40,080 Speaker 1: because it's Johnson dismisses as a technicality what the EU 209 00:11:40,160 --> 00:11:43,000 Speaker 1: regards is very fundamental, and that is maintaining the piece 210 00:11:43,240 --> 00:11:47,160 Speaker 1: on UH in Northern Ireland by ensuring that there are 211 00:11:47,400 --> 00:11:50,360 Speaker 1: no physical infrastructure that could be attacked by by terrorists 212 00:11:50,440 --> 00:11:53,360 Speaker 1: or sectarian groups. Jos Raphael, thank you so much, as 213 00:11:53,400 --> 00:11:57,360 Speaker 1: always for that insight on the morass that is Brexit. 214 00:11:57,520 --> 00:12:01,360 Speaker 1: Teresa Hale is Bloomberg Opinion editor joining us from London. 215 00:12:19,320 --> 00:12:21,520 Speaker 1: I remember after I had my first child, there was 216 00:12:21,559 --> 00:12:25,040 Speaker 1: a game changing moment. Moment. It was when he was 217 00:12:25,160 --> 00:12:29,440 Speaker 1: big enough to fit into an Ergo carrier. It was 218 00:12:29,600 --> 00:12:31,920 Speaker 1: a carrier where I could carry him around, not have 219 00:12:31,960 --> 00:12:34,880 Speaker 1: a stroller, get on the subway, go up and downstairs, 220 00:12:34,920 --> 00:12:37,080 Speaker 1: and it was fine. And here we have a Lia 221 00:12:37,160 --> 00:12:39,840 Speaker 1: Sabo who just joined us in our offices here, chief 222 00:12:39,840 --> 00:12:43,080 Speaker 1: executive officer of Compass Diversified Holdings, and one of his 223 00:12:43,120 --> 00:12:47,560 Speaker 1: portfolio companies is the Ergo company. So I I had 224 00:12:47,600 --> 00:12:49,760 Speaker 1: to I had to sort of reminisce a little bit. 225 00:12:49,920 --> 00:12:52,160 Speaker 1: But I want to just ask you about a company 226 00:12:52,200 --> 00:12:54,480 Speaker 1: like that, which has expanded tremendously since the time when 227 00:12:54,520 --> 00:12:57,080 Speaker 1: I had my first child. I'm wondering, how do you 228 00:12:57,280 --> 00:13:01,320 Speaker 1: expand it when it's got such a specific focus, well, 229 00:13:01,920 --> 00:13:05,080 Speaker 1: remaining true to the brand, but also getting big enough scale. 230 00:13:05,080 --> 00:13:07,080 Speaker 1: And this is sort of a really key question right 231 00:13:07,120 --> 00:13:09,640 Speaker 1: now as we look at say we Work, and some 232 00:13:09,720 --> 00:13:13,600 Speaker 1: of these other companies that are struggling to do just that. Yeah, So, Lisa, 233 00:13:13,640 --> 00:13:17,080 Speaker 1: it's one of the challenges that any consumer company has. 234 00:13:17,200 --> 00:13:19,840 Speaker 1: And you know, in our business we invest in industrial 235 00:13:20,040 --> 00:13:23,320 Speaker 1: and branded consumer companies. You know, a company like Ergo. 236 00:13:23,440 --> 00:13:26,000 Speaker 1: When we acquired the business, it was from the founder 237 00:13:26,120 --> 00:13:29,320 Speaker 1: car and Frost and Karen was looking for us to 238 00:13:29,360 --> 00:13:33,920 Speaker 1: help build the business distribution wise globally, and so the 239 00:13:34,080 --> 00:13:38,360 Speaker 1: first part of the playbook was to establish distribution in 240 00:13:38,360 --> 00:13:42,240 Speaker 1: Europe and Asia, China being one of the faster growing 241 00:13:42,280 --> 00:13:45,400 Speaker 1: markets that we have right now. And then, as with 242 00:13:45,559 --> 00:13:49,760 Speaker 1: every consumer product business that we own, the lifeblood of 243 00:13:49,800 --> 00:13:52,600 Speaker 1: it is innovation, So figuring out what are the pain 244 00:13:52,640 --> 00:13:55,960 Speaker 1: points that consumers have with that product, how can we 245 00:13:56,080 --> 00:13:59,480 Speaker 1: innovate to create, you know, a better product that better 246 00:13:59,520 --> 00:14:04,640 Speaker 1: addresses the consumers needs. And then to understand what freedom 247 00:14:04,720 --> 00:14:07,280 Speaker 1: the customer is going to give us to be able 248 00:14:07,320 --> 00:14:12,480 Speaker 1: to extend, expend into adjacent markets without deluding down the 249 00:14:12,840 --> 00:14:15,400 Speaker 1: you know, the core market that we're addressing. So last, 250 00:14:15,600 --> 00:14:19,720 Speaker 1: your your company, Compass Diversifi Holdings is essentially a holding 251 00:14:19,720 --> 00:14:21,840 Speaker 1: company and you you mentioned you have some brand new 252 00:14:21,880 --> 00:14:26,240 Speaker 1: consumer uh companies that you own. So what we're seeing 253 00:14:26,240 --> 00:14:28,840 Speaker 1: in the markets stay is concerned about the consumer, uh 254 00:14:28,880 --> 00:14:31,960 Speaker 1: you know, and I think so from your perspective, what 255 00:14:32,120 --> 00:14:35,480 Speaker 1: is your sense of how the consumer is right now? Yes, 256 00:14:35,560 --> 00:14:38,400 Speaker 1: So the consumer has been strong, and the consumer has 257 00:14:38,440 --> 00:14:41,120 Speaker 1: been strong over the course of twenty nineteen, and it's 258 00:14:41,120 --> 00:14:44,080 Speaker 1: really been a carryover for a number of years. And 259 00:14:44,120 --> 00:14:47,240 Speaker 1: what we're seeing is, you know, in today's market, the 260 00:14:47,240 --> 00:14:49,640 Speaker 1: consumer has a lot of choices, so you have to 261 00:14:49,720 --> 00:14:52,600 Speaker 1: give them reasons to want to buy. And how you 262 00:14:52,640 --> 00:14:57,040 Speaker 1: connect to your consumer is changing dramatically. Clearly, the rise 263 00:14:57,080 --> 00:15:00,600 Speaker 1: of digital media and social media is change changing the 264 00:15:00,600 --> 00:15:05,480 Speaker 1: connectivity and how you interact. But generally the consumer feels strong. 265 00:15:06,000 --> 00:15:09,800 Speaker 1: Labor markets continue to be very tight, wage gains continue 266 00:15:09,840 --> 00:15:13,320 Speaker 1: to be strong, and that continues to fuel spending. And 267 00:15:13,400 --> 00:15:15,200 Speaker 1: you know, at the same time, we have very easy 268 00:15:15,200 --> 00:15:17,800 Speaker 1: financial conditions. So I think if you look at balance 269 00:15:17,840 --> 00:15:21,760 Speaker 1: sheets of consumers today, they are incredibly strong. And so 270 00:15:21,800 --> 00:15:24,320 Speaker 1: that would I would say, you know, from our standpoint, 271 00:15:24,400 --> 00:15:27,480 Speaker 1: is the real pillar of strength in the economy. Luckily 272 00:15:27,520 --> 00:15:31,480 Speaker 1: that represents the economy. So the economy is still you know, growing, 273 00:15:31,520 --> 00:15:34,200 Speaker 1: but uh, you know, it's remained strong throughout the year. 274 00:15:34,360 --> 00:15:36,880 Speaker 1: Well as how many of your portfolio companies sort of 275 00:15:36,920 --> 00:15:40,840 Speaker 1: sit within this retail consumer facing category? Yeah, so we 276 00:15:40,920 --> 00:15:44,040 Speaker 1: have four companies in the consumer facing and then we 277 00:15:44,080 --> 00:15:47,600 Speaker 1: have four in the true industrial side. Okay, so of 278 00:15:47,640 --> 00:15:51,080 Speaker 1: those four, how many do you think that the tariffs 279 00:15:51,080 --> 00:15:54,880 Speaker 1: will be a serious concern if they do go into effect, 280 00:15:54,920 --> 00:15:59,080 Speaker 1: the more serious or significant tariffs that have been proposed 281 00:15:59,080 --> 00:16:02,080 Speaker 1: by President Trump in China. Yeah, so we're fortunate and 282 00:16:02,120 --> 00:16:06,600 Speaker 1: that we have very little exposure to tariffs. We move 283 00:16:06,800 --> 00:16:10,200 Speaker 1: production out of China years ago, so Ergo Baby would 284 00:16:10,200 --> 00:16:13,480 Speaker 1: be a classic example. We moved into Vietnam many years 285 00:16:13,480 --> 00:16:16,120 Speaker 1: ago for reasons that were totally different. There was a 286 00:16:16,160 --> 00:16:18,760 Speaker 1: lot of IP theft. As we hear about a lot 287 00:16:18,800 --> 00:16:22,600 Speaker 1: in these trade talks, we experienced at firsthand, and so 288 00:16:22,680 --> 00:16:25,960 Speaker 1: as a result of that, we redomiciled where a production 289 00:16:26,000 --> 00:16:28,360 Speaker 1: base was gonna be for Ergo and for all of 290 00:16:28,400 --> 00:16:32,520 Speaker 1: our companies out of China. Now we've had some minor 291 00:16:32,560 --> 00:16:36,000 Speaker 1: exposure where products are still produced in China, and on 292 00:16:36,080 --> 00:16:39,880 Speaker 1: those instances, what we have found is with tariffs going 293 00:16:39,920 --> 00:16:44,400 Speaker 1: into effect, the dollar is strengthened. Our vendors find that 294 00:16:44,480 --> 00:16:48,720 Speaker 1: they have significant capacity in China. So the vast majority 295 00:16:48,760 --> 00:16:51,160 Speaker 1: of the tariff has been pushed back on the vendor 296 00:16:51,600 --> 00:16:54,720 Speaker 1: and dollar strength is enabling that some of the cost 297 00:16:54,760 --> 00:16:58,280 Speaker 1: pressure that you do get. We've found receptivity with our 298 00:16:58,320 --> 00:17:01,800 Speaker 1: retail partners and pushing through, but the vast majority, you know, 299 00:17:01,840 --> 00:17:05,080 Speaker 1: has been pushed back to our our trade partners. So 300 00:17:05,119 --> 00:17:08,440 Speaker 1: alias again about the four companies in the industrial space, 301 00:17:08,480 --> 00:17:12,520 Speaker 1: four companies in the consumer space, Where is Compass diversified 302 00:17:12,520 --> 00:17:16,840 Speaker 1: holdings looking now to deploy capital. Yeah, well, now is 303 00:17:16,840 --> 00:17:20,520 Speaker 1: an interesting time and I would say we were looking 304 00:17:20,520 --> 00:17:23,679 Speaker 1: out and as our strategic direction this year was we 305 00:17:23,680 --> 00:17:27,520 Speaker 1: were looking to be more net divestors than investors. And 306 00:17:27,560 --> 00:17:30,439 Speaker 1: the reason for that is we looked at risk that 307 00:17:30,560 --> 00:17:34,679 Speaker 1: seemed elevated from the economy. Um, we have a trade 308 00:17:34,680 --> 00:17:38,120 Speaker 1: war that's ongoing, we have a presidential election, we have brexit, 309 00:17:38,520 --> 00:17:42,000 Speaker 1: you have seventeen trillion dollars of global negative rates, which 310 00:17:42,000 --> 00:17:43,680 Speaker 1: probably tells you everything you need to know about the 311 00:17:43,680 --> 00:17:46,800 Speaker 1: global economy and the health of it. And so we 312 00:17:46,880 --> 00:17:50,280 Speaker 1: felt that the environment to be putting capital to work 313 00:17:50,320 --> 00:17:54,240 Speaker 1: today was not conducive because at the same time, prices 314 00:17:54,280 --> 00:17:57,960 Speaker 1: are extraordinarily high, and so that felt like a you know, 315 00:17:58,200 --> 00:18:01,879 Speaker 1: upside down risk reward balance for us. Now that being said, 316 00:18:02,320 --> 00:18:05,680 Speaker 1: we're constantly out there looking for new opportunities. I would 317 00:18:05,680 --> 00:18:09,120 Speaker 1: say we principally are looking to invest through the eight 318 00:18:09,119 --> 00:18:13,119 Speaker 1: different platform companies that we have to do add on acquisitions, 319 00:18:13,160 --> 00:18:16,520 Speaker 1: and we still remain open to divestitures just as a 320 00:18:16,560 --> 00:18:19,959 Speaker 1: broad strategy mandate. So, given your experience, what do you 321 00:18:20,000 --> 00:18:22,560 Speaker 1: think the next downturn will look like? And this is 322 00:18:22,560 --> 00:18:24,040 Speaker 1: The reason why I ask is because that's what's on 323 00:18:24,080 --> 00:18:27,760 Speaker 1: everyone's mind today. Yeah, well, so, I guess this could 324 00:18:27,760 --> 00:18:29,560 Speaker 1: be a bit of a you know, I don't know 325 00:18:29,600 --> 00:18:32,200 Speaker 1: if it's contrarian or it maybe a little bit of 326 00:18:32,240 --> 00:18:36,080 Speaker 1: an outlier. But you know, our view is the policies 327 00:18:36,160 --> 00:18:39,920 Speaker 1: of the Federal Reserve have really pushed a lot more 328 00:18:40,119 --> 00:18:43,520 Speaker 1: in terms of the you know, the money, the quantitative easing, 329 00:18:43,640 --> 00:18:46,640 Speaker 1: the lowering of interest rates. We believe that it has 330 00:18:46,720 --> 00:18:49,399 Speaker 1: pushed the cycles to be both stronger on the up 331 00:18:49,440 --> 00:18:52,639 Speaker 1: cycle and longer in duration, but probably more violent on 332 00:18:52,680 --> 00:18:54,840 Speaker 1: the downside. And I think you know, what we saw 333 00:18:54,840 --> 00:18:58,439 Speaker 1: in two thousand and the first correction was a pretty 334 00:18:58,480 --> 00:19:03,040 Speaker 1: significant you know, draw down in economic contraction. But then 335 00:19:03,320 --> 00:19:07,280 Speaker 1: the policies that created the two thousand and two to 336 00:19:07,400 --> 00:19:11,680 Speaker 1: two thousand and eight expansion, driven by you know, quantitative 337 00:19:11,720 --> 00:19:15,439 Speaker 1: easing type policies, caused a much bigger draw down. I 338 00:19:15,480 --> 00:19:18,639 Speaker 1: think today we fear that those could it could be 339 00:19:18,640 --> 00:19:24,040 Speaker 1: an even bigger draw down. That would be our fear. Well, interesting, 340 00:19:24,240 --> 00:19:25,919 Speaker 1: Elias say, well, thank you so much for joining us. 341 00:19:25,960 --> 00:19:29,280 Speaker 1: Elias's chief executive officer accomplished diversified holdings, joining us here 342 00:19:29,280 --> 00:19:48,640 Speaker 1: in a Bloomberg Interactive Brooker Studio. There has been a 343 00:19:48,680 --> 00:19:52,959 Speaker 1: big question hovering over the cannabis and the tobacco industries 344 00:19:53,040 --> 00:19:55,840 Speaker 1: over the past few months, and that is what will 345 00:19:55,920 --> 00:19:59,399 Speaker 1: the vaping outbreak the deaths that are mounting in the 346 00:19:59,480 --> 00:20:02,960 Speaker 1: United States tied to vaping due to their industries joining 347 00:20:03,000 --> 00:20:05,639 Speaker 1: US now, Mark Zuglan, he is CEO of Canopy Growth 348 00:20:06,000 --> 00:20:09,960 Speaker 1: joining us from Ontario. Mark, I want to start there 349 00:20:10,000 --> 00:20:13,040 Speaker 1: because it's something that I'm sure all of your investors 350 00:20:13,040 --> 00:20:15,439 Speaker 1: are asking, what do you do with the fact that 351 00:20:15,480 --> 00:20:19,280 Speaker 1: the FDA has raised serious concerns about vaping devices and 352 00:20:19,359 --> 00:20:22,639 Speaker 1: that fifteen people at least have been uh, have died 353 00:20:22,760 --> 00:20:25,600 Speaker 1: in what has been linked to the cigarettes at a 354 00:20:25,640 --> 00:20:27,879 Speaker 1: time when that is sort of the preferred vehicle for 355 00:20:28,000 --> 00:20:32,720 Speaker 1: using cannabis right now. Yeah, I think you know, the 356 00:20:33,119 --> 00:20:34,920 Speaker 1: stories that we're hearing, certainly out of the out of 357 00:20:34,920 --> 00:20:37,520 Speaker 1: the US are are tragic, and I think you know, 358 00:20:37,760 --> 00:20:42,320 Speaker 1: compounding um that tragedy is that um, there's still a 359 00:20:42,359 --> 00:20:45,480 Speaker 1: lot of unknown people are still this many months later, UM, 360 00:20:45,520 --> 00:20:49,080 Speaker 1: trying to gather the information and understand um, you know 361 00:20:49,119 --> 00:20:52,080 Speaker 1: the role of of of the illicit market, whether it's 362 00:20:52,680 --> 00:20:55,199 Speaker 1: people are tampering with products, whether it's you know, vitamin 363 00:20:55,280 --> 00:20:56,679 Speaker 1: E is being added. You know, a lot of a 364 00:20:56,680 --> 00:20:59,199 Speaker 1: lot of questions on on what's happening and so UM, 365 00:20:59,200 --> 00:21:01,320 Speaker 1: it's very hard for me to speak to that particular 366 00:21:01,359 --> 00:21:03,840 Speaker 1: set of details. But what I can do is speak 367 00:21:03,880 --> 00:21:06,639 Speaker 1: to can Be growth and what's happening in Canada because 368 00:21:06,680 --> 00:21:09,600 Speaker 1: as as you point out, in the next several months, um, 369 00:21:09,640 --> 00:21:12,680 Speaker 1: you know, we will be launching bait products in Canada, 370 00:21:12,720 --> 00:21:15,000 Speaker 1: and I think it's important to talk about what that 371 00:21:15,080 --> 00:21:18,800 Speaker 1: structure looks like. Right in Canada, we have a fully 372 00:21:19,000 --> 00:21:22,159 Speaker 1: regulated market, so the way we make our products, what 373 00:21:22,240 --> 00:21:25,320 Speaker 1: goes into the products, where those products are sold, UM, 374 00:21:25,400 --> 00:21:28,120 Speaker 1: all have rules that surround them and rules that we 375 00:21:28,240 --> 00:21:30,280 Speaker 1: need to operate in. And you know, I think that 376 00:21:30,440 --> 00:21:32,440 Speaker 1: the second thing if you look at you know, players 377 00:21:32,480 --> 00:21:35,000 Speaker 1: like Canopy, you know we we did not go out 378 00:21:35,040 --> 00:21:37,200 Speaker 1: to China and just source the first product we could 379 00:21:37,200 --> 00:21:39,160 Speaker 1: find and ask somebody else to fill it and put 380 00:21:39,160 --> 00:21:41,520 Speaker 1: our brand on it. Um. We've been building these products 381 00:21:41,560 --> 00:21:44,360 Speaker 1: for two years and even you know, many many months ago. 382 00:21:44,400 --> 00:21:47,080 Speaker 1: You know, the focus has been on consumer features and 383 00:21:47,119 --> 00:21:50,920 Speaker 1: consumer safety. So our products, our tamper resistant, our products 384 00:21:50,920 --> 00:21:54,240 Speaker 1: will be UL certified, meaning the heating elements are controlled 385 00:21:54,280 --> 00:21:57,680 Speaker 1: and the battery is controlled. You will have you know, serialization, 386 00:21:57,720 --> 00:22:00,520 Speaker 1: so God forbides something does happen, you're able to trace 387 00:22:00,600 --> 00:22:03,320 Speaker 1: it back and immediately know what's happened. And again we 388 00:22:03,400 --> 00:22:06,399 Speaker 1: control the full process. We control what goes in, so 389 00:22:06,440 --> 00:22:08,520 Speaker 1: we can ensure it is only cannabis and it is 390 00:22:08,560 --> 00:22:12,920 Speaker 1: only turpins, which which you know do naturally occur in cannabis. 391 00:22:12,960 --> 00:22:16,280 Speaker 1: So there's a number of things so I think focused 392 00:22:16,280 --> 00:22:20,000 Speaker 1: on and it comes down to threefold. One being transparent. 393 00:22:20,119 --> 00:22:22,600 Speaker 1: There are unknowns and there are risks associate with vaping, 394 00:22:22,680 --> 00:22:25,080 Speaker 1: and we need to be transparent about that. And we 395 00:22:25,119 --> 00:22:28,840 Speaker 1: need to do research to understand more. To a regulated 396 00:22:28,960 --> 00:22:32,520 Speaker 1: environment to control the products going out is essential. And 397 00:22:32,720 --> 00:22:36,240 Speaker 1: three have companies that are investing long term to build 398 00:22:36,280 --> 00:22:39,400 Speaker 1: products and brands. So Mark, just give us a sense 399 00:22:39,440 --> 00:22:42,520 Speaker 1: of kind of in your experience and based upon your knowledge, 400 00:22:42,560 --> 00:22:48,440 Speaker 1: how are consumers using vaping products with cannabis and is 401 00:22:48,480 --> 00:22:53,919 Speaker 1: that a problem in and of itself. So you know, 402 00:22:54,000 --> 00:22:58,199 Speaker 1: in in Canada today there are no actual legal venues 403 00:22:58,240 --> 00:23:02,239 Speaker 1: to sell th HC or CBD bait pen so you know, 404 00:23:02,280 --> 00:23:06,240 Speaker 1: anything being sold in Canada today is essentially through an unregulated, 405 00:23:06,520 --> 00:23:09,879 Speaker 1: uncontrolled market in the United States. UM, there is you know, 406 00:23:10,080 --> 00:23:13,159 Speaker 1: of course state level rules governing some products, but you 407 00:23:13,200 --> 00:23:15,600 Speaker 1: know other products you know, are are our listens? I 408 00:23:15,640 --> 00:23:18,159 Speaker 1: think you know the the Again I fall back to, 409 00:23:18,240 --> 00:23:20,159 Speaker 1: you know, this need for regulation. You know where one 410 00:23:20,160 --> 00:23:22,439 Speaker 1: of these these few companies who who go on there 411 00:23:22,480 --> 00:23:25,480 Speaker 1: and ask for more regulation, ask for more UM controls 412 00:23:25,520 --> 00:23:27,480 Speaker 1: because I think it's it's good for our sector, it's 413 00:23:27,480 --> 00:23:32,080 Speaker 1: good for UM the consumer. So what lesson should the 414 00:23:32,160 --> 00:23:34,600 Speaker 1: United States take from Canada? If you're saying that you 415 00:23:34,680 --> 00:23:37,760 Speaker 1: do have the regulatory regime, is there a lesson that 416 00:23:37,800 --> 00:23:40,639 Speaker 1: can be derived as the US tries to understand the 417 00:23:40,720 --> 00:23:46,680 Speaker 1: underpinnings of this vaping epidemic. So, you know, without even 418 00:23:46,680 --> 00:23:50,280 Speaker 1: speaking specifically to to Bates, you know, be, this is 419 00:23:50,280 --> 00:23:52,840 Speaker 1: a message we're carrying with respect to CBD and frankly 420 00:23:52,880 --> 00:23:55,600 Speaker 1: with respect to UM. You know, a state's right system, 421 00:23:55,760 --> 00:23:59,639 Speaker 1: you know for UM, for th HC products, which is UM. 422 00:23:59,680 --> 00:24:04,000 Speaker 1: You know, a clear federal set of rules, a clear 423 00:24:04,440 --> 00:24:08,119 Speaker 1: set of regulatory processes UM UH, you know testing that 424 00:24:08,160 --> 00:24:11,679 Speaker 1: a consumer can rely on UM. You know, understanding a 425 00:24:11,720 --> 00:24:13,639 Speaker 1: brand and how it relates back to the producer. You 426 00:24:13,640 --> 00:24:15,280 Speaker 1: know all of these things. You know these are these 427 00:24:15,320 --> 00:24:18,320 Speaker 1: are good things for for the sector, for the businesses 428 00:24:18,320 --> 00:24:20,280 Speaker 1: in the sector, and the consumers who buy the products. 429 00:24:21,119 --> 00:24:23,040 Speaker 1: Mark so cool and thanks so much for joining us. 430 00:24:23,080 --> 00:24:27,480 Speaker 1: Mark is the CEO of Cannopy Growth Corporation, calling us 431 00:24:27,480 --> 00:24:30,680 Speaker 1: a vafone from Smith Falls, Ontario. Thanks for listening to 432 00:24:30,680 --> 00:24:33,119 Speaker 1: the Bloomberg P and L podcast. You can subscribe and 433 00:24:33,119 --> 00:24:36,280 Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform 434 00:24:36,320 --> 00:24:38,880 Speaker 1: you prefer. M Paul Sweeney, I'm on Twitter at pt 435 00:24:39,000 --> 00:24:41,639 Speaker 1: Sweeney and Lisa bram Woyds I'm on Twitter at Lisa 436 00:24:41,760 --> 00:24:44,360 Speaker 1: bramwo wits one Before the podcast, you can always catch 437 00:24:44,440 --> 00:24:46,240 Speaker 1: us worldwide. I'm Bloomberg Radio.