Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. We
Speaker 1: are now turning our attention to Canada, in particular the
Speaker 1: Canadian housing market. This week, Moody's Investors Service downgraded Canada
Speaker 1: banks for the first time in more than four years.
Speaker 1: Why expanding levels of private sector debt could weaken asset
Speaker 1: quality in the future. That's according to David beat, senior
Speaker 1: vice president in the Financial Institutions Group at Moody's, and
Speaker 1: he is based in Toronto, and he comes to us now. David,
Speaker 1: thank you so much for joining us. Thanks for having
Speaker 1: so I wanted just to start with, how much the
Speaker 1: troubles at alternative mortgage lender Home Capital Group weighed in
Speaker 1: your decision to downgrade other Canadian banks? Uh, not at all.
Speaker 1: These Um, we do not rate Home Capital as a
Speaker 1: matter of fact, so I can't comment on the details
Speaker 1: of their situation. But I would just note that at
Speaker 1: about sixteen billion dollars in mortgages mortgage assets there you know,
Speaker 1: a very small part of the one point five trillion
Speaker 1: dollar Canadian mortgage market. Uh. The reasons for their current
Speaker 1: troubles are very idiosyncratic, and they're not anything to do
Speaker 1: with the assets they have on their books. It's more
Speaker 1: confidence around funding. UM. So we don't view it as
Speaker 1: a as a probable source of contagion for the rest
Speaker 1: of the banks. Uh. And um, it didn't factor into
Speaker 1: our decision. Okay, So home capital might not be the
Speaker 1: problem or even the catalysts. Isn't like the asset back
Speaker 1: commercial paper market uh circa two thousand seven in Canada
Speaker 1: collapsing and then you know, singling and petting doom for
Speaker 1: everybody else. But it could potentially, just on a broader level,
Speaker 1: the housing market in Canada, particularly in Toronto, has been
Speaker 1: under quite a bit of scrutiny for getting quite inflated. Um.
Speaker 1: And you think that this could be a potential concern
Speaker 1: for the banks in Canada, Well, yes, indeed, and that
Speaker 1: elevated housing prices, particularly in the g t A, the
Speaker 1: Greater Toronto Area and the Greater Vancouver area have been
Speaker 1: on our radar for a number of years and have
Speaker 1: figured UH quite prominently in the research that we've published
Speaker 1: over that time. But the first the first stage of
Speaker 1: of our credit analysis for bank starts with what we
Speaker 1: call the macro profile, which is our assessment of the
Speaker 1: operating environment in which the banks operate and UH. In
Speaker 1: our view UM, the degree of leverage in the in
Speaker 1: the system overall has is at a very high level
Speaker 1: and continues to rise, and that gives us concern about
Speaker 1: the future knock on negative effects on asset quality. When
Speaker 1: you see the amount of leverage in this system, are
Speaker 1: you're talking about the dwindling down payments that consumers are
Speaker 1: making on houses relative to the amount of debt that
Speaker 1: they're taking on. Are you talking about hedge funds and
Speaker 1: other investors borrowing short term to lend long term? What
Speaker 1: exactly where are you seeing the biggest build up of leverage? Well,
Speaker 1: our primary metric when we look at this, and this
Speaker 1: the metric we use globally for assessment of our preating
Speaker 1: environments is private debt to GDP and the rate of
Speaker 1: growth of that metric. So we get our data from
Speaker 1: Statistics Canada and we review that on a regular basis.
Speaker 1: That includes consumer debt, both mortgage and non mortgage, as
Speaker 1: well as corporate and commercial debt UM. The corporate component
Speaker 1: is largely not held on the bank's balance sheets. We
Speaker 1: have a robust debt capital markets here in Canada and
Speaker 1: it's largely institutional investors that have the corporate book. But
Speaker 1: the consumer mortgages and non real estate security the lending
Speaker 1: is where we have been more focused. And not even
Speaker 1: really the mortgages. There are obviously concerns with the inflated
Speaker 1: housing prices um and what that might do under stress um,
Speaker 1: but there would still be significant collateral back in those mortgages.
Speaker 1: It's the credit cards and the indirect auto finance and
Speaker 1: those types of less well secured exposures that would have
Speaker 1: you know, loss given default in the area of a
Speaker 1: hundred percent, which would be probably the driver of larger losses.
Speaker 1: When was the last time that you saw the levels
Speaker 1: of leverage by the metric metric that you just laid
Speaker 1: out that are as high as they are today. I
Speaker 1: don't believe they've ever been as high as they are today,
Speaker 1: and certainly the component of it which relates to household
Speaker 1: debt has never been as high. Which banks are most exposed. UM,
Speaker 1: there's relative degrees depending on how you cut the data
Speaker 1: of exposure to the Canadian consumer across the banking system. UM.
Speaker 1: UH suffice it to say that that we feel the
Speaker 1: that are baseline credit assessments, which is sort of our
Speaker 1: starting point for rating the banks. UH is the best UH,
Speaker 1: you know, indicator of of relative exposure. In that case,
Speaker 1: uh TD would be the highest rated of the Canadian
Speaker 1: banks and National Bank of Canada would be the lowest
Speaker 1: of those six. David Beattie, thank you so much for
Speaker 1: joining us. This is a really important topic and we
Speaker 1: look forward to hearing from you again. David Beatty is
Speaker 1: senior vice president in the Financial Institutions Group at Moody's
Speaker 1: Investors Service. Moody's did downgrade UH a number of Canadian
Speaker 1: banks for the first time in more than four years
Speaker 1: this week in part because of UH. Frankly, this incredible
Speaker 1: expansion of consumer debt relative to g d P that
Speaker 1: we have seen, and David just said that he has
Speaker 1: not seen a level that has been this high UH
Speaker 1: in recent memory. Right now, I want to dig a
Speaker 1: little bit further into a political development that does not
Speaker 1: have to do with James Comey, the fired FBI director
Speaker 1: that has gained so much attention in Washington, d C.
Speaker 1: But in fact, President Trump issued a commission ordered a
Speaker 1: commission on Fraudulent Voting in elections, which caught my attention
Speaker 1: because this could potentially rerange the landscape for how votes
Speaker 1: are broken up across the country and could potentially have
Speaker 1: longer term effects. To understand a little bit more about
Speaker 1: what the stakes are here, I want to bring in
Speaker 1: Ken Doyle, senior editor of Bloomberg Bona's Money and Politics
Speaker 1: Reporter report, coming to us from Arlington, Virginia. Ken, thank
Speaker 1: you so much for joining us. Can you can you
Speaker 1: first just give me a sense of what this Commission
Speaker 1: on Fraudulent Voting in Elections actually is? Well, it's it's
Speaker 1: not it's not clearer exactly yet. What they haven't met,
Speaker 1: they haven't actually started up that it was announced in
Speaker 1: an executive order at the White House yesterday exactly. It's
Speaker 1: supposed to be a fifteen member commission. They only announced
Speaker 1: about five or six members. It's headed by uh, well,
Speaker 1: it is headed by Advice President Pence, but it's the
Speaker 1: vice chairman is going to be Chris Koback. Who's the
Speaker 1: Secretary of State for Kansas, who's been a very outspoken,
Speaker 1: UH person on immigration and voter fraud issues, somebody who
Speaker 1: has really staked out a position on these issues. And UH,
Speaker 1: it seems like what they want to do with this
Speaker 1: is UM uh, you know, emphasize the claims that that
Speaker 1: Trump and other President Trump and others have made about
Speaker 1: voter fraud being a major problem. This, of course, is
Speaker 1: not a view that's shared by UM everybody and and
Speaker 1: many Democrats view this is a basically a partisan effort
Speaker 1: to UM to pass more voter I d UH legislation
Speaker 1: would basically, you know, has the potential to suppress turnout,
Speaker 1: especially among minorities and people that might support Democrats. So
Speaker 1: it's a very controversial UM topic. It was something that
Speaker 1: was emphasized by Trump after the election in which he
Speaker 1: lost the popular vote by about three million votes, and
Speaker 1: and it hasn't been talked about for the last really
Speaker 1: for a couple of months. UM. But they decided to
Speaker 1: make this announcement yesterday. And I think the suspicion from
Speaker 1: Trump's critics you said at the beginning that this is
Speaker 1: something other than the Russia comy issue, but the suspicion
Speaker 1: from Trump's critics is that, um they wanted to talk
Speaker 1: about something else, and that's why it was brought up
Speaker 1: this week. Well, okay, so let's put this in a perspective.
Speaker 1: I mean, should we care about this or is this
Speaker 1: window dressing from President Trump trying to appease his his
Speaker 1: core supporters. I think that that's the question is whether
Speaker 1: this would be a legitimate investigation. There have been similar
Speaker 1: investigations in the past of problems with the voting system.
Speaker 1: They generally have been more sort of on a bipartisan basis,
Speaker 1: where we look at all the issues. This is, you know,
Speaker 1: a commission that was out to look at just one issue,
Speaker 1: the voter fraud issue that the Republicans have emphasized and
Speaker 1: that I say has been you know, very controversial. There
Speaker 1: were a couple of Democrats that were named yesterday, um
Speaker 1: uh to who who were going to participate in the commission?
Speaker 1: Bill Gardner, the Secretary of State of New Hampshire, and
Speaker 1: I think it's Matt Dunlap, who's the Secretary of State
Speaker 1: of Maine. But both of those people have actually you know,
Speaker 1: pushed back against the Trump claims that there was widespread
Speaker 1: voter fraud, and it's you know, it's difficult to find
Speaker 1: any Democrats, and really many Republicans, you know, also feel
Speaker 1: that there was not um that this is just not
Speaker 1: a major issue. It's not an issue that affects um
Speaker 1: election results in any kind of um significant way. Well,
Speaker 1: let's let's zoom back a little bit and get a
Speaker 1: sense of how quickly official can move to change these
Speaker 1: standards by which people have to adhere in order to vote,
Speaker 1: or potentially even rearranged districts. I mean, can people move
Speaker 1: quickly without say, legislative action to rearrange the voting parameters? No,
Speaker 1: I mean that's the thing. That's The laws on this
Speaker 1: are set state by state. Um. There there have been
Speaker 1: significant changes in the laws in some states. They they
Speaker 1: the states that have taken up this issue are generally
Speaker 1: those states that have Republican majority legislatures and have have
Speaker 1: moved ahead on this. There have been some significant Supreme
Speaker 1: Court decisions that have allowed more of that activity and
Speaker 1: some of the states to move ahead. But this commission,
Speaker 1: the only thing that it's actually charged to do is
Speaker 1: to write a report to the President that says, you know,
Speaker 1: what what ought to be done, presumably about this Uh,
Speaker 1: they say that the report won't come out until some
Speaker 1: time next year. UM, and then at that point, presumably
Speaker 1: they might pass along recommendations either to the states or
Speaker 1: possibly to Congress. I mean, there's some suspicion that, um,
Speaker 1: the the Republicans might try to use this to roll
Speaker 1: back what's called the Motor Voter Act and National Voter
Speaker 1: Registration Act, which was the national law that was put
Speaker 1: in place to ease voter registration requirements that there would be,
Speaker 1: you know, basically you could fill out a postcard and
Speaker 1: send it into state officials to register more easily, and
Speaker 1: also requiring states to allow registration through you know, um,
Speaker 1: driver license and other other state facilities. So the Republicans
Speaker 1: might try to use it for something like that, but
Speaker 1: not not immediately, you know. Can I have to wonder
Speaker 1: if this is window dressing or if this is basically
Speaker 1: plead or diversion to give core supporters of President Trump
Speaker 1: something to think about other than the hurrah around James
Speaker 1: come and his uh and his is getting fired. Is
Speaker 1: it is this emblematic of Washington spinning its wheels and
Speaker 1: getting admired and stuff that is is not going to
Speaker 1: go anywhere and is a waste of time. Well, I mean,
Speaker 1: I think that there's a lot of interest in sort
Speaker 1: of controlling the narrative, right, I mean, whether and especially
Speaker 1: at the White House, that they may feel like they've
Speaker 1: lost some control of what's going on and they're trying
Speaker 1: to get it back and have Trump be more you know,
Speaker 1: on the offense rather than the defense. This was something
Speaker 1: that he was pushing, he was talking about a lot
Speaker 1: earlier in the year. And actually, I mean it's interesting
Speaker 1: because a lot of people said, you know, that he
Speaker 1: shouldn't be talking about this because there was there wasn't
Speaker 1: a lot of evidence to back it up, and it
Speaker 1: was kind of problematic. But it does I think it
Speaker 1: does show the point that we're at that they've brought
Speaker 1: this up as as you know, an alternative, um, you know,
Speaker 1: thing to talk about as opposed to the Russia coomy thing.
Speaker 1: And clearly they're they're very people in the White House
Speaker 1: are very preoccupied by this at this point. This is
Speaker 1: such a huge story this week that um, you know
Speaker 1: that it's hard for them to to talk about something else,
Speaker 1: but they like to. Obviously, is there anything else that
Speaker 1: we can expect them to try to divert the attention
Speaker 1: to I mean something even worthwhile like health care, taxes. Well,
Speaker 1: I think that that's what they would certainly, that's what
Speaker 1: the Republicans on the Hill would like to talk about.
Speaker 1: They'd like to be able to get back to that.
Speaker 1: I think that that's certainly what um, you know, what
Speaker 1: the White House would like to They want to find
Speaker 1: a way back to talking about other things, including those issues.
Speaker 1: But that's gonna be hard for everybody. It's gonna be
Speaker 1: hard for people in Congress. I think that to talk
Speaker 1: about those issues as well when they're going to be
Speaker 1: asked questions about you know, this latest controversy. Yeah. Well
Speaker 1: the other is, I guess, Ron Meat, it's probably easier
Speaker 1: for people to care about and get excited about rather
Speaker 1: than very tricky things with lots of sides, like healthcare
Speaker 1: and taxes. Ken do thank you so much for joining us.
Speaker 1: Ken Doyle is senior editor for Bloomberg Bonna's Money and
Speaker 1: Politics Report. Coming to us from Arlington, Virginia. Talking about
Speaker 1: the latest President Trump executive order ordering a commission on
Speaker 1: fraudulent voting in elections? Is it just a diversion tactic
Speaker 1: to move some IV halls away from the James comey drama.
Speaker 1: Perhaps we want to take a moment to let you
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Speaker 1: It's pretty amazing. Download our io s app or search
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Speaker 1: it out. Learn more at Bloomberg dot com slash lens.
Speaker 1: We got some retail sales numbers today, and we've got
Speaker 1: a whole host of results from department stores over the
Speaker 1: past twenty four hour and they kind of paint a
Speaker 1: conflicting picture. To get a better sense of what it
Speaker 1: all means, I want to bring in Sema Show, consumer
Speaker 1: discretionary analyst for Bloomberg Intelligence, as well as Bert Flickinger,
Speaker 1: Managing director at Strategic Resource Group H and seem I
Speaker 1: want to start with you to set the stage with
Speaker 1: respect to these US retail sales numbers that we got
Speaker 1: for April that seemed to be okay. They weren't terrible,
Speaker 1: thank you Lisa. They were okay compared to last month,
Speaker 1: but they still missed expectations. And I think part of
Speaker 1: the benefit was from the easter shift from March to April.
Speaker 1: Um but I think if you step back and you
Speaker 1: think about and also you look at what the components
Speaker 1: were of retail sales, the a lot of the growth
Speaker 1: was coming from categories where we've seen growth before, building materials,
Speaker 1: non store retails, so basically online um so. And you
Speaker 1: saw positive sales from autos, though they've declined since last year.
Speaker 1: So I think going forward that's going to be a
Speaker 1: risk for retail sales. And Bert certainly we saw nothing
Speaker 1: Rosie out the numbers out of most of the department stores, calls, UH, Nordstrom's,
Speaker 1: Macy's really some devastatingly disappointing numbers. What do you make
Speaker 1: of all this? It's it's part of the day to them,
Speaker 1: all of many going down. So you see Bondon in
Speaker 1: a in a tune of Trouble Sears Holdings, which still
Speaker 1: sells a lot of apparel and accessories in trouble J
Speaker 1: J Crew and trouble, Barney's in trouble. Even nice is Uh,
Speaker 1: You're the worldwide star of bonds and fixed income Lisa
Speaker 1: and Nemon Marcus market bonds are are trading way down,
Speaker 1: and there's some silver lining in Penny. Penny's gross margins
Speaker 1: if you stacked over a three year period or up
Speaker 1: about a thousand percent, gross margins are still trading up.
Speaker 1: SMP just upgraded the bonds to B plus, while Nordstrom
Speaker 1: and the others are triple C. And with Penny, you've
Speaker 1: got more margin expansion. Uh, solid or flat same store
Speaker 1: sales projected for the rest of the year. But four
Speaker 1: cornerstones are really doing well. So for them find Jewelry
Speaker 1: uh doing well, Boys and girls fashion doing well, at
Speaker 1: home doing well. So Penny shifting a lot of sales
Speaker 1: from Sears, which is you, and SIMA said reporting next
Speaker 1: week ton of trouble on shifting sales from just about
Speaker 1: everybody else in sector two. Well, Uh, Seema, I want
Speaker 1: to get to back to what one the thing that
Speaker 1: you were saying before we drill into the likely success
Speaker 1: or failure of some of these companies. I want to
Speaker 1: dig into something that you were talking about with respect
Speaker 1: to the drivers of some of the gain in retail sales.
Speaker 1: You talked about autos for example, where we have seen
Speaker 1: the sales slowing, we've seen building materials. I mean, do
Speaker 1: these numbers suggest to you that there is kind of
Speaker 1: more weakness that was going to play out in retail
Speaker 1: sales that could sort of speak to something broader. Yeah.
Speaker 1: So I think I've probably been a little bit more
Speaker 1: on the bare side versus some of my colleagues because
Speaker 1: I'm concerned about how strong autos were last year, and
Speaker 1: if you step back, twee did this with each other.
Speaker 1: I'm very concerned about the rising auto loans, the delinquencies.
Speaker 1: I'm very concerned about the synchronies and the alliance data
Speaker 1: systems of the world raising their charge off rates, which is,
Speaker 1: by the way, credit income is a huge component of
Speaker 1: many department doors and other retailers operating income, and it's
Speaker 1: a huge driver of sales. So credit. If people are
Speaker 1: using credit to buy and then they're not paying it back,
Speaker 1: I think that it paints the more negative picture of
Speaker 1: the consumer. If you step back and you think about
Speaker 1: the macro indicators. The economists talk about a lot of
Speaker 1: that wage increase, and it's on the low end, and
Speaker 1: it might be that those people are shifting the money
Speaker 1: either to their homes or just too basic necessities like healthcare,
Speaker 1: which could go up if we have the American health
Speaker 1: Care Act pass, or just housing costs, you know. So
Speaker 1: I'm more concerned about the actual state and health of
Speaker 1: the consumer, and then what it means for the retailers
Speaker 1: who are facing this potentially weaker consumer, and then the
Speaker 1: secular pressure of the Amazons and rising competition in their space,
Speaker 1: right and burn, just to sort of what you were
Speaker 1: talking about with the winners and the losers of me
Speaker 1: you talk to Sephora. This has been a longstanding trend
Speaker 1: that people spend more on makeup because you know, because
Speaker 1: of possibly Instagram, because people want to look good in
Speaker 1: their selfies. Right, They're getting more manicure. But Bert, I
Speaker 1: mean like project out over the next two years, I
Speaker 1: mean you said that Danue mo Are, We're going to
Speaker 1: actually see some of these companies, these department stores really
Speaker 1: truly closed. I mean, this has been going on for
Speaker 1: a long time. Yeah, Lisa's is your referenced so presently
Speaker 1: in some of our earlier broadcasts. When the retail bonds
Speaker 1: go to triple C minus and trade sixty five or below. Uh,
Speaker 1: they're really they're really in trouble. And that's also often
Speaker 1: a leading bankruptcy indicator. So are there ones that are
Speaker 1: ye so uh Sears Hole Holdings, km arts there, UH
Speaker 1: Jay crew hasn't gotten there, but easily easily could. The
Speaker 1: Barney's that's in a ton of trouble and mgen Neman,
Speaker 1: Marcus Group, dash Burg dorses there and then a lot
Speaker 1: of the teen retailers that have already gone over Niagara
Speaker 1: falls in a barrel with without any padding, so route
Speaker 1: route route one. There might be some bright, bright blue
Speaker 1: skies ahead. We've got a Memorial Day coming up. The
Speaker 1: last quarter reported with some of the worst weather between
Speaker 1: cold rain, UH, floods, etcetera. Now there's some lighthouse lighthouses
Speaker 1: in terms of economic activity between energy all levels from
Speaker 1: renew renewable to carbons. Agricultures back on its feet, manufacturing
Speaker 1: is back on its feet. There'll be some more UH
Speaker 1: spending and with the tax refunds because of the problems
Speaker 1: in Washington coming out late. UH second quarters should be
Speaker 1: good and it's is un Sima presently pointed out. Auto
Speaker 1: sales of UM hit the hit the wall at Darlington
Speaker 1: and bouncing off and limping to the finish line what
Speaker 1: that usually means. And with Apple in between product cycles,
Speaker 1: as people will go out to department stores, Spend or Disney,
Speaker 1: the other theaters have a strong studio release schedule, So
Speaker 1: there are potentially more people going to the malls this summer.
Speaker 1: And when I talked to surviving retailers, they're seeing a
Speaker 1: lot of shoppers shift over in the same malls from
Speaker 1: the declining retailers are going going down swinging, trying to
Speaker 1: liquidate their inventory for their vendors and unsecured creditors. You know,
Speaker 1: as you talk, I mean when you talk about some
Speaker 1: of the bonds that are trading down and sort of
Speaker 1: uh indicating that there could be an imminent bankruptcy of
Speaker 1: companies like Sears and Kmart and potentially Jay Crew in
Speaker 1: a little bit, I have to wonder. I mean, they've
Speaker 1: been signaling this for a long time, and you know,
Speaker 1: Eddie Lampert, for example, with Sears, has really kept that
Speaker 1: company afloat. But yeah, I was just go ahead, yeah, no,
Speaker 1: please go. But I was just gonna say that retail
Speaker 1: tends to die a slow death. Can look at radio shock,
Speaker 1: right because a lot of the individual stores are profitable,
Speaker 1: so they just basically milk them for cash. And like,
Speaker 1: he's that's basically what he's done, right, He's not spending
Speaker 1: any and so, yeah, Sears should have died ten years ago,
Speaker 1: but he's able to keep it alive. And you see
Speaker 1: that with many of the retailers. It's only that just
Speaker 1: kind of limp along and then. But is this part
Speaker 1: of the problem, right, Is this part of the reason
Speaker 1: why the retail sector has been unable to sort of
Speaker 1: revive itself, apart from Amazon coming in and just completely
Speaker 1: changing the landscape. Is it partly that you know, they
Speaker 1: won't let a bad thing die. There's there's an insidious,
Speaker 1: unreported story too, is that the greedy bankruptcy firms are
Speaker 1: gouging these poor retailers, whether it's FTC M and a
Speaker 1: UH in the case of a few firms, or some
Speaker 1: of the notable bankruptcy firms gouging these poor firms and
Speaker 1: the securits and the under secureds UH for over a
Speaker 1: hundred million in professional feast. They don't know what the
Speaker 1: devil they're doing. They haven't done any work in retail.
Speaker 1: They bring in financial advisors, I don't know what the
Speaker 1: devil they're doing, and it almost seems that their goal
Speaker 1: is boomerang bankruptcy, is to do a Chapter eleven bankruptcy
Speaker 1: followed by a Chapter seven so they could do a
Speaker 1: hundred and professional fees twice while pairing the company. And
Speaker 1: that's the scandal that the bond holders and the secured creditors,
Speaker 1: the unsecured largely the vendors and the landlords really have
Speaker 1: to get get after these bankruptcy firms that really have
Speaker 1: load and no retail experience in the space and have
Speaker 1: often failed in in in prior ones as U and
Speaker 1: Seim are so describing so well. Having these companies link
Speaker 1: limp along and the only ones who are getting rich
Speaker 1: are the bankruptcy lawyers their firms and the professionals they
Speaker 1: bring in again with with close close to no relevant
Speaker 1: retail experience. I mean, then I guess this makes sense.
Speaker 1: Right then you still have these people selling things that
Speaker 1: chieper prices and it hurts the whole industry. You're not
Speaker 1: getting that shake out that you need. So see what happens.
Speaker 1: In my perspective, legacy retailers all need to rethink the
Speaker 1: whole competitive landscape and how big they are. They grew
Speaker 1: all too much and too fast, and the two thousands
Speaker 1: and the ones that exist probably have to be significantly
Speaker 1: smaller to be profitable and to have upside, right because
Speaker 1: online now is a growing part of their business. So
Speaker 1: I think they're just it's it's a huge They have
Speaker 1: to really step back and say what kind of business
Speaker 1: should I be now? It's not the business it used to.
Speaker 1: And underpinning that question goes to something that you were
Speaker 1: saying before, Sema, which is the idea that healthcare is
Speaker 1: getting more expensive and housing costs are getting more expensive,
Speaker 1: and a greater proportion of people's income is going to
Speaker 1: those expenses. In other words, the amount that could potentially
Speaker 1: go to discretionary spending to these retailers is going down.
Speaker 1: I mean, aside from the Amazon albatross, you know, are
Speaker 1: we seeing some kind of reduction in spending that we
Speaker 1: can even see in the us A retail sales numbers.
Speaker 1: I think that you are. Some of it is probably
Speaker 1: due to spending shifting to other areas necessities, but it's
Speaker 1: also I think people have to step back and think
Speaker 1: about human behavior. Since oh eight, everybody has been used
Speaker 1: to deals. I don't care how much money you are,
Speaker 1: how wealthy. If you do not have a sale, you're
Speaker 1: not going to buy. It's so true. I used to
Speaker 1: come home doesn't matter. I used to come home from
Speaker 1: the store and I would say to my husband. I'd
Speaker 1: be like, I got this on sale, and he's like,
Speaker 1: how it's off? He said, how much did you spend?
Speaker 1: That's a fifty dollars you would roll as absolute amount.
Speaker 1: So I think that that mindset is killing retail across
Speaker 1: the board because people want a deal. How can you
Speaker 1: pull back from promotions to boost your gross margin where
Speaker 1: you're going to kill your sales. So on top of
Speaker 1: all of this, it's really so the fact that these
Speaker 1: retailers limp along that just sort of exacerbates. I think
Speaker 1: the problem that hey, you know, I'm not going to
Speaker 1: buy that black shirt because I'm gonna get it next
Speaker 1: week from Macy's with the twelve coupons they send me
Speaker 1: every day in the mail. And the fresh vendors are
Speaker 1: causing some of the problem too unwittingly. So in our
Speaker 1: field work, we're seeing them under resourcing UH prestige and
Speaker 1: luxury fashion shoes. Two retailers like Nordstrom because they think
Speaker 1: they can sell full price to their own stores, whether
Speaker 1: it's Gooch or or others. And then what they ultimately
Speaker 1: do is they don't they don't give enough luxury goods
Speaker 1: leading department stores who made them, and then then they
Speaker 1: wind up closing off on the internet or give it
Speaker 1: to Carol Myerwitz and Ernie Herman to close out at
Speaker 1: t j X and the rest of the off price
Speaker 1: places across American and worldwide. Vendor community share shares in
Speaker 1: the blame and pain. But there's going to be a
Speaker 1: retail renaissance coming after this retail ice age, but it's
Speaker 1: going to take about a thousand days for us to
Speaker 1: go through the deep freeze and bounce back. Well, thank
Speaker 1: you so much for joining me. Really a fascinating conversation.
Speaker 1: I am sure it will be ongoing. SEMA shows consumers
Speaker 1: espressional analysts for Bloomberg Intelligence and Bert Flickinger, Managing director
Speaker 1: at Strategic Resource Group. Right now, I want to look
Speaker 1: in to a new type of lending. Oh, it's not
Speaker 1: that new. I guess this business is more than a
Speaker 1: decade old, but it's certainly been ramping up. Jim Richard
Speaker 1: Talia is co chief executive officer of Unison home Ownership Investors,
Speaker 1: which is based in San Francisco, and Jim, we were
Speaker 1: just talking a little bit offline about sort of the
Speaker 1: objective of getting money to consumers who want to buy
Speaker 1: houses to help pay for their down payments. Can you
Speaker 1: explain a little bit about what this is? Sure, thanks
Speaker 1: for having me on. Uh. Unison has introduced a new
Speaker 1: financial product category to the world. Is what we call
Speaker 1: it home ownership investment. It's long term funding. Uh, it's
Speaker 1: not alone. Unison invests in the home alongside you. There
Speaker 1: are no interest payments, no interest charges when you sell
Speaker 1: the home. As partners, we share the outcome. We share
Speaker 1: the change in value of the home. So if the
Speaker 1: home value rises, we will share the appreciation. If the
Speaker 1: home value falls, will also share in the loss. One
Speaker 1: of the purposes of the funding that we provide is
Speaker 1: to use it as part of the down payment on
Speaker 1: a home purchase. So, uh, this this seems like it
Speaker 1: has somewhat of a pretty big risk attached to it,
Speaker 1: just because you don't get paid out until you know,
Speaker 1: thirty years down the line when somebody sells the house,
Speaker 1: or unless it's gets prepaid earlier, and you know who's
Speaker 1: investing and uh, what's what's the value proposition for them?
Speaker 1: So we raise money from institutional investors like pension funds
Speaker 1: and endowments. Residential real estate is a very attractive asset
Speaker 1: class for these investors because it closely tracks inflation and
Speaker 1: it's a very large component of the economy. They've never
Speaker 1: had any way to get exposure to it until now.
Speaker 1: And one of the things that's very extraordinary about what
Speaker 1: we do is that, for the first time ever, Unison
Speaker 1: is making residential real estate, which is the world's largest
Speaker 1: asset class, an investable asset class for institutional investors. So
Speaker 1: you opened the business in two thousand and five, what
Speaker 1: has the one of the turn has been like, Uh,
Speaker 1: they've actually been very good. We have some of the
Speaker 1: investors that invested with us way back have invested again.
Speaker 1: We've managed a pool of these assets that were generated
Speaker 1: before the crisis through the crisis. They perform well. Um,
Speaker 1: you know, it's a it's a it's a good program.
Speaker 1: It's a it's a it's a good deal. We strike
Speaker 1: between the investor and the consumer. The consumer gets the
Speaker 1: benefit of long term finance without payments, and the investor
Speaker 1: gets the benefit of the new asset class. These investors
Speaker 1: don't need payments. They're long term investors. They need exposure
Speaker 1: to the asset class. And the consumer likes the idea
Speaker 1: of not having to make payments on long term finance.
Speaker 1: So it's a there's a natural alignment between the two
Speaker 1: and that's the genesis for the business. How how what
Speaker 1: sort of the total volume of loans that have been
Speaker 1: originated like this or not loans? They're not loans, they're
Speaker 1: not to take that back financing excuse me. We are
Speaker 1: growing very very quickly right now. We started the business,
Speaker 1: as you mentioned, back before the crisis, we had about
Speaker 1: fourteen thousand consumers on our pipeline when we were forced
Speaker 1: to basically you know, hunkered down for the crisis for
Speaker 1: a while, so we had done you know, our first
Speaker 1: several hundred transactions at that point. After the crisis, we
Speaker 1: relaunched our original program, the home buyer I'm sorry, the
Speaker 1: homeowner program, and added the home buyer program, and now
Speaker 1: that program is ramping up very very quickly. We've got
Speaker 1: very large amounts of capital committed, and as I said,
Speaker 1: we're growing like ercent a month over month in terms
Speaker 1: of our our origination pipeline, Do you have certain parameters
Speaker 1: as far as how much money the homeowners have to
Speaker 1: put down or sort of any of the loan to
Speaker 1: value ratio or anything like that. In most cases, the
Speaker 1: homeowner puts down half of the down payment and we
Speaker 1: put down half that you know, by most cases they're
Speaker 1: getting a loan on the property, so we share the
Speaker 1: down payment fifty. Right, But as far as the parameters
Speaker 1: for the consumer and what you know, kinds of leverage are,
Speaker 1: you know, just to make sure that people aren't being
Speaker 1: irresponsible or unable paypafter loaner, you know, because possibly they're
Speaker 1: gonna have to get a mortgage in addition to the
Speaker 1: down payments, to make sure that it's not going to
Speaker 1: be uh, something that's gonna end up in foreclosure, which
Speaker 1: could potentially become a problem. Right Sure, in general, the
Speaker 1: LTV on the property is eighty percent or less. Remember
Speaker 1: this is a way for you to get to a
Speaker 1: d l TV because you can buy a home with
Speaker 1: ten percent down in the with an agency loan. You
Speaker 1: can do that today, but you're going to wind up
Speaker 1: borrowing and paying mortgage insurance. So you have that high leverage.
Speaker 1: The monthly payment on that loan with mortgage insurance is
Speaker 1: going to be about fifteen to pent higher than the
Speaker 1: monthly payment would be if you got an eighty percent
Speaker 1: loan and didn't pay mortgage insurance. So what we do
Speaker 1: is we enable the consumer to get the benefit of
Speaker 1: making a full twenty percent down payment with only putting
Speaker 1: ten percent of their cash in. And that benefit is huge.
Speaker 1: It's additional purchasing power, it's a lower monthly payment, things
Speaker 1: like that. What regions of the country are you targeting.
Speaker 1: We're currently in thirteen states, uh the entire West coast
Speaker 1: and the northeast order from Virginia up through Massachusetts. We're
Speaker 1: also in Illinois and Arizona. The states that were in
Speaker 1: as you, I'm sure you'll recognize a comprise a lot
Speaker 1: of the largest metro areas in the country. So we're
Speaker 1: already in areas that that account for of the US
Speaker 1: real estate. Do you think that the target demographic is
Speaker 1: really build millennial? That's certainly one of the people that
Speaker 1: we help, but our programs actually help people across the
Speaker 1: entire their entire life. As a homeowner. We can help
Speaker 1: you buy your first home, and that definitely helps a millennial,
Speaker 1: but we can help you with your last home, and
Speaker 1: we can help you finance your life needs in between
Speaker 1: with our homeowner program that allows you to tap into
Speaker 1: your existing home equity without borrowing. Jim RICHTELI thank you
Speaker 1: so much for joining us. Really an interesting new type
Speaker 1: of financing. Jim Richitelli as co chief executive officer of
Speaker 1: Unison home Ownership Investors, which is based in San Francisco,
Speaker 1: and he joins us here in a bloombrook eleven three
Speaker 1: oh studios in New York. Thanks for listening to the
Speaker 1: Bloomberg p n L podcast. You can subscribe and listen
Speaker 1: to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform
Speaker 1: you prefer. I'm pim Fox. I'm on Twitter at pim Fox.
Speaker 1: I'm on Twitter at Lisa abramoids one. Before the podcast,
Speaker 1: you can always catch us worldwide on Bloomberg Radio