1 00:00:05,800 --> 00:00:08,720 Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 2 00:00:08,760 --> 00:00:11,520 Speaker 1: Along with my co host Lisa Bramowitz. Each day we 3 00:00:11,640 --> 00:00:15,120 Speaker 1: bring you the most important, noteworthy, and useful interviews for 4 00:00:15,200 --> 00:00:17,840 Speaker 1: you and your money, whether you're at the grocery store 5 00:00:17,960 --> 00:00:20,720 Speaker 1: or the trading floor. Find the Bloomberg p m L 6 00:00:20,840 --> 00:00:32,199 Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. So 7 00:00:32,240 --> 00:00:34,640 Speaker 1: we got retail sales out this morning and they were great. 8 00:00:34,840 --> 00:00:38,560 Speaker 1: US retail sales advanced in July by the most this year, 9 00:00:38,640 --> 00:00:43,400 Speaker 1: which is good, but it's not as good as consumer confidence, 10 00:00:43,640 --> 00:00:46,040 Speaker 1: which is at a fifteen year high. And this is 11 00:00:46,159 --> 00:00:48,720 Speaker 1: raising some kind of dissonance and some kind of questions 12 00:00:49,080 --> 00:00:53,040 Speaker 1: among economists, including for Lara Raym she's a senior economist 13 00:00:53,200 --> 00:00:57,200 Speaker 1: FS Investments, which oversees about twenty and a half billion 14 00:00:57,240 --> 00:01:00,600 Speaker 1: dollars and it's based in Philadelphia. Laura, can you give 15 00:01:00,640 --> 00:01:04,560 Speaker 1: me a sense of why it's concerning that there isn't 16 00:01:04,640 --> 00:01:08,119 Speaker 1: the same kind of enthusiasm that we're seeing in retail 17 00:01:08,240 --> 00:01:12,080 Speaker 1: sales as in the consumer confidence readings. Yeah, you know, 18 00:01:12,520 --> 00:01:15,120 Speaker 1: I think this disconnect is something that we're seeing in 19 00:01:15,240 --> 00:01:18,120 Speaker 1: lots of areas of the economy and in financial markets, 20 00:01:18,120 --> 00:01:22,039 Speaker 1: but specific to retail sales. We've had the consumer be 21 00:01:22,080 --> 00:01:25,440 Speaker 1: the real workhorse of our economy. This entire expansion, you've 22 00:01:25,480 --> 00:01:29,520 Speaker 1: had growth averaging two percent. Overall consumer consumer spending has 23 00:01:29,520 --> 00:01:33,720 Speaker 1: been averaging three And here's the problem, right, that cannot 24 00:01:33,760 --> 00:01:38,200 Speaker 1: continue indefinitely. The savings rate has been chiseled down from 25 00:01:38,200 --> 00:01:41,280 Speaker 1: over five percent to now only three point eight percent. 26 00:01:41,840 --> 00:01:46,920 Speaker 1: That's historically relatively low. Wait, so in other words, people 27 00:01:47,760 --> 00:01:50,440 Speaker 1: Americans are going out and they're digging into their savings 28 00:01:50,480 --> 00:01:53,680 Speaker 1: that they can go to heat home depot and renovate 29 00:01:53,720 --> 00:01:57,000 Speaker 1: their bathroom or buy that really nice pan that they've 30 00:01:57,000 --> 00:01:59,080 Speaker 1: been looking for. That's exactly right. I mean, you have 31 00:01:59,160 --> 00:02:01,000 Speaker 1: to think about when are you're going to get the 32 00:02:01,000 --> 00:02:03,080 Speaker 1: money to spend, and it's either going to come from 33 00:02:03,160 --> 00:02:06,520 Speaker 1: wages and income or it's going to come from your 34 00:02:06,560 --> 00:02:09,359 Speaker 1: savings and some other things like stock market gains or 35 00:02:09,400 --> 00:02:11,960 Speaker 1: housing appreciation. But really we look at those two big 36 00:02:12,000 --> 00:02:17,240 Speaker 1: factors of income and savings, and income has been really lagging. 37 00:02:17,280 --> 00:02:19,680 Speaker 1: That's one of the things we're not seeing during this 38 00:02:19,800 --> 00:02:24,040 Speaker 1: recovery very robustly. Usually at this stage in the recovery, 39 00:02:24,040 --> 00:02:26,400 Speaker 1: we're seeing better wage gains than we're seeing right now. 40 00:02:26,480 --> 00:02:28,280 Speaker 1: Let's go a little deeper here, because when we talk 41 00:02:28,360 --> 00:02:32,640 Speaker 1: about retail sales, are we really talking about buying that 42 00:02:32,680 --> 00:02:35,639 Speaker 1: really nice pan or buying that beautiful shirt that you've 43 00:02:35,639 --> 00:02:37,840 Speaker 1: been looking at that's cost three d dollars in his 44 00:02:37,880 --> 00:02:40,239 Speaker 1: way above your means? Or are we talking about people 45 00:02:40,800 --> 00:02:43,880 Speaker 1: paying more for rent, paying more for healthcare, paying more 46 00:02:43,919 --> 00:02:46,240 Speaker 1: for the necessities in their life, and getting squeezed on 47 00:02:46,320 --> 00:02:48,440 Speaker 1: every end that you know, what you bring up as 48 00:02:48,480 --> 00:02:52,920 Speaker 1: a huge issue right now that we're seeing across the economy, 49 00:02:52,960 --> 00:02:56,480 Speaker 1: and that's that what we call discretionary spending, what people 50 00:02:56,520 --> 00:02:59,280 Speaker 1: can spend on vacations, what they can spend on restaurants, 51 00:02:59,480 --> 00:03:02,880 Speaker 1: what they can spend on sporting goods is getting crowded 52 00:03:02,880 --> 00:03:06,040 Speaker 1: out to a greater and greater degree, most importantly by 53 00:03:06,280 --> 00:03:09,680 Speaker 1: higher spending on healthcare. We've seen that, you know, over 54 00:03:09,720 --> 00:03:13,520 Speaker 1: the last uh several decades, really increase as a share 55 00:03:13,560 --> 00:03:16,679 Speaker 1: of consumer spending. So again, you know, when we look 56 00:03:17,520 --> 00:03:21,240 Speaker 1: just like what what percentage healthcare spending is as a 57 00:03:21,280 --> 00:03:26,000 Speaker 1: proportion of retail sales, it's so retail sales different respending, 58 00:03:26,040 --> 00:03:29,400 Speaker 1: but total spending you're looking at almost twenty percent now 59 00:03:29,520 --> 00:03:33,280 Speaker 1: when up from eight percent, so you know that's over 60 00:03:33,520 --> 00:03:36,480 Speaker 1: several decades, but it's a huge difference. And you add 61 00:03:36,520 --> 00:03:40,040 Speaker 1: in higher cost of education, which over a lifetime is 62 00:03:40,160 --> 00:03:43,440 Speaker 1: less but still is more expensive now than it was 63 00:03:44,160 --> 00:03:48,320 Speaker 1: two decades ago. You're really seeing consumers when it comes 64 00:03:48,360 --> 00:03:52,000 Speaker 1: to you know, those extra purchases, having to dig into 65 00:03:52,040 --> 00:03:55,560 Speaker 1: their savings more and having to really rely on higher income. 66 00:03:55,920 --> 00:03:59,320 Speaker 1: And I can't stress enough. With productivity as low as 67 00:03:59,360 --> 00:04:02,560 Speaker 1: it's been, and we got second quarter productivity numbers not 68 00:04:02,840 --> 00:04:05,720 Speaker 1: terribly impressive, we're just not going to see those standard 69 00:04:05,760 --> 00:04:08,680 Speaker 1: of living or real wage gains. Yeah. I was just 70 00:04:08,720 --> 00:04:11,920 Speaker 1: reading an article actually that Japan's economy is now growing 71 00:04:11,960 --> 00:04:14,440 Speaker 1: at the fastest pace among the G seven nations, which 72 00:04:14,440 --> 00:04:18,160 Speaker 1: is an amazing, amazing turn of fate. Right, Um, well, 73 00:04:18,200 --> 00:04:20,200 Speaker 1: digging into the retail sales, I want to look at 74 00:04:20,320 --> 00:04:22,760 Speaker 1: where we saw people actually spending, and just to give 75 00:04:22,760 --> 00:04:26,080 Speaker 1: some perspectives, So consumption counts for the U s ECONTUY. 76 00:04:26,160 --> 00:04:28,200 Speaker 1: So this is huge, right, So if people dig into 77 00:04:28,240 --> 00:04:31,039 Speaker 1: their savings, maybe that's actually, you know, not so bad. 78 00:04:31,080 --> 00:04:32,800 Speaker 1: Maybe economists think, hey, you know, if they do it 79 00:04:32,839 --> 00:04:34,640 Speaker 1: for long enough, maybe it could spur some growth and 80 00:04:34,640 --> 00:04:38,080 Speaker 1: be the stimulus, the fiscal stimulus to factors to fiscal stimulus. 81 00:04:38,520 --> 00:04:41,679 Speaker 1: But where we saw the gains were at department stores, 82 00:04:41,720 --> 00:04:44,680 Speaker 1: which was really interesting because they've been hammered recently. UM. 83 00:04:44,720 --> 00:04:49,520 Speaker 1: Also sporting goods retailers, and building supply outlets. UM. What's 84 00:04:49,520 --> 00:04:51,480 Speaker 1: your take on this? So, you know, I think I 85 00:04:51,560 --> 00:04:53,400 Speaker 1: think we have to you know, month to month. All 86 00:04:53,440 --> 00:04:55,640 Speaker 1: of these categories are really volatile. We did see a 87 00:04:55,680 --> 00:04:58,320 Speaker 1: recovery department store sales, but that was after two months 88 00:04:58,320 --> 00:05:01,440 Speaker 1: of pretty significant decline, so we were kind of due 89 00:05:01,480 --> 00:05:03,880 Speaker 1: for a bounce. I think one of the issues was 90 00:05:04,200 --> 00:05:06,840 Speaker 1: we had Amazon Prime Day fall in July and that 91 00:05:06,880 --> 00:05:10,560 Speaker 1: did cause a big boost in non store retailers. Can't 92 00:05:10,560 --> 00:05:15,360 Speaker 1: believe that an entire company can create holiday to buy 93 00:05:15,440 --> 00:05:18,799 Speaker 1: our stuff and people buy it. Maybe we need Amazon 94 00:05:18,839 --> 00:05:21,479 Speaker 1: Prime Day for businesses to get them to start spending 95 00:05:21,480 --> 00:05:25,679 Speaker 1: more robustly. But yeah, So, Lara, as an economist who 96 00:05:25,800 --> 00:05:28,520 Speaker 1: is advising on how to invest, how do you make 97 00:05:28,600 --> 00:05:32,599 Speaker 1: sense of all of this? Uh, sort of different pieces 98 00:05:32,600 --> 00:05:36,120 Speaker 1: of data that paint kind of a crooked picture. To me. 99 00:05:36,480 --> 00:05:39,159 Speaker 1: What we need to get comfortable with is the fact 100 00:05:39,240 --> 00:05:42,200 Speaker 1: that we're just probably not going to see growth accelerate 101 00:05:42,240 --> 00:05:46,800 Speaker 1: from here, and here's two percent. It feels uh pretty, 102 00:05:47,240 --> 00:05:50,720 Speaker 1: it feels stable, it feels boring, it feels sluggish, and 103 00:05:50,760 --> 00:05:53,599 Speaker 1: that's because it is. But we are just stuck in 104 00:05:53,640 --> 00:05:56,839 Speaker 1: this rut. I tell people two percents to new three percent. 105 00:05:56,960 --> 00:05:59,480 Speaker 1: In the eighties and nineties, we grow three percent. Now 106 00:05:59,480 --> 00:06:01,080 Speaker 1: we're going to out two percent and you have to 107 00:06:01,080 --> 00:06:04,400 Speaker 1: invest accordingly. So does that mean that bonds still look 108 00:06:04,440 --> 00:06:07,919 Speaker 1: okay to you? And that stocks might be a little 109 00:06:07,920 --> 00:06:09,840 Speaker 1: expensive but aren't going to be due for a big fall. 110 00:06:09,880 --> 00:06:11,760 Speaker 1: We're just gonna keep muddling along in this, you know. 111 00:06:11,920 --> 00:06:15,640 Speaker 1: I think that um that the financial markets overall looked 112 00:06:15,680 --> 00:06:19,360 Speaker 1: like they've gotten ahead of economic fundamentals. On the inflation front, 113 00:06:19,480 --> 00:06:21,800 Speaker 1: I still think that interest rates and inflation are going 114 00:06:21,839 --> 00:06:25,000 Speaker 1: to be low. I see low interest rates out as 115 00:06:25,000 --> 00:06:28,640 Speaker 1: far as I can look. I see a cautious fed um. 116 00:06:28,680 --> 00:06:31,640 Speaker 1: But I think when it comes to other asset prices, 117 00:06:32,000 --> 00:06:34,760 Speaker 1: I think there's a lot of euphoria out there, and importantly, 118 00:06:35,520 --> 00:06:39,080 Speaker 1: no evidence that anybody is discounting any kind of downside 119 00:06:39,120 --> 00:06:45,080 Speaker 1: surprise economic, financial, market or geopolitical. None of these risks 120 00:06:45,120 --> 00:06:49,520 Speaker 1: are counted in. So that's where I don't see the 121 00:06:49,640 --> 00:06:52,040 Speaker 1: optimism that I feel like the markets are pricing in 122 00:06:52,120 --> 00:06:54,200 Speaker 1: right now. Yeah, we were talking before the show that, 123 00:06:54,480 --> 00:06:57,080 Speaker 1: you know, concerns about nuclear war brought the market down 124 00:06:57,120 --> 00:06:59,400 Speaker 1: a little touch and then everybody was like, whatever, not 125 00:06:59,440 --> 00:07:01,240 Speaker 1: a big deal. Lara Ray, and thank you so much 126 00:07:01,240 --> 00:07:03,320 Speaker 1: for joining us. Truly a pleasure to speak with you. 127 00:07:03,400 --> 00:07:07,400 Speaker 1: Lara Ray, Senior economist, FS Investments, which overseas about twenty 128 00:07:07,440 --> 00:07:22,600 Speaker 1: and a half billion dollars and is based in Philadelphia. 129 00:07:23,440 --> 00:07:25,920 Speaker 1: One area where it was not little changed was in 130 00:07:25,960 --> 00:07:28,600 Speaker 1: the retail sales data that we got earlier today. They 131 00:07:28,640 --> 00:07:32,240 Speaker 1: came in ahead of expectations. They were really great. But 132 00:07:32,320 --> 00:07:34,280 Speaker 1: I was speaking with Sema Shot ahead of this segment. 133 00:07:34,400 --> 00:07:37,520 Speaker 1: She was saying, it doesn't seem to jibe exactly with 134 00:07:37,560 --> 00:07:40,400 Speaker 1: some of the earnings that we've gotten out of some 135 00:07:40,480 --> 00:07:43,120 Speaker 1: of the big retailers. And she joins us here, Seema Shot, 136 00:07:43,120 --> 00:07:46,960 Speaker 1: consumer discretionary analyst for Bloomberg Intelligence. Can you explain a 137 00:07:46,960 --> 00:07:49,640 Speaker 1: little bit what's going on here? Right? So there's no 138 00:07:49,720 --> 00:07:52,520 Speaker 1: doubt retail sales for July were very strong. Um. I 139 00:07:52,560 --> 00:07:55,400 Speaker 1: was pretty particularly surprised about the strength and autos given 140 00:07:55,440 --> 00:07:57,920 Speaker 1: what we saw earlier. This month when the Big three 141 00:07:58,360 --> 00:08:01,680 Speaker 1: released their auto sales, they were all down significantly, and 142 00:08:01,680 --> 00:08:05,360 Speaker 1: then we get the auto parts US and a lot 143 00:08:05,400 --> 00:08:08,760 Speaker 1: of these categories that appeared very strong. Doesn't match with 144 00:08:08,800 --> 00:08:12,520 Speaker 1: what the actual companies are saying. So I would step 145 00:08:12,520 --> 00:08:15,040 Speaker 1: back and think that one month doesn't make a trend 146 00:08:15,040 --> 00:08:17,640 Speaker 1: and see how Q three earnings come out, because if 147 00:08:17,640 --> 00:08:19,560 Speaker 1: there was a lot of incentives, at least on the 148 00:08:19,560 --> 00:08:22,280 Speaker 1: autos or promotions on the retail side, it could mean 149 00:08:22,280 --> 00:08:24,760 Speaker 1: that margins are impacted, and so that that's part of 150 00:08:24,760 --> 00:08:26,920 Speaker 1: why sales were so strong in July. Do you have 151 00:08:27,000 --> 00:08:28,960 Speaker 1: any sense where the strength was. I mean, because we 152 00:08:29,000 --> 00:08:31,200 Speaker 1: did get the home depot numbers and they were great 153 00:08:31,240 --> 00:08:32,960 Speaker 1: and Wall Street doesn't care at all because it had 154 00:08:32,960 --> 00:08:35,559 Speaker 1: already priced it all um, But you know where where 155 00:08:35,640 --> 00:08:38,040 Speaker 1: the we're the surprises? Where could they be coming from? Right? 156 00:08:38,080 --> 00:08:41,160 Speaker 1: I definitely think Building Materials has been strong consistently. Home 157 00:08:41,200 --> 00:08:44,079 Speaker 1: depots an excellent operator, has done very well. They raised 158 00:08:44,080 --> 00:08:46,640 Speaker 1: their guidance. This is the highest quarterly sales and earnings 159 00:08:46,760 --> 00:08:50,520 Speaker 1: that think they've had in the company's history. Performing very well, 160 00:08:50,559 --> 00:08:54,199 Speaker 1: still having the tail end of home home renovation, housing 161 00:08:54,240 --> 00:08:58,600 Speaker 1: market improvements. So definitely strength is coming from there. I 162 00:08:58,600 --> 00:09:02,040 Speaker 1: mean in other sectors, you're seeing a little bit less bad. 163 00:09:02,240 --> 00:09:07,199 Speaker 1: Department stores were less bad that party and people anticipated 164 00:09:07,240 --> 00:09:09,200 Speaker 1: I still think, but you know, a lot of the 165 00:09:09,200 --> 00:09:11,640 Speaker 1: companies I cover continue to be weak, and they're they're 166 00:09:11,640 --> 00:09:15,320 Speaker 1: weak because of the online effect and I just not 167 00:09:15,400 --> 00:09:18,040 Speaker 1: having that compelling product. I just don't think people want 168 00:09:18,400 --> 00:09:20,480 Speaker 1: or maybe have the capacity to spend as much as 169 00:09:20,520 --> 00:09:24,000 Speaker 1: they used to, and if they do, they're shifting to online, 170 00:09:24,000 --> 00:09:28,800 Speaker 1: particularly Amazon, as people want price transparency and as other 171 00:09:28,880 --> 00:09:32,240 Speaker 1: retailers use Amazon as a marketplace and Amazon wants to 172 00:09:32,320 --> 00:09:35,600 Speaker 1: sell everything, including bonds, everything, which has been talking about 173 00:09:36,000 --> 00:09:38,600 Speaker 1: when you were saying that you have seen some persistent 174 00:09:38,640 --> 00:09:40,800 Speaker 1: weakness in the companies that you cover, can you give 175 00:09:40,880 --> 00:09:44,440 Speaker 1: us some specifics and why it's important to watch these 176 00:09:44,480 --> 00:09:46,920 Speaker 1: companies and specific results out of them to get a 177 00:09:46,960 --> 00:09:49,760 Speaker 1: better gauge perhaps and what's really going on these broad 178 00:09:49,840 --> 00:09:52,480 Speaker 1: sort of macro looks at retail sales, right, I mean, 179 00:09:52,559 --> 00:09:54,079 Speaker 1: part of it is just to step back and see 180 00:09:54,120 --> 00:09:56,840 Speaker 1: where companies fit in the competitive landscape. So one company 181 00:09:56,880 --> 00:10:00,280 Speaker 1: I cover is Signat, which had up until my a 182 00:10:00,280 --> 00:10:03,280 Speaker 1: few quarters ago, been very resilient as a destination for 183 00:10:03,280 --> 00:10:05,920 Speaker 1: where people would go when they wanted to get engaged 184 00:10:05,960 --> 00:10:08,880 Speaker 1: and buy a ring. And you've seen their comms and 185 00:10:08,960 --> 00:10:11,920 Speaker 1: the earnings, you know, consistently been weak. Recently the CEO 186 00:10:12,080 --> 00:10:15,280 Speaker 1: left right, it was like a turmoil as as But 187 00:10:15,559 --> 00:10:17,440 Speaker 1: what you're seeing, and that was more competition from the 188 00:10:17,440 --> 00:10:19,800 Speaker 1: Macy's of the world. The department stores, who are looking 189 00:10:19,800 --> 00:10:22,360 Speaker 1: for growth some way, and I've just been speaking about this, 190 00:10:22,400 --> 00:10:25,280 Speaker 1: have really come into sort of the hard lines retail subsector. 191 00:10:25,280 --> 00:10:28,360 Speaker 1: You're seeing emphasis on beauty, emphasis on home, and emphasis 192 00:10:28,440 --> 00:10:31,480 Speaker 1: on fine jewelry, and the retailers I cover are seeing 193 00:10:31,559 --> 00:10:33,559 Speaker 1: that pressure. So this is on top of the fact 194 00:10:33,600 --> 00:10:37,080 Speaker 1: that you have Amazon and Wayfair in these categories. So 195 00:10:37,360 --> 00:10:40,800 Speaker 1: apart from Signet, who are the other which are the 196 00:10:40,800 --> 00:10:45,040 Speaker 1: other companies that are most affected by this shift toward beauty, 197 00:10:45,240 --> 00:10:50,520 Speaker 1: home improvement, and oh yeah online. I mean really, I 198 00:10:50,559 --> 00:10:53,079 Speaker 1: can't think of anyone who's not affected. I cover a 199 00:10:53,240 --> 00:10:55,959 Speaker 1: wide spots of companies and they're all really affected, from 200 00:10:56,000 --> 00:10:59,439 Speaker 1: GNC to Vitamin Shop, two Staples office depot. And I 201 00:10:59,480 --> 00:11:01,760 Speaker 1: think you're e and seeing. I know Dick's reported and 202 00:11:01,760 --> 00:11:04,240 Speaker 1: I don't cover that, But if you think about how 203 00:11:04,320 --> 00:11:07,480 Speaker 1: coals commented and J. C. Penny commented about how they're 204 00:11:07,559 --> 00:11:10,560 Speaker 1: deepening their penetration and at leisure and the fact that 205 00:11:10,679 --> 00:11:13,719 Speaker 1: under Armour went and started distributing through Coals if not 206 00:11:13,840 --> 00:11:17,640 Speaker 1: maybe surprising that Dix is doing, you know, kind of 207 00:11:17,679 --> 00:11:20,080 Speaker 1: struggling today as it is, and it reminds me of 208 00:11:20,120 --> 00:11:22,199 Speaker 1: when I saw the success of bed Bath and Beyond 209 00:11:22,240 --> 00:11:24,880 Speaker 1: and Best Buy after the bankruptcies of circuit Cities and 210 00:11:24,920 --> 00:11:27,760 Speaker 1: Linens and things. When there's consolidation, the big guy went. 211 00:11:27,920 --> 00:11:29,800 Speaker 1: But then after that comes and they have to comp 212 00:11:29,840 --> 00:11:31,439 Speaker 1: again and figure out a way to grow, it becomes 213 00:11:31,559 --> 00:11:33,880 Speaker 1: very difficult. So early in the program, we were speaking 214 00:11:33,920 --> 00:11:38,120 Speaker 1: with Lara Ram of FS Investments and she was looking 215 00:11:38,160 --> 00:11:41,040 Speaker 1: at the savings rate and this really struck me that 216 00:11:41,160 --> 00:11:44,600 Speaker 1: the savings rate of US consumers has been declining pretty 217 00:11:44,600 --> 00:11:48,240 Speaker 1: steadily and it seems to suggest that people are digging 218 00:11:48,320 --> 00:11:52,800 Speaker 1: into their UH stockpiles of cash to go out and spend. 219 00:11:52,920 --> 00:11:57,720 Speaker 1: This is what's driving consumer expenditures. Does that concern you? 220 00:11:57,880 --> 00:11:59,559 Speaker 1: It definitely does, and I think it goes back. You 221 00:11:59,640 --> 00:12:01,880 Speaker 1: and I have talked about this at Link consumer credit 222 00:12:01,960 --> 00:12:04,120 Speaker 1: and the fact that they are rising charge off rates 223 00:12:04,120 --> 00:12:07,880 Speaker 1: and the retail credit cards and also maybe auto loan delinquencies. 224 00:12:07,880 --> 00:12:09,480 Speaker 1: And I just recently read I think it was in 225 00:12:09,559 --> 00:12:13,840 Speaker 1: Bloomberg that the subprime auto loans are really underwater, I 226 00:12:13,840 --> 00:12:18,200 Speaker 1: mean the deep, the deep subprime sometimes particularly terriby. This 227 00:12:18,240 --> 00:12:20,679 Speaker 1: is concerning. This is sort of the incremental customer that 228 00:12:20,760 --> 00:12:24,599 Speaker 1: any retailer who uses credit to fuel their sales is 229 00:12:24,679 --> 00:12:27,040 Speaker 1: maybe you know, maybe that's not their target customer. But 230 00:12:27,120 --> 00:12:29,040 Speaker 1: as you get to sort of how are you going 231 00:12:29,080 --> 00:12:32,000 Speaker 1: to drive sales, you get two promotions and figuring out 232 00:12:32,080 --> 00:12:34,480 Speaker 1: incentives to drive that traffic. So I definitely think it's 233 00:12:34,480 --> 00:12:37,040 Speaker 1: a concern that people are digging into their savings and 234 00:12:37,200 --> 00:12:39,080 Speaker 1: or using credit and not being able to pay it back. 235 00:12:39,200 --> 00:12:41,240 Speaker 1: And we just got Capital one earnings, and even though 236 00:12:41,240 --> 00:12:43,480 Speaker 1: there were some improvements in the auto loan side and 237 00:12:43,559 --> 00:12:46,040 Speaker 1: the credit card side, you saw a charge drops increase. 238 00:12:46,120 --> 00:12:49,000 Speaker 1: You're seeing that interest coverage, uh come to our net 239 00:12:49,360 --> 00:12:52,800 Speaker 1: coverage for these losses come down and then having to 240 00:12:52,840 --> 00:12:56,680 Speaker 1: boost reserves. So this speaks to your concern. Just giving 241 00:12:56,720 --> 00:13:00,360 Speaker 1: a forward spin to this, how are the retail colors 242 00:13:00,360 --> 00:13:05,120 Speaker 1: that you cover projecting future earnings? In other words, how 243 00:13:05,240 --> 00:13:07,400 Speaker 1: much are we going to see an ongoing kind of 244 00:13:07,520 --> 00:13:11,920 Speaker 1: grind upward in retail sales or not. Oh, I mean 245 00:13:11,960 --> 00:13:13,960 Speaker 1: I think that you might see, you know, you might 246 00:13:14,000 --> 00:13:16,520 Speaker 1: feel a little bit grind higher in the home improvement side. 247 00:13:16,559 --> 00:13:18,800 Speaker 1: So the flor In Dacores of the world home depot 248 00:13:18,880 --> 00:13:21,719 Speaker 1: even maybe lows, but you know, if you step back 249 00:13:21,760 --> 00:13:23,280 Speaker 1: and think of where they are, they might be mid 250 00:13:23,320 --> 00:13:26,440 Speaker 1: cycle and the housing tail wind. So then it becomes 251 00:13:26,440 --> 00:13:29,480 Speaker 1: a matter of, you know, how much further can people 252 00:13:29,600 --> 00:13:32,040 Speaker 1: renovated the home. I don't think that that's something that's 253 00:13:32,760 --> 00:13:35,160 Speaker 1: at risk right now, but something that I personally would 254 00:13:35,400 --> 00:13:37,360 Speaker 1: keep an eye on and look at the building products 255 00:13:37,360 --> 00:13:40,160 Speaker 1: companies and see how they are reporting. But for the 256 00:13:40,200 --> 00:13:42,600 Speaker 1: other companies, you know, I think they're really will have 257 00:13:42,640 --> 00:13:44,480 Speaker 1: to see how back to school goes. There's like that 258 00:13:44,520 --> 00:13:46,480 Speaker 1: there's that saying, so it goes back to school, so 259 00:13:46,520 --> 00:13:49,040 Speaker 1: it goes holiday. So I'd be really interested to see 260 00:13:49,080 --> 00:13:51,240 Speaker 1: how back to school is a cross buying. Are you 261 00:13:51,240 --> 00:13:52,680 Speaker 1: buying a ton of stuff for your kids to go 262 00:13:52,720 --> 00:13:57,440 Speaker 1: back to school no necessities? Is that? I'm like a 263 00:13:57,520 --> 00:14:00,360 Speaker 1: fight later. And I think holidays the test we just 264 00:14:00,440 --> 00:14:02,880 Speaker 1: failed for the holiday season. Just want to say that 265 00:14:02,960 --> 00:14:06,040 Speaker 1: on the record, But multiple retailers have already commented that 266 00:14:06,080 --> 00:14:08,160 Speaker 1: they think Q four will be exceptionally promotional, so it 267 00:14:08,200 --> 00:14:12,319 Speaker 1: depends on where their inventors told us. Promotional. That's bad thing, absolutely, 268 00:14:12,320 --> 00:14:15,280 Speaker 1: because unless they've planned for it and they've bought their 269 00:14:15,520 --> 00:14:18,040 Speaker 1: merchandise in a way that they can make some profit 270 00:14:18,320 --> 00:14:21,480 Speaker 1: or merchandise margin, it's going to be you know, it's 271 00:14:21,480 --> 00:14:22,760 Speaker 1: going to be tough for them, and you know you're 272 00:14:22,760 --> 00:14:25,880 Speaker 1: going to see more pressure from online retail, and you 273 00:14:25,880 --> 00:14:27,520 Speaker 1: know part of it. You know, what we saw maybe 274 00:14:27,560 --> 00:14:29,800 Speaker 1: in the online in July could have been from Amazon 275 00:14:29,840 --> 00:14:32,040 Speaker 1: Prime Day, So that's something else to consider. You know. 276 00:14:32,120 --> 00:14:34,080 Speaker 1: It's so interesting because I was actually reading this Bank 277 00:14:34,080 --> 00:14:37,320 Speaker 1: of America Mary Lynch Funds fund survey for August and 278 00:14:37,400 --> 00:14:41,440 Speaker 1: people we're talking about how they've been dramatically ratcheting back 279 00:14:41,480 --> 00:14:43,880 Speaker 1: their expectations for earnings going forward. In other words, we 280 00:14:43,960 --> 00:14:47,440 Speaker 1: might have seen already the peak earnings in this past quarter, 281 00:14:47,640 --> 00:14:50,560 Speaker 1: which is a little bit alarming considering, right, I mean, 282 00:14:50,600 --> 00:14:52,680 Speaker 1: for the most part, they haven't been that great. There 283 00:14:52,720 --> 00:14:55,360 Speaker 1: are always bright spots. It's not like physical stores are 284 00:14:55,400 --> 00:14:57,600 Speaker 1: going away and no one's shopping ever again. But you 285 00:14:57,640 --> 00:14:59,880 Speaker 1: have to think about where we came from from. Two 286 00:15:00,040 --> 00:15:03,920 Speaker 1: thousand to two thousand ten, when we really over built 287 00:15:03,960 --> 00:15:07,240 Speaker 1: the malls and we built multiple concepts into over a 288 00:15:07,280 --> 00:15:10,160 Speaker 1: thousand stores each and then you had this online come 289 00:15:10,200 --> 00:15:12,640 Speaker 1: and then how much can do people actually want? Maybe 290 00:15:12,640 --> 00:15:16,480 Speaker 1: the mindset and consumer behaviors less attached to stuff, and 291 00:15:17,800 --> 00:15:21,560 Speaker 1: that would be very Unamerican. Thank you so much for 292 00:15:21,640 --> 00:15:23,600 Speaker 1: joining us, as always a pleasure to speak with you. 293 00:15:23,760 --> 00:15:27,960 Speaker 1: Sima shas consumer discretionary analyst for Bloomberg Intelligence, taking a 294 00:15:28,000 --> 00:15:31,080 Speaker 1: look at some of the dissonance within the retail sales 295 00:15:31,120 --> 00:15:33,520 Speaker 1: and the earnings reports that we're getting out of retailers 296 00:15:33,520 --> 00:15:48,960 Speaker 1: that perhaps aren't seeing that enthusiasm. We have heard a 297 00:15:49,040 --> 00:15:52,240 Speaker 1: lot about the deregulation of Wall Street, or at least 298 00:15:52,240 --> 00:15:55,440 Speaker 1: the ongoing discussions to do so. And here was an 299 00:15:55,440 --> 00:15:59,840 Speaker 1: insider's look at just how regulated uh the investment industry 300 00:15:59,840 --> 00:16:03,320 Speaker 1: and particular is and what remains as sort of a 301 00:16:03,400 --> 00:16:07,320 Speaker 1: possible target for possibly tightening things up or loosening things up. 302 00:16:08,000 --> 00:16:10,320 Speaker 1: But with a better view than I have is Norm Champ, 303 00:16:10,360 --> 00:16:13,720 Speaker 1: partner within the Investment Funds group at Kirkland and ellis 304 00:16:13,760 --> 00:16:16,960 Speaker 1: also the former director of the Division of Investment Management 305 00:16:17,000 --> 00:16:19,120 Speaker 1: at the u S Securities and Exchange Commission and an 306 00:16:19,120 --> 00:16:22,440 Speaker 1: author of a new book, going Public, My Adventures inside 307 00:16:22,440 --> 00:16:26,960 Speaker 1: the SEC and how to prevent the next devastating crisis. So, Norm, 308 00:16:26,960 --> 00:16:29,280 Speaker 1: thank you so much for joining us. I would love 309 00:16:29,320 --> 00:16:32,040 Speaker 1: to get a sense from you. Are you concerned about 310 00:16:32,120 --> 00:16:35,280 Speaker 1: all of the talk about rolling back some of the regulation. 311 00:16:35,320 --> 00:16:37,880 Speaker 1: I mean, we've talked about the Department of Labor fiduciary 312 00:16:38,000 --> 00:16:40,680 Speaker 1: rule getting rolled back. Do you think that this could 313 00:16:40,760 --> 00:16:44,000 Speaker 1: make the financial system less safe? No, not at all. 314 00:16:44,280 --> 00:16:47,480 Speaker 1: So much of what was in Dodd Frank after the 315 00:16:47,520 --> 00:16:50,480 Speaker 1: crisis had nothing to do with the crisis and was 316 00:16:50,520 --> 00:16:54,800 Speaker 1: expanding federal government power over the financial services industry, which 317 00:16:54,840 --> 00:16:56,800 Speaker 1: is not something that we needed. Right. There were certain 318 00:16:56,800 --> 00:17:00,400 Speaker 1: things in Dodd Frank that address crisis issues, but most 319 00:17:00,400 --> 00:17:02,800 Speaker 1: of what was in there were political, wishless kind of 320 00:17:02,840 --> 00:17:04,640 Speaker 1: things that have been sitting around for a long time. 321 00:17:04,920 --> 00:17:08,240 Speaker 1: So I think it's important to get regulation rolled back 322 00:17:08,320 --> 00:17:12,040 Speaker 1: to some degree. I think you're already seeing the impact 323 00:17:12,280 --> 00:17:15,520 Speaker 1: of less regulation coming out of Washington, right. The Obama 324 00:17:15,560 --> 00:17:19,399 Speaker 1: administration passed hundred million dollar rules. That's rules that take 325 00:17:19,440 --> 00:17:21,880 Speaker 1: a hundred million the economy. The total number of rules 326 00:17:21,880 --> 00:17:23,879 Speaker 1: they did like that for that amount to more than 327 00:17:23,920 --> 00:17:27,760 Speaker 1: sixteen billion dollars in several years of the administration. That's 328 00:17:27,760 --> 00:17:30,399 Speaker 1: taken a lot of money out of the economy. Just 329 00:17:30,560 --> 00:17:33,840 Speaker 1: slowing that down the last six months, so basically very 330 00:17:33,960 --> 00:17:36,320 Speaker 1: few federal rules the last six months. I think it's 331 00:17:36,359 --> 00:17:38,600 Speaker 1: part of why you're seeing the economy do better because 332 00:17:38,640 --> 00:17:41,760 Speaker 1: you're having less overhang of all this regulation. So I'd 333 00:17:41,800 --> 00:17:44,560 Speaker 1: like to see them go farther and be able to 334 00:17:44,880 --> 00:17:46,920 Speaker 1: roll back some of the things that we're done well. 335 00:17:46,920 --> 00:17:51,040 Speaker 1: We've heard particular emphasis on the Vocal rule, which specifically 336 00:17:51,400 --> 00:17:55,080 Speaker 1: targets banks trading with their own capital. Do you think 337 00:17:55,160 --> 00:17:58,280 Speaker 1: that the economy would do better if we did see 338 00:17:58,280 --> 00:18:01,800 Speaker 1: a full rollback of that and more mission Vocal is 339 00:18:01,800 --> 00:18:05,960 Speaker 1: an interesting question, right. You had the American Bankers Association 340 00:18:06,000 --> 00:18:08,639 Speaker 1: and all the lobbying groups talking about VULCAR and how 341 00:18:08,720 --> 00:18:10,680 Speaker 1: terrible it was and how we needed not have it. 342 00:18:11,280 --> 00:18:13,679 Speaker 1: Since it's passed, and since the new administration came in, 343 00:18:13,840 --> 00:18:17,080 Speaker 1: I've I've heard precious little about rolling it back. You know, 344 00:18:17,080 --> 00:18:20,040 Speaker 1: it becomes another barrier to entry for banking. It becomes 345 00:18:20,040 --> 00:18:23,760 Speaker 1: another cost that smaller banks can't do. And we've had 346 00:18:23,800 --> 00:18:25,760 Speaker 1: almost no bank startups in the United States in the 347 00:18:25,840 --> 00:18:29,280 Speaker 1: last ten years, partly because of all this regulation. Uh 348 00:18:29,359 --> 00:18:34,080 Speaker 1: so you're not seeing much political movement around repealing vulcar um. 349 00:18:34,119 --> 00:18:37,320 Speaker 1: I wonder if they will attack some of these things 350 00:18:37,320 --> 00:18:40,560 Speaker 1: by different means. So remember, if you go back to 351 00:18:40,600 --> 00:18:43,520 Speaker 1: Congress and try to roll back the Vulcan provision those 352 00:18:43,600 --> 00:18:45,400 Speaker 1: kinds of things, where have the regulars roll it back? 353 00:18:45,440 --> 00:18:47,360 Speaker 1: That's going to take time, And obviously on the hill 354 00:18:47,440 --> 00:18:50,560 Speaker 1: right now, nothing's happening something like Vulcan though, or something 355 00:18:50,600 --> 00:18:53,280 Speaker 1: like the banks. I'd imagine there they might just reduce 356 00:18:53,320 --> 00:18:56,399 Speaker 1: the capital requirements. So if you you we took banks 357 00:18:56,400 --> 00:18:59,080 Speaker 1: from basically three or four percent capital pre crisis to 358 00:18:59,200 --> 00:19:01,960 Speaker 1: about ten percent. Now, if they just move that down 359 00:19:02,040 --> 00:19:04,000 Speaker 1: a bit, you're gonna have banks lending more and you're 360 00:19:04,000 --> 00:19:06,280 Speaker 1: gonna have more economic activity. I have a feeling they 361 00:19:06,320 --> 00:19:08,520 Speaker 1: might approach it that way as a trying as opposed 362 00:19:08,520 --> 00:19:10,679 Speaker 1: to trying to attacker. Can you give me a sense 363 00:19:10,920 --> 00:19:15,800 Speaker 1: of during your tenure at the SEC, what your focus was, 364 00:19:15,920 --> 00:19:19,760 Speaker 1: what your where you put your efforts to try to 365 00:19:19,800 --> 00:19:22,760 Speaker 1: make the financial system safer, and where you think things 366 00:19:22,800 --> 00:19:25,639 Speaker 1: went wrong. To sort of combine into the two thousand 367 00:19:25,680 --> 00:19:28,680 Speaker 1: and eight to baccle so the biggest thing that we 368 00:19:28,680 --> 00:19:31,720 Speaker 1: were working on the SEC was trying to figure out 369 00:19:31,760 --> 00:19:35,320 Speaker 1: how to reform money market mutual funds. So among the 370 00:19:35,320 --> 00:19:37,480 Speaker 1: many other crises and the fall of two thousand and eight, 371 00:19:37,560 --> 00:19:40,560 Speaker 1: a fund called Primary Reserve turned out woke up on 372 00:19:40,560 --> 00:19:44,280 Speaker 1: September twelve, YEP, and it found out that it owns 373 00:19:44,320 --> 00:19:46,960 Speaker 1: six fifty three million dollars worth of Lehman debt, which 374 00:19:47,080 --> 00:19:50,159 Speaker 1: was suddenly worth zero, right, And so that led to 375 00:19:50,200 --> 00:19:52,359 Speaker 1: a run on money market mutual funds. And that was 376 00:19:52,400 --> 00:19:55,119 Speaker 1: a big problem because many companies are alied on that 377 00:19:55,200 --> 00:19:58,080 Speaker 1: money and those funds to finance their operations, and suddenly 378 00:19:58,119 --> 00:20:00,960 Speaker 1: that money was sucked out. You had Treasury have to 379 00:20:00,960 --> 00:20:03,200 Speaker 1: step in and guarantee all money market mutual funds the 380 00:20:03,280 --> 00:20:05,760 Speaker 1: United States. They did so with a fifty million dollar 381 00:20:05,800 --> 00:20:09,640 Speaker 1: fund on a three trillion dollar industry. So, but confidence 382 00:20:09,680 --> 00:20:11,600 Speaker 1: is a funny thing, and they stopped the run. The 383 00:20:11,600 --> 00:20:13,520 Speaker 1: biggest thing we were working on is trying to reform them, 384 00:20:13,680 --> 00:20:16,119 Speaker 1: get them to have a floating net asset value so 385 00:20:16,200 --> 00:20:18,760 Speaker 1: that investors are more understanding of what the risks are. 386 00:20:19,080 --> 00:20:22,200 Speaker 1: We partially succeeded on that. We floated the institutional funds, 387 00:20:22,520 --> 00:20:24,480 Speaker 1: not the retail funds and not the government funds. But 388 00:20:24,720 --> 00:20:27,080 Speaker 1: you know, it was progress and was better than where 389 00:20:27,080 --> 00:20:30,879 Speaker 1: we were. Um. What really drove the crisis though, was, 390 00:20:31,119 --> 00:20:33,439 Speaker 1: you know, not money market funds. What drove the crisis 391 00:20:33,480 --> 00:20:37,640 Speaker 1: was government housing policy. Government has been and still does 392 00:20:38,400 --> 00:20:42,200 Speaker 1: ruthlessly and relentlessly push housing, right. We keep registrates low, 393 00:20:42,240 --> 00:20:44,480 Speaker 1: We guarantee mortgages with the g s s. We do 394 00:20:44,560 --> 00:20:47,280 Speaker 1: all that to get people into houses. It sounds great 395 00:20:47,480 --> 00:20:49,520 Speaker 1: to be in a house if you're someone who got 396 00:20:49,560 --> 00:20:51,520 Speaker 1: four closed on in two thousand nine, two thousand ten, 397 00:20:51,560 --> 00:20:55,320 Speaker 1: though your experience of owners ownership is not so hot. Uh, 398 00:20:55,359 --> 00:20:58,560 Speaker 1: And so that we've still got that going on now. 399 00:20:58,640 --> 00:21:02,560 Speaker 1: We are still lentlessly pushing housing. And one of the 400 00:21:02,600 --> 00:21:06,000 Speaker 1: tragedies of the Bomban administration is after raising the minimum 401 00:21:06,000 --> 00:21:10,760 Speaker 1: down payment for a mortgage right after the crisis, only 402 00:21:10,800 --> 00:21:13,080 Speaker 1: six years later they cut the minimum down payment for 403 00:21:13,119 --> 00:21:15,320 Speaker 1: a house back to three on a guarantee. More So, 404 00:21:15,400 --> 00:21:17,720 Speaker 1: do you think that we are just as vulnerable at 405 00:21:17,720 --> 00:21:19,800 Speaker 1: this point as we were leading up to the chief 406 00:21:19,800 --> 00:21:22,640 Speaker 1: as in a crisis. I do think banks have been 407 00:21:22,680 --> 00:21:25,080 Speaker 1: more conservative and who they're lending to. And you see 408 00:21:25,119 --> 00:21:28,119 Speaker 1: some of these the some of the securitization rules have 409 00:21:28,280 --> 00:21:32,320 Speaker 1: helped that and have restricted some of the real offloading 410 00:21:32,359 --> 00:21:35,080 Speaker 1: of the debt from bank balance sheets. So i'd actually 411 00:21:35,080 --> 00:21:37,080 Speaker 1: in the housing sector we're probably in a little bit 412 00:21:37,119 --> 00:21:39,600 Speaker 1: better shape, but you are seeing the inflation obviously the 413 00:21:39,640 --> 00:21:41,879 Speaker 1: stock market. That has to do with low rates, and 414 00:21:41,880 --> 00:21:44,359 Speaker 1: that has to do with people seeking return. Um. I 415 00:21:44,400 --> 00:21:48,320 Speaker 1: am concerned about what's going to happen when someday interest 416 00:21:48,400 --> 00:21:50,840 Speaker 1: rates go up. I have a feeling there are spots 417 00:21:50,840 --> 00:21:53,560 Speaker 1: in the economy where people are relying on low interest 418 00:21:53,640 --> 00:21:56,240 Speaker 1: rates that we probably haven't focused on yet, and if 419 00:21:56,240 --> 00:21:58,880 Speaker 1: we ever get real interest rates, then those are That's 420 00:21:58,880 --> 00:22:00,560 Speaker 1: a place where I would look for a problems. If 421 00:22:00,600 --> 00:22:02,920 Speaker 1: you're in the SEC today, what would be your focus? 422 00:22:03,960 --> 00:22:06,719 Speaker 1: So number one focus would be which the chairman. The 423 00:22:06,840 --> 00:22:10,040 Speaker 1: very first thing the chairman did was solicit the new chairman, J. Clayton. 424 00:22:10,280 --> 00:22:12,640 Speaker 1: Very first thing he did was solicit further comment on 425 00:22:12,760 --> 00:22:16,920 Speaker 1: the Producier rule that you mentioned earlier. And it's imperative 426 00:22:17,000 --> 00:22:20,040 Speaker 1: that the SEC sees back the momentum and that that 427 00:22:20,200 --> 00:22:22,440 Speaker 1: be the place. If there's going to be a uniform 428 00:22:22,520 --> 00:22:25,520 Speaker 1: standard for broker dealers and investment advisors, it should come 429 00:22:25,520 --> 00:22:27,800 Speaker 1: out of the SEC, not out of the Department of Labor. 430 00:22:27,800 --> 00:22:31,199 Speaker 1: Department Labor just doesn't understand how these firms work and 431 00:22:31,200 --> 00:22:33,400 Speaker 1: what's going on. It should come out of the SEC. 432 00:22:33,520 --> 00:22:36,320 Speaker 1: So that'd be high on my list, second on my list, 433 00:22:36,440 --> 00:22:38,959 Speaker 1: and I think the Chair is obviously pursuing it. Is 434 00:22:39,359 --> 00:22:41,480 Speaker 1: we've got to get more companies to go public in 435 00:22:41,520 --> 00:22:45,440 Speaker 1: the United States. Our markets are still a crown jewel 436 00:22:45,480 --> 00:22:48,240 Speaker 1: of the US economy. Um, but I p o s 437 00:22:48,280 --> 00:22:51,159 Speaker 1: are about half and on average what they were before 438 00:22:51,280 --> 00:22:54,240 Speaker 1: two thousand, So since two thousand verses before, and we 439 00:22:54,280 --> 00:22:56,880 Speaker 1: have about half the public companies we had twenty years ago. 440 00:22:57,359 --> 00:22:59,560 Speaker 1: Our markets are not going to stay in the leadership 441 00:22:59,560 --> 00:23:02,440 Speaker 1: position in unless we take some steps to help people 442 00:23:02,480 --> 00:23:04,800 Speaker 1: go public here, and that would include we're rolling back 443 00:23:04,880 --> 00:23:07,639 Speaker 1: some of the DoD FRANK things like pay ratio and 444 00:23:08,000 --> 00:23:11,639 Speaker 1: some of these very political disclosure items that are discouraging 445 00:23:11,680 --> 00:23:14,720 Speaker 1: people from going public. Norm Champ thank you so much 446 00:23:14,760 --> 00:23:17,760 Speaker 1: for joining US. Norm Champ Partner and the Investment Funds 447 00:23:17,760 --> 00:23:20,560 Speaker 1: Group at Kirkland and ellis also the former Director of 448 00:23:20,600 --> 00:23:23,040 Speaker 1: the Division of Investment Management at the U S Securities 449 00:23:23,119 --> 00:23:26,040 Speaker 1: and Exchange Commission. He has a new book it's called 450 00:23:26,080 --> 00:23:29,080 Speaker 1: going public, my adventures inside the SEC and how to 451 00:23:29,119 --> 00:23:45,720 Speaker 1: prevent the next devastating crisis. That Amazon bond sale seems 452 00:23:45,760 --> 00:23:49,320 Speaker 1: to be drawing a lot of investor interest, hearing that 453 00:23:49,520 --> 00:23:54,400 Speaker 1: the the potential bids to buy this particular debt, which 454 00:23:54,400 --> 00:23:57,720 Speaker 1: could end up being a sixteen billion dollar offering, exceed 455 00:23:57,720 --> 00:24:00,000 Speaker 1: twenty billion dollars. Here to give us a little bit 456 00:24:00,040 --> 00:24:03,640 Speaker 1: more sense of, first of all, just how well this 457 00:24:03,760 --> 00:24:06,320 Speaker 1: debt offering is probably going to be priced, and also 458 00:24:06,640 --> 00:24:11,120 Speaker 1: what this means for Amazon's uh fiscal structure. I want 459 00:24:11,119 --> 00:24:13,520 Speaker 1: to bring in Noel Hebert. He's senior US credit analyst 460 00:24:13,640 --> 00:24:16,840 Speaker 1: for Bloomberg Intelligence. So Noel, can you just give us 461 00:24:16,840 --> 00:24:21,520 Speaker 1: a sense of what your feeling is about the levels 462 00:24:21,600 --> 00:24:24,120 Speaker 1: that this debt is being a price that it will 463 00:24:24,160 --> 00:24:27,000 Speaker 1: likely be priced out later today, as well as what 464 00:24:27,200 --> 00:24:32,199 Speaker 1: this means for Amazon's credit worthiness. Yeah, so, I think so. 465 00:24:32,240 --> 00:24:34,160 Speaker 1: First of all, thanks for having me on, Lisa, and 466 00:24:34,160 --> 00:24:36,359 Speaker 1: and I think you know, at the front end of 467 00:24:36,400 --> 00:24:38,600 Speaker 1: the curve at least you know, the initial talk. You know, 468 00:24:38,640 --> 00:24:41,399 Speaker 1: we saw a little bit of concession or discount to 469 00:24:41,440 --> 00:24:44,680 Speaker 1: where Amazon's current bonds trade, So I would expect there's 470 00:24:44,680 --> 00:24:46,320 Speaker 1: going to be certainly a lot of demand at that 471 00:24:46,400 --> 00:24:49,760 Speaker 1: front end of the curve. It comes maybe pushes that 472 00:24:49,880 --> 00:24:52,560 Speaker 1: talk tighter later outam of the curve. When you start 473 00:24:52,600 --> 00:24:55,080 Speaker 1: looking at the thirty and the forty year piece, they're 474 00:24:55,080 --> 00:24:57,760 Speaker 1: a little bit tight to kind of where Amazon implied 475 00:24:57,760 --> 00:25:00,480 Speaker 1: would be. Uh so we'll see goin to have that 476 00:25:00,520 --> 00:25:02,840 Speaker 1: shapes up. But that longer into the curve tends to 477 00:25:02,880 --> 00:25:05,639 Speaker 1: be you know, as much reverse inquiry, and people started 478 00:25:05,680 --> 00:25:08,320 Speaker 1: needing that longer dated paper as anything else. So well, 479 00:25:09,680 --> 00:25:12,440 Speaker 1: no back up, because because when you say like longer data, 480 00:25:12,520 --> 00:25:14,440 Speaker 1: d da, da da, like, let's put this in a perspective. 481 00:25:14,480 --> 00:25:17,919 Speaker 1: So Amazon, a company that has completely profoundly disrupted the 482 00:25:18,080 --> 00:25:22,280 Speaker 1: entire retail industry, is selling bonds that mature in forty 483 00:25:22,640 --> 00:25:25,359 Speaker 1: years and people can't wait to buy it. And not 484 00:25:25,400 --> 00:25:28,040 Speaker 1: only that, but they're probably going to accept about four 485 00:25:28,080 --> 00:25:31,040 Speaker 1: and a half percent yields to buy this stuff, which 486 00:25:31,119 --> 00:25:34,040 Speaker 1: is markedly lower than where it would have been, say 487 00:25:34,080 --> 00:25:40,240 Speaker 1: three years ago, just based on market valuations. That's crazy. No, well, well, 488 00:25:40,280 --> 00:25:42,800 Speaker 1: I think compliance wouldn't like me to say crazy, So 489 00:25:43,200 --> 00:25:47,439 Speaker 1: let's go it's very unique. It's unique, all right, we'll 490 00:25:47,480 --> 00:25:49,480 Speaker 1: go with that. So we'll say, but I mean, you know, 491 00:25:49,560 --> 00:25:51,680 Speaker 1: a T and T just for context, right, So they 492 00:25:51,720 --> 00:25:53,399 Speaker 1: just came out with a piece of paper for for 493 00:25:53,440 --> 00:25:56,400 Speaker 1: their deal making, and you're talking about you know, about 494 00:25:56,440 --> 00:25:59,600 Speaker 1: two basis points over versus a hundred sixty or whatever. 495 00:25:59,600 --> 00:26:02,800 Speaker 1: We're talking on Amazon, so much tighter certainly to a 496 00:26:02,880 --> 00:26:05,240 Speaker 1: T and T, more in line than with sort of 497 00:26:05,240 --> 00:26:06,680 Speaker 1: some of the stuff, maybe a little bit back of 498 00:26:06,800 --> 00:26:08,320 Speaker 1: what we saw from like a home depot or an 499 00:26:08,359 --> 00:26:10,920 Speaker 1: oracle for guys that have sort of that similar, longer 500 00:26:10,960 --> 00:26:13,480 Speaker 1: dated stuff. But to your point, a lot more sort 501 00:26:13,480 --> 00:26:16,119 Speaker 1: of business volatility potentially in the long term for a 502 00:26:16,160 --> 00:26:18,920 Speaker 1: company like Amazon relative to a home depot. Well, could 503 00:26:18,920 --> 00:26:21,320 Speaker 1: you talk a little bit more about that, because with 504 00:26:21,400 --> 00:26:25,320 Speaker 1: respect to their balance sheet, they have been spending aggressively 505 00:26:25,520 --> 00:26:30,040 Speaker 1: to increase their domination across the world in various facets 506 00:26:30,040 --> 00:26:32,399 Speaker 1: of buying whatever. You can imagine. So you know, I 507 00:26:32,440 --> 00:26:34,560 Speaker 1: can imagine, I can I can see that perhaps some 508 00:26:34,640 --> 00:26:38,440 Speaker 1: of these expenditures will pay off. But can you speak 509 00:26:38,480 --> 00:26:41,400 Speaker 1: a little bit about what the uncertainties are. I think 510 00:26:41,400 --> 00:26:43,800 Speaker 1: there's a number of them, one not least of which 511 00:26:43,840 --> 00:26:46,639 Speaker 1: being is you know, as they've grown, right, they've increasingly 512 00:26:46,880 --> 00:26:52,200 Speaker 1: increased their increasingly increased, but they've added that fixed cost base. Uh, 513 00:26:52,280 --> 00:26:54,720 Speaker 1: so you're turning from sort of that sort of traditional, 514 00:26:55,200 --> 00:26:58,800 Speaker 1: you know e, calm, sort of low infrastructure dynamic into 515 00:26:58,880 --> 00:27:02,520 Speaker 1: a much more high fixed costs infrastructure, whether it's with 516 00:27:02,600 --> 00:27:05,520 Speaker 1: the aw s or now obviously with whole Foods, etcetera. 517 00:27:05,680 --> 00:27:07,439 Speaker 1: So it's really going to change the mechanics of their 518 00:27:07,480 --> 00:27:09,680 Speaker 1: business in terms of the capital investment that's going to 519 00:27:09,760 --> 00:27:13,640 Speaker 1: be required to keep all these investments going. And then 520 00:27:13,680 --> 00:27:15,680 Speaker 1: of course they're trying to play in just about every 521 00:27:15,720 --> 00:27:18,760 Speaker 1: space that's known to man, which again, some of those 522 00:27:18,800 --> 00:27:20,680 Speaker 1: are going to work, some of those aren't gonna work, 523 00:27:21,080 --> 00:27:22,240 Speaker 1: but at the end of the day, they are going 524 00:27:22,280 --> 00:27:24,320 Speaker 1: to be left with a fair amount of debt. You 525 00:27:24,320 --> 00:27:28,040 Speaker 1: don't generate a ton of profit. They generate okay, cash flow, 526 00:27:28,119 --> 00:27:30,800 Speaker 1: but people have to be careful about how they account 527 00:27:30,800 --> 00:27:32,960 Speaker 1: for that cash flow because they use capital leases pretty 528 00:27:32,960 --> 00:27:36,240 Speaker 1: aggressively as opposed to running stuff through capex. So that 529 00:27:36,320 --> 00:27:39,640 Speaker 1: kind of, from an accounting parlayan standpoint, boost the perception 530 00:27:39,680 --> 00:27:43,240 Speaker 1: of free cash flow. So you know, they're definitely very aggressive, 531 00:27:43,280 --> 00:27:45,640 Speaker 1: and not only how they approached the marketplace, but also 532 00:27:45,720 --> 00:27:48,560 Speaker 1: how they approach their balance sheet that said, you know, 533 00:27:48,640 --> 00:27:50,600 Speaker 1: you're going to be left maybe a couple of times 534 00:27:50,640 --> 00:27:53,120 Speaker 1: levered after this deal, depending on how much they do. 535 00:27:53,600 --> 00:27:56,760 Speaker 1: So it's not going to be you know, totally egregious 536 00:27:57,080 --> 00:27:59,920 Speaker 1: when you say a w S that's Amazon Web Serve 537 00:28:00,080 --> 00:28:02,679 Speaker 1: US is uh cloud, So there no problem. But I 538 00:28:02,720 --> 00:28:04,600 Speaker 1: think that this is an important point that you're making. 539 00:28:04,600 --> 00:28:07,040 Speaker 1: In other words, uh, you know, whether you're talking about 540 00:28:07,760 --> 00:28:10,000 Speaker 1: you know, accessing the cloud or building out your tech, 541 00:28:10,600 --> 00:28:13,919 Speaker 1: or whether you're talking about providing grocery services, this is 542 00:28:13,920 --> 00:28:17,359 Speaker 1: a very different thing than having an online bartering platform 543 00:28:17,440 --> 00:28:21,200 Speaker 1: for people to sort of meet and exchange their goods. Right. Also, 544 00:28:21,240 --> 00:28:23,959 Speaker 1: there has been talk about Amazon possibly building out their 545 00:28:24,000 --> 00:28:28,160 Speaker 1: own shipping and delivering systems, which also would would require 546 00:28:28,720 --> 00:28:32,280 Speaker 1: more expenditures. Right, Oh for sure. And I think, you know, 547 00:28:32,320 --> 00:28:34,639 Speaker 1: it's kind of a unique time and place, I guess 548 00:28:34,640 --> 00:28:37,359 Speaker 1: in corporate history, right because whether you look at these guys, 549 00:28:37,440 --> 00:28:39,720 Speaker 1: or you look at Tesla or Netflix or whoever it 550 00:28:39,760 --> 00:28:43,720 Speaker 1: happens to be, investors have been very willing in this 551 00:28:43,840 --> 00:28:47,240 Speaker 1: environment to fund you know, money neutral or dollar neutral, 552 00:28:47,240 --> 00:28:50,920 Speaker 1: cash flow neutral or cash losing operations on the prospect 553 00:28:51,000 --> 00:28:55,400 Speaker 1: or whatever the future growth might be um. I can't 554 00:28:55,440 --> 00:28:57,480 Speaker 1: really hark back to think of a time that's quite 555 00:28:57,480 --> 00:29:00,320 Speaker 1: like that. So for me as a credit investor, it's 556 00:29:00,400 --> 00:29:03,360 Speaker 1: kind of a bizarre time and place. But but to 557 00:29:03,400 --> 00:29:05,200 Speaker 1: your point, Yeah, the more stuff they bring in, the 558 00:29:05,240 --> 00:29:07,440 Speaker 1: more stuff you get a fund, and it gets harder 559 00:29:07,440 --> 00:29:09,840 Speaker 1: and harder to be successful at everything you do. You know, 560 00:29:09,920 --> 00:29:13,000 Speaker 1: we've seen even with very successful governies like Apple, you know, 561 00:29:13,200 --> 00:29:15,680 Speaker 1: they still don't really have a great TV platform. You know, 562 00:29:15,760 --> 00:29:18,880 Speaker 1: sometimes things fail. So, Nol Hubert, thank you so much 563 00:29:19,040 --> 00:29:21,360 Speaker 1: for that color. Noel Hubert is our senior US credit 564 00:29:21,400 --> 00:29:25,280 Speaker 1: analyst for Bloomberg Intelligence and my beacon of reason in 565 00:29:25,520 --> 00:29:31,120 Speaker 1: this odd market. Thanks for listening to the Bloomberg P 566 00:29:31,240 --> 00:29:34,240 Speaker 1: and L podcast. You can subscribe and listen to interviews 567 00:29:34,240 --> 00:29:38,320 Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. 568 00:29:38,720 --> 00:29:42,280 Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm 569 00:29:42,320 --> 00:29:45,600 Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast. 570 00:29:45,640 --> 00:29:48,280 Speaker 1: You can always catch us worldwide on Bloomberg Radio.