Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane
Speaker 1: Jai Lely. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg So,
Speaker 1: you know, we've been focusing so much with respect to
Speaker 1: trade talks between the US and China that we forgot
Speaker 1: about all the other places in the world, including in Europe,
Speaker 1: where evidently, uh, they are kind of not that please.
Speaker 1: You have them trying to negotiate their own trade deal
Speaker 1: with China. Uh. And then you also have a fact
Speaker 1: that President Trump now just throughout these potential tariffs on
Speaker 1: the of all autos that come into the US that
Speaker 1: are from outside countries. I want to bring Richard Bravo.
Speaker 1: He is a Blo and Broke news editor who has
Speaker 1: been tracking this. What's the mood there when it comes
Speaker 1: to trade discussions. Well, there's certainly a lot of confusion
Speaker 1: right now in Europe because nobody really knows what this
Speaker 1: means and what the likelihood of these tariffs actually being
Speaker 1: instituted are. Um. But as you know, the EU is
Speaker 1: currently in negotiations with Washington over steel tariffs, and these
Speaker 1: steel aluminium tariffs are set to go into effect starting
Speaker 1: June one unless they can make some kind of side agreement.
Speaker 1: So uh, this new set of possible tariffs on automobiles
Speaker 1: really does throw a wrench into those negotiations, which which
Speaker 1: are ongoing. So I think the overriding sentiment right now
Speaker 1: is confusion in Europe. So I'm trying to get a
Speaker 1: sense of how realistic people think it is that the
Speaker 1: US is going to impose tariffs on foreign cars coming
Speaker 1: into the US this point, do you have a sense
Speaker 1: of that, Um, it's it's hard to gauge at this point.
Speaker 1: But when the steel tariffs were imposed, those went into
Speaker 1: effect in March, but the initial threat was about a
Speaker 1: year ago. So even if these auto tariffs do you
Speaker 1: go into effect, it's not something that people expect would
Speaker 1: happen immediately. But I mean looking at at how the
Speaker 1: Trump administration engages in these deals, UM, many times they
Speaker 1: don't come about, but it obviously because Germany has so
Speaker 1: many auto exports, it is a threat that they do
Speaker 1: need to take seriously, irrespective of whether or not they
Speaker 1: think it will eventually come to pass. All bark, no
Speaker 1: bite that it has been the mantra. Richard Robert, thank
Speaker 1: you so much for joining us. Richard Bravo is a
Speaker 1: Bloomberg News editor coming to us from London. Volkswagen shares
Speaker 1: down almost three looking at BMW shares down also almost
Speaker 1: three percent. Jonathan knows they try to weigh what these
Speaker 1: potential tariffs could mean. You found some price action. Congratulations,
Speaker 1: because futures are doing absolutely inspect to start on any
Speaker 1: of this, I want to bring in Julian jess Up
Speaker 1: of the Institute of Economic Affairs, the chief economist joining
Speaker 1: us from London. I'm Julian. How do you view the
Speaker 1: events and the reporting around the trade issue, the threat
Speaker 1: of global auto terrorists from the United States? Is this
Speaker 1: just a negotiaring strategy? Well, I mean to be honest,
Speaker 1: I find it a bit depressing either way. You know,
Speaker 1: whether or not you think it's good or bad politics.
Speaker 1: It's certainly bad economics. This sort of protectionist measure is
Speaker 1: both unfair and inefficient. It's it's unfair because it forces
Speaker 1: US consumers to pay higher prices and have less choice
Speaker 1: than what otherwise have done. And it's inefficient because it's
Speaker 1: reducing the competitive pressure on domestic auto manufacturers in the
Speaker 1: US too, to improve the quality and price of the
Speaker 1: things they want to try and sell. So it may
Speaker 1: or may not score some short term political points, but
Speaker 1: but in the long run, I think it leads everybody
Speaker 1: worse off, just in terms of political points scoring. Chancellor
Speaker 1: Murka and Premier League saying they're committed to free and
Speaker 1: fair trade representing two countries with the biggest trade surpluses
Speaker 1: on the planet, Julian distincts of hypocrisy, doesn't it well,
Speaker 1: not really, I think as far as Germany is concerned,
Speaker 1: that the reason why they run such a huge current
Speaker 1: account surplus is essentially because they hold back domestic demand.
Speaker 1: It's not that they cheat somehow in international markets. China
Speaker 1: perhaps is a bit more guilty of that, the manipulation
Speaker 1: of the of the currency there and also sometimes dumping
Speaker 1: of things like steel on on on world markets. I
Speaker 1: think that is one of the few areas where some
Speaker 1: form of intervention and some sort of trade barrier might
Speaker 1: be justified. But I don't really see any of those
Speaker 1: arguments applying to the exports of cars from from Europe
Speaker 1: to the US, which is simply meeting a demand from
Speaker 1: US consumers themselves. So what I'm trying to figure out
Speaker 1: is from an economics perspective, you started out saying this
Speaker 1: is depressing regardless of whether it goes through. Do you
Speaker 1: expect that the increased trade tensions, regardless of what actually
Speaker 1: happens from them, will actually reduce economic growth in the
Speaker 1: world over the next couple of years. Um, well, I
Speaker 1: think they will, and we've got a preston for that.
Speaker 1: I mean, in the wake of the global recession in
Speaker 1: two thousands and two thousand and eight, lots of countries
Speaker 1: started to introduce new trade barriers that they didn't have before. Um.
Speaker 1: You know, it's much easier to argue for protectionism when
Speaker 1: your own economy is weak, and that I think actually
Speaker 1: prolonged the slump. It certainly led to more weakness in
Speaker 1: well trade than you you might have expected. So again
Speaker 1: there's there's this contrast. You score some sort of short
Speaker 1: term populist points. Maybe it's good politics, but economically it
Speaker 1: holds back growth. Certainly, if we're looking at the future
Speaker 1: of growth in over the next ten twenty thirty years,
Speaker 1: a lot of it is going to come from emerging markets,
Speaker 1: and China has been leading, but others will will start
Speaker 1: to catch up, in which case you certainly want more
Speaker 1: free trade. It might be you end up importing more
Speaker 1: from these countries yourself, but you've got more opportunities to
Speaker 1: exports too. Something has got lost over the last couple
Speaker 1: of weeks, Julian, the focus seems to be once again
Speaker 1: on the trade surplus or trade deficit with respective countries,
Speaker 1: when for a moment it was driven by Wilbur Ross,
Speaker 1: the Commerce Secretary, and it was about the theft of
Speaker 1: American genius, It was about intellectual property, it was about
Speaker 1: real issues about the future, not just headline grabbing stories
Speaker 1: about getting trade surpluses down two billion dollars. Has this
Speaker 1: administration sort of lost its way a little bit as
Speaker 1: to what it wants out of the Chinese? Well, I
Speaker 1: think this sort of illustration in particular has always been
Speaker 1: a bit muddled about what trade is about. So it
Speaker 1: sees a trade surplus as a as a good thing
Speaker 1: and a trade deficit as as a bad thing, whereas
Speaker 1: all those things really are is the result of decisions
Speaker 1: made by consumers and companies that you know they might
Speaker 1: choose to buy good from overseas, wether than one produced domestically,
Speaker 1: it's not not a zero sum game. You know, both
Speaker 1: sides benefit from trade, whether you're an import ural or
Speaker 1: the exporter. Um. What I'm also worried about is increasingly
Speaker 1: spurious reasons being used to justify intervention in markets. And
Speaker 1: a good example is the ctential security concerns over over
Speaker 1: intellectual property and so on. Sometimes that's valid, but it's
Speaker 1: not obvious to me it's valid enoughy single occasion. Another
Speaker 1: is food safety standards or animal welfare standards in the
Speaker 1: agricultural sector. I think people are finding excuses to intervene
Speaker 1: for very narrow protectionist interests rather than thinking about the
Speaker 1: broad economics and whether they're security issues, whether the auto
Speaker 1: situation is a national security issue and aid to the president.
Speaker 1: The headline just coming across the Bloomberg Julian, the trade
Speaker 1: deficits are a national security concern? Should they be? Julian,
Speaker 1: that's absolutely ludicrous, Um, you know exactly. I mean, you know,
Speaker 1: I run a run a deficit with various high street
Speaker 1: shops in the UK because you know, try as hard
Speaker 1: as I like, there's nothing that they want to buy
Speaker 1: from me, but they've got plenty of things I want
Speaker 1: to buy from them. I'm not worse off because I
Speaker 1: run a trade deficit with my local coffee shop. Coffee
Speaker 1: shops not looking to dominate the world though, is it, Julian, Well,
Speaker 1: some of the high street chains particularly are. But um,
Speaker 1: we have to we have to recognize that, you know,
Speaker 1: China is already the world's second biggest economy. In time
Speaker 1: it will become the become the biggest. We want free
Speaker 1: trade with them, of course, and if there are particular
Speaker 1: areas where they're cheating or we don't trust them fair enough,
Speaker 1: we might want to intervene. But but the idea that
Speaker 1: you can measure the strength or witness of relationship purely
Speaker 1: by the bilateral trade surplus or deficit Parde is economically illiterate,
Speaker 1: Julian jessup Sellagasari really feels. I think of the Institute
Speaker 1: of Economic Affairs, the chief economist joining us from London.
Speaker 1: I want to cross over to Allison Williams of Bloomberg Intelligence,
Speaker 1: the senior analyst for US banks here in New York. Allison,
Speaker 1: you've been following Deutsche Bank very closely, and what have
Speaker 1: we learned about the strategy this morning? So I think
Speaker 1: that I guess a little surprise in terms of you know,
Speaker 1: cuts to the equity business, cutting head count, um, you know,
Speaker 1: giving some new targets. The key for Joute bank is
Speaker 1: going to be, um you know, firstly meeting these targets.
Speaker 1: I think that's been the disappointment with some of the
Speaker 1: prior management and um you know, in my opinion, um
Speaker 1: and and Argent Bauwer who co covers Deutsche Bank with me.
Speaker 1: You know, our view is really just that it's the
Speaker 1: revenue side of things that are that's much more difficult.
Speaker 1: Keep in mind that um, you know, trading is a
Speaker 1: significant portion of the business. Uh, the equity has really
Speaker 1: been the the area that's trailed. We focus on fixed
Speaker 1: income mostly because it's more important to them, but equity
Speaker 1: is really where they've sort of not been able to
Speaker 1: regain market share. And then you know, looking at other businesses,
Speaker 1: the German retail business has not been one with a
Speaker 1: lot of opportunity, and as a management they've they've sold
Speaker 1: off some of that. Um So I think, you know,
Speaker 1: delivering on costs I think is something that Sewing has
Speaker 1: made it very there that he is going to deliver
Speaker 1: on that the whole second, Allison, because this is actually
Speaker 1: really important, you say, delivering on costs, in other words,
Speaker 1: job cuts. But I want to quote the head of
Speaker 1: Hermes Eos on Bloomberg Television saying, job cuts in itself
Speaker 1: are not a new strategy and they're also not value creating.
Speaker 1: So do they actually give a strategy or do they
Speaker 1: just look at cost savings? So from a true strategic perspective,
Speaker 1: UM the changes, and I think they're really more sort
Speaker 1: of at the at the margin. You know what what
Speaker 1: they had said with the last quarters earnings is that
Speaker 1: UM they are going to try to you know, reign
Speaker 1: in and just focus more on their core competencies, more
Speaker 1: of a focus on the European business, pull back from
Speaker 1: the US rates business about ten percent. And then you know,
Speaker 1: similarly within the global equities unit, UM again just trying
Speaker 1: to to cut down the business and focus more on
Speaker 1: the profitability aspect of that UM and so UM, you know,
Speaker 1: to your point, job cuts in and of itself, and
Speaker 1: it sort of doesn't matter this thought eyes of the cut.
Speaker 1: That matters where you're cutting in, how effective it's going
Speaker 1: to be. And you know, the tougher part of it is,
Speaker 1: you know you can come in and cut jobs, but
Speaker 1: can you do it in a way that you can
Speaker 1: kind of still keep your good people that you um.
Speaker 1: And that's not to say that everyone is not good,
Speaker 1: but to keep the people that are, you know, imperative
Speaker 1: to the strategy of the people that are in the
Speaker 1: units that they want to focus on. You know, you're
Speaker 1: gonna want to keep morale up and keep those people
Speaker 1: UM And can you do that successfully when you're in
Speaker 1: this more broadly cutting mode that creates a lot of
Speaker 1: uncertainty for everyone? Now, Allison also doing it quickly enough,
Speaker 1: we all know to keep going back to this. We
Speaker 1: all know some really talented individuals at Deutsche Bank who
Speaker 1: have stayed with the bank despite the last few years
Speaker 1: which have been terribly difficult for morale. But at the
Speaker 1: same time, Allison, this equity story has been hanging over
Speaker 1: this bank now for months and months and months. Could
Speaker 1: you imagine trying to work in the equities business over
Speaker 1: the last few months at Deutsche Bank and trying to
Speaker 1: gain any kind of business from anywhere at all when
Speaker 1: our reports that that unit is going to be demolished
Speaker 1: over the next couple of months. And I think that
Speaker 1: is what you've seen in the equities of revenue numbers
Speaker 1: and keep in mind, you know, the prime business was
Speaker 1: one of the businesses that that really suffered with some
Speaker 1: of the legal concerns. That's not surprising, you know, versus
Speaker 1: several years ago when all of the banks were weak
Speaker 1: during the crisis. Here you had someone that people were
Speaker 1: worried about the viability of the of the franchise and
Speaker 1: they had other people to pick from. And what we
Speaker 1: learned from the crisis is once people make those decisions,
Speaker 1: they generally tend not to go back. So even though
Speaker 1: Deutsche Mac may have retained those clients, UM, part of
Speaker 1: the wallet may have going to Peer. Peer's JP Morgan
Speaker 1: talked about some of the progress they've made an international
Speaker 1: prime over the years, and even though Deutscha said they've
Speaker 1: won back the clients, they haven't had, you know, the
Speaker 1: the upside and growth that some of the US piers had.
Speaker 1: So I think that gives UM you know, credence to
Speaker 1: the story that it has been tough to try to UM,
Speaker 1: you know, not only win back market share but sort
Speaker 1: of keep what you have UM you know, with with
Speaker 1: with a tough environment at one company, in general, environments
Speaker 1: challenging but stronger competitors. Alison Williams of Bloomberg in Stelligence.
Speaker 1: Great to cant shop with you on the story that
Speaker 1: keeps on giving. And the big question, you know, John, honestly,
Speaker 1: is are we watching the beginnings of an emerging markets crisis?
Speaker 1: It's a good question. And does the central bank in
Speaker 1: Turkey have any credibility with the market because quite clearly
Speaker 1: three basis points in an interest rate hike yesterday wasn't
Speaker 1: enough to to stem the bleeding of the Turkish lira. Yeah. Well,
Speaker 1: one person who says this is not a crisis is
Speaker 1: Jeff Dennis. Let's bring him in. He is the head
Speaker 1: of Global Emerging Markets at UBS Investment Bank. We love
Speaker 1: having him on. Jeff, thank you so much for being
Speaker 1: with us. You wrote in a report this is not
Speaker 1: a crisis. In another report, this is not a crisis.
Speaker 1: So you know, at a certain point you have an
Speaker 1: increasing number of voices saying this could be the precursor
Speaker 1: of something that we saw in Why do you think
Speaker 1: it is not? I think the comparisons of n are
Speaker 1: frankly ridiculous. Um what was Certainly there are countries like
Speaker 1: Turkey that do have very weak fundamentals that are being
Speaker 1: picked over by investors in a rising dollar environment we've
Speaker 1: got at the moment. But in the late nineties you
Speaker 1: had a number of Asian countries running six seven eight
Speaker 1: percent current account depth as they will have fixed exchange rates,
Speaker 1: they're running out of reserves um. It was just a
Speaker 1: much less table environment than we've got today. One of
Speaker 1: the advantages for emerging markets of a floating exchange rate regime,
Speaker 1: which of course is what everybody's started to adopt instigation
Speaker 1: crisis of the late nineties, it gives you a uh
Speaker 1: an ability to take some of the pressure at the
Speaker 1: pressure cooker by actually allowing the currency to go down.
Speaker 1: I still think you have to look at Turkey as
Speaker 1: a little bit of a one off in this environment. Think,
Speaker 1: what's very interesting about the situation of this warnings, Although
Speaker 1: there's still a lot of doubts about what's hapving in Turkey,
Speaker 1: some of the other em currencies that have been out
Speaker 1: of pressure recently, like the random like the pasto in
Speaker 1: Mexico and the Brazilian rayal are well off their loads.
Speaker 1: And so this still feels to me like an individual
Speaker 1: country problem, not a general emerging market problem. Jeff. To
Speaker 1: that point, the price sanction of the last couple of
Speaker 1: days to suggest that Turkey is decoupled from the wider
Speaker 1: em story. So let's spend a little bit of time
Speaker 1: talking about Turkey an emergency three hundred basis point hike yesterday.
Speaker 1: But the events and how they rolled out and how
Speaker 1: they played out were really interesting. First we find out
Speaker 1: there's a Central Bank meeting, an emergency one because we
Speaker 1: weren't expecting one until the first week of June. And
Speaker 1: then the Deputy Prime Minister of Turkey goes on Twitter
Speaker 1: and says it's time to regain the confidence of investors.
Speaker 1: Was that the government given the central bank the green
Speaker 1: light yesterday, Jeff Um, I suspect that is the case.
Speaker 1: It was the government giving the Central bout of the
Speaker 1: green lights, and and if that was a kind of
Speaker 1: oblique signal to do that, that that's kind of helpful
Speaker 1: because of course, as you imply by your question there, Jonathan,
Speaker 1: And actually the backdrop to all of this is the
Speaker 1: clear desire of present eard One to get involved directly
Speaker 1: in monetary policy in Turkey, which is obviously what he
Speaker 1: said in the statements a few days ago, which is
Speaker 1: what sets the thing going. So I think, to be honest,
Speaker 1: the speed with which, even though a great rise was
Speaker 1: definitely needed, and the speeder which it came through was
Speaker 1: somewhat surprising and perhaps does indicate that the government, so
Speaker 1: to speak, might have given them a you know, a
Speaker 1: behind the hand if you like green light. Um. I
Speaker 1: think the point we make here is that this is
Speaker 1: probably the minimum they had to do. It's pushed real
Speaker 1: interest rates in Turkey up to about five basis points plus.
Speaker 1: There's still concerns about things such as the high price
Speaker 1: of oil, a very wide currenting count death that. As
Speaker 1: I've said, so it remains to be seen whether this
Speaker 1: will be enough, and certainly we're not changing our record
Speaker 1: inndations on Tokey were underweight in equities, we don't like
Speaker 1: the currency generally, so it's a wait to see here.
Speaker 1: But this probably did move through a bit quicker than
Speaker 1: we'd anticipated. Yeah, So the answer, Jonathan Varrow is that
Speaker 1: Jeff Dennis overt Eubs is not sticking his hand in
Speaker 1: this blender. It's like trade in a blend. It's just, God,
Speaker 1: what a brutal image, Jeff. I do want to get
Speaker 1: your sense that you're saying that that Turkey is an
Speaker 1: idiosyncratic story. We have a bunch of idiosyncratic stories. We
Speaker 1: also have Argentina. We also have elections that are coming
Speaker 1: up in Mexico. We have some issues in Southeast Asia.
Speaker 1: I'm just wondering, at what point do these idiosyncratic stories
Speaker 1: add up to something more, especially given the fact that
Speaker 1: we've seen so much money go into emerging markets through
Speaker 1: exchange traded funds, through index strategies that are indiscriminate. The
Speaker 1: point we make about all of this is, this is
Speaker 1: all of the margin being driven by the rebound of
Speaker 1: the dollar. The dollars gone against the euro to one
Speaker 1: seventeen over the last several months. That always pulls money
Speaker 1: out of them and pushes currencies under pressure. And of
Speaker 1: course that has done as as they poked holes in
Speaker 1: some of the weaker stories. Now, Um, the house view
Speaker 1: here is the dollar goes back down again later this
Speaker 1: year towards the one thirty level. Obviously, the talent situation
Speaker 1: is a bit of a risk to that view, but
Speaker 1: that's what the house view is here. Now. If that's wrong, um,
Speaker 1: and the dollar continues to rally, well, these things will
Speaker 1: become a more generalized crisis. I think the point we're
Speaker 1: trying to make here is on our long term view
Speaker 1: on the U. S. Dollar. There's not enough going wrong
Speaker 1: in the emerging markets overall. Even though you've got politics
Speaker 1: in Brazil and politics in Mexico and Argentina has obviously
Speaker 1: been a concern, there's not enough negative going on in
Speaker 1: them to cause a major crisis here now, especially if
Speaker 1: the dollar goes back down again. Now, your last point
Speaker 1: is very important. We've seen massive amounts of money coming
Speaker 1: to the M fifty four billion dollars into e M
Speaker 1: equity funds so far this year, and very little that
Speaker 1: seems to have gone out so far. If some of
Speaker 1: that does start to come out, that will be a
Speaker 1: little bit of a negative. But we see this as
Speaker 1: a temporary decline in the M driven by a stronger dollar,
Speaker 1: which ultimately we think we'll roll over and we'll give
Speaker 1: us a better environment for emergency markets later this year. Jeff,
Speaker 1: It's almost the e M equivalent of a stock pickers
Speaker 1: market at the moment. Pick your spots, take your opportunities,
Speaker 1: and make sure you've got a long time arising. If
Speaker 1: you apply that to we am right now, Jeff, what
Speaker 1: are you looking at? Well? We um we as actually
Speaker 1: not a lot of markets. Why major markets we have
Speaker 1: got big overweights, and we like Russia, we liked we
Speaker 1: like career, where we think the earnings numbers are going
Speaker 1: to start to improve again. We actually in terms of
Speaker 1: markets that have been under pressure recently, we're taking h well,
Speaker 1: you know, we haven't overweight Indonesia, so we'd buy that back.
Speaker 1: Those are three markets that I think are worth looking at.
Speaker 1: Selective exposure in Central Europe, um more neutral in countries
Speaker 1: like India and China. But those some of the markets
Speaker 1: that we're looking at um um in this environment. But
Speaker 1: our big call here is the dollars going back down
Speaker 1: again eventually, and that's going to bring these sentiment back.
Speaker 1: I think for m Jeff, what would have to happen
Speaker 1: to make you rethink your thesis that this is not
Speaker 1: a crisis and that everything is just fine. Two things.
Speaker 1: First all, an ongoing dollar rally, dollar continues to move
Speaker 1: up to say, US inflation goes up more than we think,
Speaker 1: and the Fed's got to do more. Our house few
Speaker 1: here for examples, the US and placing pressure is going
Speaker 1: to fade a little bit in the second half of
Speaker 1: the year, but if inflation continues to rise, the Fed's
Speaker 1: got to get more aggressive. Bond yours get up a
Speaker 1: lot more, pushing the dollar higher. That would obviously mean
Speaker 1: more outflows from me. From a fundamental point of view,
Speaker 1: what I'm watching above all is the earnings momentum now,
Speaker 1: corporate earnings growth, and e M last year was extremely strong.
Speaker 1: North of that, the forecast are running around fifteen this year.
Speaker 1: Our own numbers a little higher than that. If those
Speaker 1: earnings numbers start to come under pressure, that would indicate
Speaker 1: that the pressure we've had on currencies recently, on the
Speaker 1: markets generally, is starting to contaminate the corporate story, and
Speaker 1: that would make me a little bit more cautious. So
Speaker 1: from a fundamental point of view, would definitely look at
Speaker 1: the earnings numbers as well as of course monitoring the
Speaker 1: U S currency. Just to wrap things up, just finally, Jeff,
Speaker 1: what's the response of the Federal Reserve if e M
Speaker 1: does fall out of bed? Do we have a federal
Speaker 1: reserve that is less sensitive or increasingly sensitive to what's
Speaker 1: having abroad? Because j Pal spoke about em very recently,
Speaker 1: didn't suggest to me we had a Federal Reserve chair
Speaker 1: that was sensitive to what was happening abroad. I don't
Speaker 1: think the Fed is going to remotely design policy based
Speaker 1: on what's going on abroad unless you have a fully
Speaker 1: fledged crisis. I want to make the point EM is
Speaker 1: down ten to eleven from from the high. It is
Speaker 1: not This is not a crisis. The Chinese currency hasn't moved,
Speaker 1: countries have not moved as all this is idiosyncratic, is
Speaker 1: driven by the dollar. I think the dollar will play
Speaker 1: a role in the Fed's policy as part of their
Speaker 1: their metrics. But what's going on in EM unless you
Speaker 1: end up with a full blown prices, which you're not
Speaker 1: going to have in our view, that's not going to
Speaker 1: make a lot of difference to them. Jeff, really strong
Speaker 1: and really reasoned, and we appreciate your time this morning.
Speaker 1: Jeff Dennis UBS, head of Global Emerging Market Strategy. Scott
Speaker 1: Mushkin joins us now he is Wolf Research Senior retail analyst.
Speaker 1: Uh joining us by phone. Scott, So, what happened here?
Speaker 1: Why are people trading down Best Buy shares so much?
Speaker 1: Right now? Yeah, thanks for thanks for having me on.
Speaker 1: I think there's shares are down because of profitability. Um.
Speaker 1: You know they had a monster comp as you as
Speaker 1: you're talking about ten point one perceis incredible. Um, but
Speaker 1: the flow through to the bottom line I think was
Speaker 1: less than people expected given that that comp And frankly,
Speaker 1: that's exactly what happened with Target yesterday. Um. You know,
Speaker 1: strong sales, um, but the profitability wasn't wasn't there? And
Speaker 1: I think it's concerning, uh, concerning some investors. What does
Speaker 1: this mean that they're basically slashing prices so much and
Speaker 1: offering such discounts that they don't actually make any money?
Speaker 1: Is that that the answer here? So so I don't
Speaker 1: think it's the prices that they're slashing. It's the cost
Speaker 1: of doing business. It's the omni channel cost to do business,
Speaker 1: so it's the delivery, it's the in store service. So
Speaker 1: it's just costing more now to be a retailer and
Speaker 1: to be a relevant retailer. And again, same thing with
Speaker 1: Target yesterday. All right, So if it's the same thing
Speaker 1: with Target yesterday, is this eventually going to work out
Speaker 1: in their favor or are they going down the wrong
Speaker 1: path now? I actually think Best Buy is going down
Speaker 1: the right path. Um. I think they are creating relevance
Speaker 1: for themselves um and Hubert, who runs the company, has
Speaker 1: done an amazing job emphasizing culture we're seeing, I think
Speaker 1: a distancing between you know, like considered surviving retailers and
Speaker 1: the ones that are probably going to be more trouble.
Speaker 1: I put you know, Home is not just a survivor,
Speaker 1: it's a thriver. Um. You know, clearly best buy last
Speaker 1: man standing in that industry, but putting a strategic plan
Speaker 1: that that makes sense. UM and Target looks like it's
Speaker 1: it's moving into that category now too, with with with
Speaker 1: Brian Cornell is doing over there. So no, they're they're
Speaker 1: doing the right stuff. It's just costing them. It's costing
Speaker 1: them some money. Scott. You know what I'm struck by
Speaker 1: People talk about how there really hasn't been that much inflation,
Speaker 1: and yet it seems like there are these extra costs.
Speaker 1: Prices are going up. Certainly for the retailers, they're just
Speaker 1: absorbing them, uh and it sort of is cutting into
Speaker 1: their bottom line rather than passing along, Uh, the increases
Speaker 1: with higher prices for consumers. Is that really what's going
Speaker 1: on here? Such a great question, and and to a degree, yes,
Speaker 1: And that where we're seeing it the most right now,
Speaker 1: where we're most nervous about what you're talking about is
Speaker 1: in the consumables area. Uh, price increases go right through
Speaker 1: Bentonville Walmart's headquarters. UM. Walmart's been dragging their feet on
Speaker 1: on raising prices and getting consumables, and that's making everybody nervous.
Speaker 1: I mean, obviously we hate Campbell's report UM and talked
Speaker 1: about really no pricing power UM. So this is an issue.
Speaker 1: We do have rising costs, rehbalizing logistics costs, we have
Speaker 1: rising labor costs in some cases, rising input costs UM.
Speaker 1: And you know, right now there's a lot of friction
Speaker 1: at retail to get that pricing through. UH. Some other
Speaker 1: people like Srwyn Williams and paint um they're they're having
Speaker 1: more success UM. But right now consumables is a focal
Speaker 1: point of you know, will we see price right now?
Speaker 1: We're not? Is the idea here that when retailers have
Speaker 1: tried to raise prices on these consumables, people just go elsewhere,
Speaker 1: that they just lose too much volume? Yes, And and
Speaker 1: it's also business plans. You know, Walmart's plan is to
Speaker 1: take a lot of share, So they're getting a lot
Speaker 1: of volume share UM, and that's offsetting some of the
Speaker 1: rising costs that they're seeing. So there their their plan
Speaker 1: is to take share in the US, and so it's
Speaker 1: different agendas at different companies. And right now Walmart's agenda
Speaker 1: is to take share, and they haven't let price through
Speaker 1: as much as we would have thought. We'll see as
Speaker 1: time goes on, by the way, because these pressures are
Speaker 1: our building. So it's definitely a fluid situation. Hey, Scott Muskin,
Speaker 1: what's next for these companies? I mean, is it getting
Speaker 1: their online game in order? Is it making the stores
Speaker 1: more attractive or shrinking the store footprint? What's next for them?
Speaker 1: I mean, I think it's optimizing the stores as you
Speaker 1: talk about. I think it's omni channel, and I think
Speaker 1: it's very specific to companies like Target. We were really
Speaker 1: believed they need to have a complete shop, they have
Speaker 1: to do more with their food. UM. So it depends
Speaker 1: on you know, it's company to company um. But generally
Speaker 1: optimizing the store base, improving the store experience, and then
Speaker 1: working uh their omni channel and having a very good
Speaker 1: e commerce and website. So that's what's that, That's what's next,
Speaker 1: and they've got to keep you know, they gotta hope
Speaker 1: the economy keeps coming. Scott, who is the most vulnerable.
Speaker 1: I mean, we continue to think the most vulnerable companies
Speaker 1: are what we call the multi regional UH supermarket chains,
Speaker 1: guys like Kroger, a'll hold, Albertson's merging into Right Aid.
Speaker 1: And the reason is this Amazon is really going after
Speaker 1: the consumables area with you know, with Whole Foods. But
Speaker 1: there's other other factors there. You have all the h
Speaker 1: you have Walmart building share, which I just talked about. Um,
Speaker 1: you have very strong regional chains like an ATB down
Speaker 1: in Texas or Doubula is up in Boston. So those
Speaker 1: those companies are really fighting a pretty strong battle. And
Speaker 1: me we just talked about the lack of pricing power
Speaker 1: there too. So those are the ones we we worry
Speaker 1: about the most. All Right, We've got to leave it there,
Speaker 1: but I want to thank you very much. Scott Mushkin.
Speaker 1: He is a senior retail analyst and managing director for
Speaker 1: Wolf Research. Talking about the best Buy as well as
Speaker 1: the efforts on behalf of Target by Brian Cornell. Very
Speaker 1: interesting stuff. Pere to give us more details and to
Speaker 1: explain what's going on with President Donald Trump and the
Speaker 1: it seems to be off meeting, but between the President
Speaker 1: and North Korea's leader Kim Chung. I want to bring
Speaker 1: in Craig Gordon, executive editor for Bloomberg Bloomberg Bureau chief
Speaker 1: for Washington, D C. Craig a surprise or not so
Speaker 1: much a surprise, as President Trump previously had said he
Speaker 1: didn't know whether the meeting would take place. Yeah, I'm
Speaker 1: a little surprised that we got this letter this morning.
Speaker 1: I think there was definitely there were a lot of
Speaker 1: bearers signs if someone was going to take place. There
Speaker 1: had been a lot of verbal sniping back and forth
Speaker 1: between the two sides. Trump seemed to keep open the
Speaker 1: possibilities late as yesterday at the meeting might still go forward.
Speaker 1: But yeah, we had dropped a letter on Kim Jong
Speaker 1: n this morning saying that based on Kim's rather bellico
Speaker 1: statements about Mike pens and a few other things that
Speaker 1: have come around lately, that there's really no reason to
Speaker 1: go forward with the summit in Singapore. Well. Having said that,
Speaker 1: this also comes at a time when North Korea said
Speaker 1: it shut its nuclear test site ahead of the planned meeting.
Speaker 1: Could this be a situation where the President got what
Speaker 1: he wanted and then decides doesn't necessarily makes sense for
Speaker 1: the US to meet with North Korea. Sure, that's a possibility.
Speaker 1: I mean, it's interesting to me because both sides seem
Speaker 1: to be doing, you know, a little trust building steps
Speaker 1: to try to salvage the summit. They obviously shut down
Speaker 1: the nuclear faciliar destroyer, blew it up. Whatever they did.
Speaker 1: Trump and Secretary of State Pompeo have been kind of
Speaker 1: easing back on Trump's early rhetoric that there had to
Speaker 1: be sort of immediate to nuclearization. Pompeo said in testimony
Speaker 1: yesterday that it had to be verifiable. Trump said on
Speaker 1: Fox News this morning that it had to be uh,
Speaker 1: sort of it could be phased in, they'd be okay
Speaker 1: with that. And everybody seemed to be trying to kind
Speaker 1: of dance around a little bit to try to find
Speaker 1: ways to salve age this thing. Obviously, Trump decided there
Speaker 1: was really not much point in going forward, and so
Speaker 1: he he canceled it with this letter. Well, it's certainly
Speaker 1: showing up in markets right now. SMP five hundred, which
Speaker 1: was making a move higher in early trading, down now
Speaker 1: about four tenths of a percent. Craig, do you think
Speaker 1: this has anything to do with the president's meeting with
Speaker 1: the South Korea's leader. Um, it's possible, although you know,
Speaker 1: we know that the sub Kreen leader was ranged in
Speaker 1: trying to have this happened. Obviously, the North and South
Speaker 1: have been having some of the I mean dramatic We
Speaker 1: also the dramatic images of Kim walking across the d
Speaker 1: m Z, the sort of warm embraced there. I think,
Speaker 1: you know, the South Korean leader is known to be
Speaker 1: somebody who wants the Moon, wants to have this meeting,
Speaker 1: wants to try to turn on the temperature on the peninsula.
Speaker 1: All those nuclear weapons and conventional weapons are pointed right
Speaker 1: at him, frankly first and foremost, so he's eager to
Speaker 1: make this happen. Um. So it's not really clear. We
Speaker 1: didn't have a very clear signal coming out of the
Speaker 1: meeting earlier this week when Trump and Moon met, of
Speaker 1: where this was headed. But as I say, you know,
Speaker 1: it felt like there was a chance that could still
Speaker 1: come together. But there was definitely a lot of headwinds
Speaker 1: that this thing was running into. And so while I'm
Speaker 1: surprised by the timing, I'm not surprised by the outcome.
Speaker 1: All Right, Craig Gordon, Bloomberg's your chief in Washington. Thanks
Speaker 1: for listening to the Bloomberg Surveillance podcast. Subscribe and listen
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Speaker 1: you prefer. I'm on Twitter at Tom Keene before the podcast.
Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio