WEBVTT - Apparel Industry Issues Dire Warning: Prices Going Up 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penel podcast. I'm Paul swing you 0:00:05.360 --> 0:00:07.680 along with my co host Lisa Brahma Waits. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money, whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.960 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:22.480 at Bloomberg dot com. It's a big week for retail 0:00:22.560 --> 0:00:25.560 We did get earnings from Macy's today, We're expecting j C. 0:00:25.760 --> 0:00:29.360 Penny as well as Walmart and Target all later in 0:00:29.760 --> 0:00:32.199 the week. And of course these earnings come with a 0:00:32.320 --> 0:00:36.600 backdrop of potential tariffs. President Trump did delay some of 0:00:36.600 --> 0:00:39.640 the additional tariffs they p planned to impose on goods 0:00:39.680 --> 0:00:44.200 from China to December from September, but still the mood 0:00:44.479 --> 0:00:48.880 is highly wary among retailers. Joining us now as Rick Helfenvine, 0:00:48.960 --> 0:00:52.320 he's president and CEO of American Apparel and Footwear Association. 0:00:52.360 --> 0:00:56.440 He's joining us from Las Vegas during a convention there, 0:00:56.560 --> 0:00:59.160 and Rick, thanks for being with us. Let's start with 0:00:59.200 --> 0:01:02.520 the convention with the with the mood that you're hearing 0:01:02.840 --> 0:01:07.520 from the retailers in attendance today, Well, storm clouds over 0:01:07.520 --> 0:01:10.480 the port bow. I'm telling you, I'm here in Las Vegas. 0:01:11.160 --> 0:01:15.520 Ninety thousand people come to our semi annual industry trade 0:01:15.560 --> 0:01:19.920 show called the Magic Show, and they're buying and they're crying. 0:01:20.120 --> 0:01:23.959 Nobody is happy. Um. Yesterday, early in the morning, we 0:01:24.000 --> 0:01:28.440 thought we had some terrific news from the administration. We 0:01:28.520 --> 0:01:33.120 thought the Grin should finally spirit our Christmas season. But 0:01:33.319 --> 0:01:36.000 later in the day, as the lists they called him 0:01:36.040 --> 0:01:39.120 for A and four be started to pop out, we 0:01:39.160 --> 0:01:42.440 realized we really weren't in much better shape. Seventies seven 0:01:42.520 --> 0:01:45.959 percent approximately of the goods that we bring in for 0:01:46.000 --> 0:01:49.360 the holiday season will be hit by tariffs I have 0:01:50.520 --> 0:01:55.840 on September one. It's not a pretty picture. People are scrambling. 0:01:55.880 --> 0:01:59.640 And the reason least that it affects our industry so much, 0:01:59.760 --> 0:02:05.080 is it quite simply fortable of parallel of or We're 0:02:05.080 --> 0:02:08.920 eighty four percentable accessors, including backpacks and hand babs come 0:02:09.200 --> 0:02:11.680 from China and we don't really have a place to 0:02:11.760 --> 0:02:15.040 move it. So someone's got to pay these tariffs. We've 0:02:15.080 --> 0:02:18.760 been telling the administration over and over and over again, 0:02:18.800 --> 0:02:24.040 please don't do this, Please don't hit the consumer so 0:02:24.440 --> 0:02:27.320 the question is will it hit the consumer, will it 0:02:27.400 --> 0:02:29.919 hit the retailers? How much will we pass along to 0:02:30.080 --> 0:02:34.240 consumers versus sucked up by the retailers. Well, you know 0:02:34.720 --> 0:02:36.720 a lot of smart people in our industry and I 0:02:36.960 --> 0:02:41.480 speak to them regularly. No, no tariff is a good 0:02:41.480 --> 0:02:47.840 tariff ten percent? You know, maybe it's survivable, but is not. 0:02:48.120 --> 0:02:51.280 And every time the President has said ten percent, it 0:02:51.360 --> 0:02:56.080 goes to So we're anticipating the worst, not the best. 0:02:56.680 --> 0:02:59.480 We'll do the best thing that we possibly can to 0:03:00.320 --> 0:03:04.360 you know, avoid earnings compression. But you know what, the 0:03:04.440 --> 0:03:07.960 end results gonna be loosing. Honestly, Prices are gonna go up, 0:03:08.000 --> 0:03:10.080 sales are going to go down. Jobs are gonna get lost. 0:03:10.120 --> 0:03:12.520 It's not going to be a pretty time. It's gonna 0:03:12.560 --> 0:03:17.760 be retail ugly for our industry. That's what's unfortunately gonna happen. 0:03:18.080 --> 0:03:21.160 And we told them, we told them, we're telling them. 0:03:21.360 --> 0:03:23.919 Nobody's listening, and you know, you don't want to hear 0:03:23.960 --> 0:03:30.440 something really sad um. Approximately of all newborn, infant and 0:03:30.440 --> 0:03:33.600 todblet goods sold in the United States is ten dollars 0:03:33.639 --> 0:03:36.000 or less, and they're gonna get hit with a tariff 0:03:36.400 --> 0:03:40.520 September one percent. What is ten percent due to ten dollars? 0:03:40.680 --> 0:03:45.200 I mean, think about what we're doing where they exempted 0:03:45.320 --> 0:03:49.240 car seats but not children's clothes. I mean crazy stuff. 0:03:49.360 --> 0:03:51.960 I will say that one important thing for me when 0:03:52.000 --> 0:03:55.040 my child children were babies was to buy those ten 0:03:55.120 --> 0:03:57.240 packs of ones Ease and then be able to if 0:03:57.280 --> 0:04:00.400 they if they had an issue, just simply throw it 0:04:00.480 --> 0:04:02.240 out that having to worry about it because it was 0:04:02.320 --> 0:04:04.720 five dollars for ten onesies or whatever else. But Rick, 0:04:04.800 --> 0:04:06.280 you know, I want to I want to talk into 0:04:06.320 --> 0:04:09.920 all seriousness looking forward at some of the retailers and 0:04:10.000 --> 0:04:12.360 how they're adapting to this scenario. Some people would push 0:04:12.400 --> 0:04:15.119 back and say, why is so much of the apparel 0:04:15.720 --> 0:04:20.120 manufactured over in China? Why can't the supply chain be moved? Well, 0:04:20.200 --> 0:04:24.200 you know what, our retail consumer for the last several years, 0:04:24.520 --> 0:04:28.920 particularly the millennial customer, is very conscious about product quality, 0:04:29.200 --> 0:04:33.960 product safety, um sustainability, environment, workers, right to human rights. 0:04:34.640 --> 0:04:36.880 And we've been able to do that in China and 0:04:37.080 --> 0:04:40.479 do it effectively, whereas when we go outside of China 0:04:40.520 --> 0:04:45.160 it becomes a much more difficult gold to attain. The 0:04:45.360 --> 0:04:49.720 Chinese have been extremely efficient to work with so they 0:04:50.480 --> 0:04:54.360 really generally meet the high expectations of the American market. 0:04:54.480 --> 0:04:58.119 So what's the administration telling us? They're telling us point 0:04:58.160 --> 0:05:02.480 blank get out of China. So where are we gonna go? 0:05:02.839 --> 0:05:05.720 You know? Number two places Vietnam. The presidents threatened them 0:05:05.760 --> 0:05:09.080 with tariffs. Number three is India. He's threatened them. We 0:05:09.200 --> 0:05:13.320 don't even have a second choice. So, um, we're in 0:05:13.360 --> 0:05:15.960 a tough spot. We're gonna we're gonna work through it 0:05:16.040 --> 0:05:18.840 at ten percent. If it goes to at least, I 0:05:18.920 --> 0:05:21.040 don't know what's going to happen. So Rick, it's been 0:05:21.040 --> 0:05:23.479 a pretty gloomy Wednesday. A lot of people talking about 0:05:23.560 --> 0:05:26.560 the worst case scenarios. You're definitely piled on there. But 0:05:26.680 --> 0:05:29.720 you are in Vegas and you're at this huge trade show. 0:05:30.000 --> 0:05:35.680 Anything getting excited today? Um? Yeah, I mean it's funny. 0:05:36.960 --> 0:05:40.320 It's funny. I'm winning hand. Um, it's positive. There's a 0:05:40.360 --> 0:05:42.120 lot of people, here's a lot of activities, a lot 0:05:42.160 --> 0:05:45.400 of buying going on. On the other hand, people are worried. So, 0:05:45.640 --> 0:05:49.679 you know, the economy finally got good, We're finally getting 0:05:49.760 --> 0:05:51.719 to where we're supposed to be, but you know, retail 0:05:51.720 --> 0:05:54.960 has been challenged. Leasa for the last couple of years 0:05:55.000 --> 0:05:57.160 ago back to two oh one seven, we had more 0:05:57.279 --> 0:06:00.880 bankruptcies than than two o eight. Uh. And then too, 0:06:00.920 --> 0:06:02.480 oh wait, you go to two o one eight, we 0:06:02.600 --> 0:06:05.600 lost over a million square foot of retail in this 0:06:05.760 --> 0:06:08.600 year to oh one nine. The first four months of 0:06:08.960 --> 0:06:12.320 the year, we had more announced store closings than all 0:06:12.400 --> 0:06:15.840 of the last year. So retail businesses a struggle. And 0:06:15.960 --> 0:06:18.240 then you you, you know, look as a as a 0:06:18.440 --> 0:06:22.600 bell weather for the economy, and you know, two thirds 0:06:22.640 --> 0:06:25.200 of our economy is based on the consumer. Ten percent 0:06:25.279 --> 0:06:29.480 of the jobs are in retail. We keep telling the administration, hey, great, 0:06:29.560 --> 0:06:32.520 you're talking to China. That's a good thing, but stay 0:06:32.600 --> 0:06:35.120 away from the consumer because we're the ones driving the 0:06:35.200 --> 0:06:39.800 economy and they we just worry the administration's getting bad advice. 0:06:40.400 --> 0:06:42.320 Rick helfan Bin, thank you so much for being with us. 0:06:42.400 --> 0:06:45.440 Have fun in Las Vegas. It sounds like perhaps another 0:06:45.560 --> 0:06:48.120 another go at the slot machines. Rick Helvin bine At, 0:06:48.160 --> 0:06:51.240 President CEO of American Apparel and Footwall Association, phoning in 0:06:51.360 --> 0:07:06.560 from Vegas. Thirty year yields in the US currently two 0:07:06.720 --> 0:07:11.520 point oh four percent, the lowest on record. Tumbling in 0:07:11.640 --> 0:07:14.520 the wake of fears of a recession of a global 0:07:14.680 --> 0:07:18.920 turndown as we do get weaker than expected manufacturing data 0:07:19.240 --> 0:07:22.960 out of China as well as the German economy shrinking 0:07:23.040 --> 0:07:25.760 in the second quarter. Joining us now Axel Mark, President 0:07:25.800 --> 0:07:29.320 and chief investment officer at MERK Investments, coming to us 0:07:29.400 --> 0:07:31.840 from San Francisco. Axel thank you so much for being 0:07:31.920 --> 0:07:33.600 with us. What do you make of these thirty year 0:07:33.640 --> 0:07:37.760 yields today? Great to be with you. Well, as you 0:07:37.880 --> 0:07:41.760 point out, they do reflect fears of a global slowdown. Um, 0:07:42.240 --> 0:07:45.000 the the biggest sue I have with all this coverage 0:07:45.040 --> 0:07:48.040 of the markets is that all the issues you're mentioning 0:07:48.200 --> 0:07:50.440 is are not issues the fit can fix. The fit 0:07:50.520 --> 0:07:53.560 cannot fix China, the fit cannot fix Germany, the fit 0:07:53.880 --> 0:07:58.040 cannot fix the trade war. And financial conditions are super easy, 0:07:58.280 --> 0:08:01.000 and so rate cuts I'm not the solution. The reason 0:08:01.200 --> 0:08:04.240 these long term rates are low is because obviously when 0:08:04.320 --> 0:08:08.200 you have a global trade war, the business sentiment is declining, 0:08:08.400 --> 0:08:11.000 and and yes, you're going to invest less when those 0:08:11.040 --> 0:08:14.760 sort of tensions are about, but you you're giving it 0:08:14.840 --> 0:08:16.680 the wrong medicine if you call for a right cut 0:08:16.720 --> 0:08:19.080 in the sort of environment. So if the FED can't 0:08:19.120 --> 0:08:24.560 do anything. Then are people not pessimistic enough? Um? Well 0:08:25.080 --> 0:08:28.320 are they? The question is what sort of pessimistm is there? Right? 0:08:28.360 --> 0:08:30.920 The U S economy is a fairly closed economy, um. 0:08:30.960 --> 0:08:34.000 The and if in many ways it's astounding how well 0:08:34.040 --> 0:08:36.880 the US economy has held up in light of all 0:08:36.920 --> 0:08:39.079 of this, Right, it's not. It's not a surprise that 0:08:39.200 --> 0:08:43.200 global businesses um face some headwinds. But consumers have been 0:08:43.240 --> 0:08:47.200 doing very well. Um. Indeed, as I may remind people, 0:08:47.360 --> 0:08:50.839 the unemployment rate is near a record low. Right. And 0:08:51.480 --> 0:08:53.760 also the the sort of challenges that we're facing. A 0:08:53.920 --> 0:08:57.040 tweet dependent tomorrow, the President could come out with a 0:08:57.040 --> 0:08:59.640 tweet and saying everything is great on the trade front, um. 0:08:59.800 --> 0:09:03.480 And then what then we're faced with potentially overheating economy. 0:09:03.720 --> 0:09:06.560 And here we are talking about the recession because maybe 0:09:06.640 --> 0:09:08.600 maybe somewhat terrors are going to be imposed. Now. What's 0:09:08.640 --> 0:09:12.360 happening is, of course, um, the inventories are being jolted 0:09:12.400 --> 0:09:15.040 around as people are holding things, and then maybe investments 0:09:15.080 --> 0:09:17.559 don't take place because of the uncertainty. So clearly that's 0:09:17.600 --> 0:09:20.520 the headwind. But again the FIT can't fix that. And 0:09:20.840 --> 0:09:22.880 that's also why the yield curve is not inverting the 0:09:22.960 --> 0:09:26.120 way historically inverts. Normally you would have the three year 0:09:26.160 --> 0:09:28.280 ten year in word and then gradually going from the 0:09:28.400 --> 0:09:30.520 kind of the three month tenure. This way, it's going 0:09:30.520 --> 0:09:33.439 the other way around. So we're imposing their recession the 0:09:33.480 --> 0:09:35.800 other way around around the FED tightening because of an 0:09:35.840 --> 0:09:40.480 overheating economy. It's the President inducing a slowdown with the 0:09:40.520 --> 0:09:43.319 tweets and and the trade tensions. And this is not 0:09:43.559 --> 0:09:46.599 this You don't need the same sort of cure to 0:09:46.720 --> 0:09:50.000 the disease because the disease is different. So I'm trying 0:09:50.040 --> 0:09:51.839 to put together a lot of what you're saying, and 0:09:52.400 --> 0:09:55.160 it's interesting, it's sort of a controversial issue. You're actually 0:09:55.520 --> 0:09:58.400 making an argument that the the U. S. Economy is 0:09:58.520 --> 0:10:01.559 closer to overheating then many people think, and that the 0:10:01.640 --> 0:10:03.959 FED should really respond to the economic data. That just 0:10:04.080 --> 0:10:07.439 isn't that that bad at this point? What are you 0:10:07.520 --> 0:10:11.000 looking at to indicate that we're closer to an overheating 0:10:11.040 --> 0:10:13.400 than anyone else who I speak to seem to think. 0:10:14.240 --> 0:10:16.959 I'm not saying this is the baseline scenario, but it 0:10:17.120 --> 0:10:20.199 is a risk not to be ignored. Right um, And 0:10:20.480 --> 0:10:23.439 and absolutely, the the the inversion of the yelk cuve 0:10:23.600 --> 0:10:26.800 is but one indicator that there's a slowdown. There's clearly 0:10:26.840 --> 0:10:31.719 global headwinds. But um, the difference I make is that 0:10:32.120 --> 0:10:34.920 we do have an election coming next year. The president 0:10:35.120 --> 0:10:37.520 will want to be re elected just like any president 0:10:37.600 --> 0:10:39.240 perfo him as well, so he wants to have a 0:10:39.320 --> 0:10:42.120 strong economy, and so he has every incentive in the 0:10:42.200 --> 0:10:45.520 world to reduce those straight tensions which I saw yesterday. Right, 0:10:45.559 --> 0:10:47.800 you can take some of these things off again very quickly. 0:10:48.000 --> 0:10:50.480 Questions how much damage will have been caused in the 0:10:50.559 --> 0:10:52.920 interim and and and what we can do about it. 0:10:53.320 --> 0:10:55.880 But the feder Reserve, in my view, would be very 0:10:55.920 --> 0:10:59.439 well served to to be data dependent and patient rather 0:10:59.520 --> 0:11:02.520 than be allowing political development. And nobody knows what the 0:11:02.559 --> 0:11:05.680 heck that even means. Instead, it's egging on the president 0:11:05.920 --> 0:11:07.880 to to escalate the trade war, and he did it 0:11:07.960 --> 0:11:10.360 the day after that was said. And so my view 0:11:10.520 --> 0:11:12.439 is that if the FED just took the long view 0:11:12.480 --> 0:11:15.400 on this and took a deep breath, Um, yeah, maybe 0:11:15.480 --> 0:11:17.760 the s MP would plunge more, But maybe that would 0:11:17.760 --> 0:11:20.120 send a signal to the White House and instead of 0:11:20.200 --> 0:11:22.760 the FED becoming a tool of the president. They suddenly 0:11:22.760 --> 0:11:25.359 don't want to become a tool. But Powell is exactly 0:11:25.480 --> 0:11:28.440 doing what what the President wants and and is egging 0:11:28.520 --> 0:11:31.480 him on in many ways. Axcel, just real quick here, 0:11:31.800 --> 0:11:34.319 what would you have to see to change your view 0:11:34.400 --> 0:11:36.880 and say, you know what, markets are right? The President 0:11:37.000 --> 0:11:40.400 is right, the Fed should cut rates well. Financial conditions 0:11:40.440 --> 0:11:43.200 need to deteriorate. Financial conditions is not the VIX index. 0:11:43.280 --> 0:11:46.559 The financial conditions is. And look at the financial the 0:11:46.880 --> 0:11:49.920 Chicago Fed Financial Conditions Index rather than most of the 0:11:49.960 --> 0:11:51.920 other ones that have too much weight on the VIX. 0:11:52.400 --> 0:11:55.120 You need to have a deterioration in the transmission channel. 0:11:55.240 --> 0:11:57.400 That is what the FEED should look at. Access to 0:11:57.480 --> 0:11:59.640 credit needs to become more difficult. You don't need to 0:11:59.679 --> 0:12:01.800 have the hiccup in d s MP. And so if 0:12:01.880 --> 0:12:06.240 that were to happen, lowing rates helped. Lowing rates doesn't 0:12:06.280 --> 0:12:08.959 do any good. And and that's why I'm not suggesting 0:12:09.000 --> 0:12:11.240 that is in the slowdown. But the FIT can't help 0:12:11.320 --> 0:12:15.079 the slowdown if we already have accommodative monetary policy. And 0:12:15.160 --> 0:12:17.360 so there's really nothing the FIT can do at this stage. 0:12:17.480 --> 0:12:18.959 And it would be very helpful for the FETE to 0:12:19.040 --> 0:12:22.680 just communicate what it can and cannot do. Yeah, axel Mark, 0:12:22.920 --> 0:12:24.920 thank you so much for being with us. Axel Mark, 0:12:24.960 --> 0:12:28.960 President and Chief Investment Officer at Merk Investments in San Francisco. 0:12:43.800 --> 0:12:46.679 We Work filed it's s one form ahead of its 0:12:46.720 --> 0:12:50.640 initial public offering today and our reporters an analysts have 0:12:50.720 --> 0:12:54.960 been parsing through the document. Quite a description of losses 0:12:55.200 --> 0:12:58.800 and also hope for community and what that could potentially 0:12:58.840 --> 0:13:01.320 reap in terms of joining us. Now, we're very lucky 0:13:01.360 --> 0:13:04.360 to say is Jeff lang Baum, his senior reat Sirie 0:13:04.440 --> 0:13:08.000 equity analyst for Bloomberg Intelligence, and Ellen Hewitt Startups reporter 0:13:08.200 --> 0:13:10.679 for Bloomberg News joining us from our Bloomberg nine sixties 0:13:10.679 --> 0:13:13.839 studio in San Francisco. Ellen, let's start with you. What 0:13:13.960 --> 0:13:17.400 do we learn today from the WE Work Companies I 0:13:17.600 --> 0:13:20.520 p O filing. There's so much to pass through. I'm 0:13:20.559 --> 0:13:22.440 still going through it, and I still have a lot 0:13:22.480 --> 0:13:24.439 to go through. I think the main story is, yes, 0:13:24.559 --> 0:13:26.959 this is a company with a lot of growth and 0:13:27.320 --> 0:13:30.240 a lot of losses. They have been losing, um, you know, 0:13:30.400 --> 0:13:33.640 close to two billion dollars in Those were numbers that 0:13:33.679 --> 0:13:36.000 we knew already, but we're starting to get a closer 0:13:36.080 --> 0:13:38.360 look at just how quickly it's growing and just how 0:13:38.440 --> 0:13:41.000 quickly it's losses are growing. And there's lots of other 0:13:41.120 --> 0:13:44.120 interesting information in there as well, in particular about the 0:13:44.160 --> 0:13:47.599 relationship between its CEO and co founder Adam Newman and 0:13:47.760 --> 0:13:50.559 the company. There's a lot of complicated financial structures that 0:13:50.679 --> 0:13:54.120 over the years we work has done to help support UM. 0:13:54.280 --> 0:13:57.640 Mr Newman and vice versa. There's this very close relationship 0:13:57.679 --> 0:14:00.680 with a lot of financial structures in there. So Jeff 0:14:00.840 --> 0:14:03.760 building on Ellen just said, we saw just how quickly 0:14:03.800 --> 0:14:06.120 their their revenues are growing and how quickly their losses 0:14:06.120 --> 0:14:08.760 are growing. At first blush. What's your big takeaway? Was 0:14:08.840 --> 0:14:11.160 this better than expected from your from your point of 0:14:11.240 --> 0:14:15.240 view or worse? UM? I would say probably about the same. UM. 0:14:15.679 --> 0:14:18.160 The one thing that really stood out to me was 0:14:18.240 --> 0:14:21.240 that it's it's not clear how they can continue to 0:14:21.360 --> 0:14:24.760 grow revenue the same magnitude that they've been growing it 0:14:25.160 --> 0:14:28.160 without also continuing to increase their costs. Right, because their 0:14:28.200 --> 0:14:32.720 revenue um grows when they add new incremental locations, and 0:14:32.960 --> 0:14:37.040 that's a costly endeavor, and so in order for them 0:14:37.120 --> 0:14:40.600 to approach profitability, they really have to I think scale 0:14:40.640 --> 0:14:44.720 back the the expansion um and and then that, you know, 0:14:44.840 --> 0:14:46.720 kind of gets you back to what's the valuation and 0:14:46.760 --> 0:14:48.120 how are we looking at this thing? Is it a 0:14:48.200 --> 0:14:52.640 high growth vehicle or is it an eventual profit generator? Ellen? 0:14:52.720 --> 0:14:56.280 This morning Tom Keene was parsing through the filing and 0:14:56.480 --> 0:15:01.000 he found numerous references the word community. I imagine it 0:15:01.200 --> 0:15:04.640 was over ten and I'm wondering what actually at its 0:15:04.760 --> 0:15:08.840 heart is this business, what is its competitive advantage and 0:15:09.160 --> 0:15:11.880 what will distinguish it from from from other companies that 0:15:11.920 --> 0:15:14.200 try to do the similar kind of thing. If you 0:15:14.480 --> 0:15:16.960 ask we Work, they'll they'll give you an answer that's 0:15:17.000 --> 0:15:19.840 that's pretty abstract. They talk about the idea of the 0:15:20.000 --> 0:15:22.920 power of we, and that's connected to this idea of community. 0:15:23.000 --> 0:15:27.200 It's this this sense of togetherness and and working together 0:15:27.360 --> 0:15:29.680 better and and it's part of this brand that we 0:15:29.800 --> 0:15:31.960 Work has really developed that they try to use to 0:15:32.000 --> 0:15:34.840 set themselves apart from your Regius or your other sort 0:15:34.880 --> 0:15:38.960 of stayed office providers. They really believe that building a 0:15:39.080 --> 0:15:42.600 global network of these flexible office spaces is going to 0:15:42.640 --> 0:15:46.560 provide something that is beyond just easy access to space. 0:15:46.680 --> 0:15:49.040 You know, they have a lot of enterprise customers that 0:15:49.200 --> 0:15:51.640 I imagine look at we Work as a very simple 0:15:52.120 --> 0:15:54.880 and easy way to, for example, set up a satellite 0:15:54.920 --> 0:15:57.240 office in a city where they maybe don't currently have 0:15:57.320 --> 0:15:59.880 a presence. It's much easier to do that by paying 0:16:00.040 --> 0:16:03.200 we Work, then by you know, hiring your own real 0:16:03.320 --> 0:16:05.400 estate team to go and look for places and signed 0:16:05.440 --> 0:16:07.400 a ten year lease and and that's maybe the more 0:16:08.080 --> 0:16:12.040 practical business application. But yeah, they talk about this idea 0:16:12.120 --> 0:16:14.720 of community being really central to what makes me work different. 0:16:14.800 --> 0:16:18.480 In fact, when they sold UM bonds last year for 0:16:18.560 --> 0:16:21.400 the first time, this was when we first encountered the 0:16:21.600 --> 0:16:26.600 infamous metric community adjusted EBIT, which many people mocked UM. 0:16:27.200 --> 0:16:29.560 But it's interesting that we Work chose that because it 0:16:29.880 --> 0:16:31.840 is indicative of how much they believe in this idea 0:16:31.880 --> 0:16:36.560 of community being central to uh their business. If you'll notice, 0:16:36.600 --> 0:16:38.880 community adjusted EBA does not in the s one, although 0:16:38.920 --> 0:16:41.200 I looked back at some of the draft versions and 0:16:41.280 --> 0:16:44.160 it isn't the first three draft versions of five, so 0:16:44.360 --> 0:16:47.520 some made it some of the way. Banker said, no way, 0:16:47.600 --> 0:16:52.040 are you subjecting yourself to that again, guys, no, just stop, Jeff, 0:16:52.120 --> 0:16:54.480 I do want to ask about the business model from 0:16:54.600 --> 0:16:57.920 a real estate perspective. I always am unclear of how 0:16:58.080 --> 0:17:01.760 much of we Work property is own versus least. What 0:17:01.920 --> 0:17:05.199 sort of the breakdown here the majority is least. They 0:17:05.280 --> 0:17:07.960 disclosed in the s one that they have forty seven 0:17:08.040 --> 0:17:12.840 billion dollars of lease obligation UM and that compares to 0:17:13.119 --> 0:17:17.480 four billion dollars of committed revenue backlog. So UM. You know, 0:17:18.240 --> 0:17:22.359 if and when we have a economic downturn that pulls 0:17:22.480 --> 0:17:26.480 tenants away from office space there on the hook for 0:17:26.560 --> 0:17:29.600 a lot more than what they are obligated to receive 0:17:30.200 --> 0:17:32.640 UM and and you know that this will that will 0:17:32.720 --> 0:17:35.560 really test the power of their community. How many of 0:17:35.640 --> 0:17:38.600 these tenants that are on short term leases with them 0:17:39.320 --> 0:17:42.840 stay UM as opposed to you know, pulling back and 0:17:43.280 --> 0:17:46.639 finding somewhere else to run their business. UM, if they 0:17:46.680 --> 0:17:48.560 don't need that cost, And then what does that mean 0:17:48.640 --> 0:17:52.280 for we Work going forward? Ellen, what's the what's their 0:17:52.359 --> 0:17:55.320 goal as far as how they plan to expand revenues here? 0:17:56.520 --> 0:17:58.760 You know, I think it's just continuing to look at 0:17:58.880 --> 0:18:01.159 growing in parts of the world where they don't have 0:18:01.240 --> 0:18:04.240 as big a presence. Commercial real estate is a huge 0:18:04.320 --> 0:18:06.560 addressable market. This is something that they always talk about 0:18:06.640 --> 0:18:08.720 when they're trying to make the pitch for why you 0:18:08.760 --> 0:18:12.200 should believe that this company is worth forty seven billion dollars, 0:18:12.240 --> 0:18:15.280 which was their most recent private valuation. They look to 0:18:15.680 --> 0:18:18.399 areas such as in South America and in Asia and 0:18:18.600 --> 0:18:22.119 point to, you know, the low penetration that their business 0:18:22.200 --> 0:18:26.040 has among you know, the office real estate market, and 0:18:26.240 --> 0:18:28.840 and they say, look, we've really figured out how to 0:18:29.440 --> 0:18:32.680 retrofit and fit out with furniture and office very quickly, 0:18:32.800 --> 0:18:35.360 very cheaply. You know, it might also look the same 0:18:35.400 --> 0:18:37.480 as we work somewhere else in the world, but look, 0:18:37.560 --> 0:18:39.040 we can do it for not a lot of money 0:18:39.040 --> 0:18:40.440 and not a lot of time, and that's going to 0:18:40.520 --> 0:18:43.200 help us grow more quickly than everyone else. Um. And 0:18:43.400 --> 0:18:45.960 as as we mentioned earlier, they talk a lot about 0:18:46.080 --> 0:18:49.360 how if they needed to get to profitability, they could 0:18:49.440 --> 0:18:51.719 just stop growing. And in fact, in they s one 0:18:51.720 --> 0:18:54.720 they cite a couple examples, including one in London where 0:18:55.200 --> 0:18:57.800 in the wake of Brexit they felt like maybe they 0:18:57.800 --> 0:19:01.040 should slow down growth, and in doing so they were 0:19:01.080 --> 0:19:03.080 able to show that their occupancy rates went up. So 0:19:03.480 --> 0:19:05.879 they're obviously looking for examples where they can point to 0:19:06.520 --> 0:19:10.119 and say, look, if things go poorly, we have a 0:19:10.200 --> 0:19:12.399 little bit of a place to fall back on, which is, 0:19:12.440 --> 0:19:14.760 if we stop growing so quickly, we won't lose money 0:19:14.800 --> 0:19:17.200 as quickly. Um. But yeah, while they think the going 0:19:17.280 --> 0:19:18.879 is good, they'd like to grow as quickly as possible. 0:19:18.920 --> 0:19:21.520 Reverseas Jeff, I do have to wonder, especially if most 0:19:21.560 --> 0:19:26.840 of their contracts releases and not ownership over these commercial properties, 0:19:27.440 --> 0:19:30.600 what the asset liability balance is, Like, I mean it's 0:19:30.640 --> 0:19:33.600 not secured. What are their assets that they could liquidate 0:19:33.680 --> 0:19:37.679 if they do have a problem. That's unclear. Um, they 0:19:38.320 --> 0:19:42.040 do own some, but they're all kind of complicated structures. Um. 0:19:42.240 --> 0:19:46.440 But but realistically, this is a it's a it's a 0:19:46.640 --> 0:19:51.200 very complicated large sublease business. Right. They lease off the space, 0:19:51.440 --> 0:19:53.960 they turn it around, they make it cool, um, and 0:19:54.040 --> 0:19:57.160 then they sublease it. And they've got average lease length 0:19:57.320 --> 0:20:00.760 of their leases are average fifteen years and there's member 0:20:01.160 --> 0:20:05.520 leases are average fifteen months, and so they are definitely mismatched. 0:20:05.720 --> 0:20:09.199 And you know, the over the past ten years, as 0:20:09.240 --> 0:20:11.840 they've been growing, it has worked because the office market 0:20:11.880 --> 0:20:15.000 has been expanding. Um. But that is has yet to 0:20:15.080 --> 0:20:19.120 really be tested. Jeff Langbaum, Senior read and Sirie Equity 0:20:19.119 --> 0:20:22.480 analyst for Bloomberg Intelligence. Ellen qwittt Uh, startup supporter for 0:20:22.560 --> 0:20:25.400 Bloomberg News, joining us from our San Francisco studios. Thank 0:20:25.480 --> 0:20:39.040 you so much for your time. We talk a lot 0:20:39.080 --> 0:20:43.560 about the war in technology, the war for the latest advancements, 0:20:43.880 --> 0:20:46.840 and a lot of times people talk about quantum computing, 0:20:47.000 --> 0:20:50.160 the idea of what's next, sort of what's the next 0:20:50.240 --> 0:20:53.520 see change within the computing industry. Luckily we have Dr 0:20:53.600 --> 0:20:57.040 Bob Sutor, he's vice president and IBM QUE Strategy and 0:20:57.160 --> 0:21:00.560 Ecosystem at IBM joining us here in bloom We're gonna 0:21:00.560 --> 0:21:04.440 active broker studios. So, Drs Sutor, I'm wondering, can you 0:21:04.520 --> 0:21:08.200 just start by explaining what is it that you do? Well, 0:21:08.280 --> 0:21:11.280 I'm in IBM Research. Okay, there we go. I mean, 0:21:11.520 --> 0:21:15.040 basically we talk about quanting quantum computing. What are we 0:21:15.119 --> 0:21:18.320 actually talking about here? Well, I mentioned IBM Research because 0:21:18.359 --> 0:21:21.600 we deal with the really, really, really new things that 0:21:21.880 --> 0:21:23.960 are going to be coming to market in five, ten, 0:21:24.080 --> 0:21:28.159 or sometimes twenty years. So quantum computing, which is what 0:21:28.280 --> 0:21:32.840 we do. UM is developing an entirely new type of 0:21:32.960 --> 0:21:37.200 hardware and software stack to solve problems that really today 0:21:37.240 --> 0:21:40.239 are just not tractable using existing systems. So give us 0:21:40.240 --> 0:21:47.719 an example. So let's take um um option um risk analysis. Right, 0:21:47.760 --> 0:21:49.920 So you're trying to figure out you have a portfolio 0:21:50.080 --> 0:21:51.520 and you could be a hedge fund, or this could 0:21:51.560 --> 0:21:54.720 be your retirement account. When you start thinking of the 0:21:54.800 --> 0:21:58.040 stocks and bonds and derivatives and all these different types 0:21:58.480 --> 0:22:02.359 of instruments, they're so many different connections between them and 0:22:02.480 --> 0:22:04.680 also things that are happening in the world. When you 0:22:04.760 --> 0:22:09.440 start to analyze these things, the combinations just grow exponentially, 0:22:09.560 --> 0:22:12.440 and here I literally mean exponentially and not just a 0:22:12.600 --> 0:22:16.960 lot all right. Current computers can't handle that. They can't 0:22:17.040 --> 0:22:21.280 handle that growth, and so they require either a tremendous, 0:22:21.600 --> 0:22:25.320 in fact ridiculous amount of memory to process or maybe 0:22:25.520 --> 0:22:28.280 only a million years to do the computation. This is 0:22:28.320 --> 0:22:30.359 a really important point and it's something that a lot 0:22:30.400 --> 0:22:33.560 of businesses are looking into, and even from a governmental standpoint, 0:22:33.600 --> 0:22:37.240 there have been proposals that perhaps regulation of banks, for example, 0:22:37.280 --> 0:22:40.600