WEBVTT - Surveillance: Hollenhorst on Soft Landing 0:00:05.120 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:08.520 --> 0:00:12.360 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.880 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.079 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:30.680 the Bloomberg Terminal and the Bloomberg Business app on set. 0:00:30.760 --> 0:00:32.919 Right now is our interview of the day for those 0:00:33.000 --> 0:00:36.560 of you who concerned about the persistency of inflation. Andrew 0:00:36.560 --> 0:00:40.080 Hollenhorst is chief US Economist at Citygroup and has been 0:00:40.120 --> 0:00:44.400 shockingly prescient about elevated inflation not only in America but 0:00:44.520 --> 0:00:47.920 for Citygroup worldwide as well. Andrew, I want to go 0:00:47.960 --> 0:00:51.760 back to yesterday's Free for all on one year, six months, 0:00:51.800 --> 0:00:56.920 three months, one month annualized John's beautiful job there on PPI. Seriously, 0:00:56.960 --> 0:00:59.640 the granularity of the data. Are we getting way too 0:00:59.640 --> 0:01:02.840 grand n here? Andrew? Are we so desperate that we're 0:01:02.920 --> 0:01:04.559 just looking at every single tea leaf? 0:01:05.720 --> 0:01:07.920 Well, I really think you have to do both here, Tom, 0:01:07.920 --> 0:01:11.120 and I would say for John, PPI is one of 0:01:11.160 --> 0:01:14.160 the hardest releases to read. You have a lot of 0:01:14.240 --> 0:01:16.920 different subcomponents, a lot of different core measures, and we 0:01:16.959 --> 0:01:19.039 look at all of those things. We look at those 0:01:19.040 --> 0:01:23.240 things in course CPI also the supercore. We're looking at 0:01:23.400 --> 0:01:28.160 various measures of underlying inflation one month trends, three month trends, 0:01:28.280 --> 0:01:30.759 So you have to look at the details, but then 0:01:30.800 --> 0:01:34.119 you have to look back, step back and look at 0:01:34.760 --> 0:01:40.039 where is the factory broadly in the economy. So looking 0:01:40.080 --> 0:01:44.400 at the details, there's some upside risks we're seeing. If 0:01:44.400 --> 0:01:47.200 we look at inflation in August, we obviously have gasoline 0:01:47.240 --> 0:01:50.880 prices that are up. Airs are down twenty percent since March. 0:01:50.960 --> 0:01:54.080 That's certainly not the experience I've had with airfares, so 0:01:54.120 --> 0:01:55.520 we think we're going to see those coming up in 0:01:55.560 --> 0:01:59.160 the official data. That's on the kind of details, the 0:01:59.480 --> 0:02:02.040 you know, short term movements month to month. But then 0:02:02.080 --> 0:02:03.840 you step back and you say, where are we going 0:02:03.880 --> 0:02:06.639 as an economy. It's an economy that's generating two percent 0:02:06.720 --> 0:02:09.519 plus growth, it's an economy with a very tight labor 0:02:09.560 --> 0:02:13.919 market wave growth running around five percent by various different measures. 0:02:14.240 --> 0:02:17.040 That's not an economy that's going to bring inflation back 0:02:17.080 --> 0:02:19.480 down to two percent. So yeah, we're getting a couple 0:02:19.600 --> 0:02:22.760 months of softer inflation readings here, that's certainly going to 0:02:22.840 --> 0:02:24.680 look like a soft landing. I don't think that's where 0:02:24.680 --> 0:02:25.160 we're headed. 0:02:25.240 --> 0:02:27.920 We were speaking with Vish Turbotur of Morgan Stanley earlier 0:02:27.960 --> 0:02:30.600 and he said that the bond market action this week 0:02:30.639 --> 0:02:34.000 was a head scratcher since you got softer than expected 0:02:34.080 --> 0:02:37.240 economic data. You did get confirmation at least in the 0:02:37.560 --> 0:02:40.960 data that we're getting right now of disinflation. Do you 0:02:41.040 --> 0:02:43.440 agree or do you think that this makes perfect sense 0:02:43.520 --> 0:02:46.400 that the more the Fed gets complacent, the more concerned 0:02:46.440 --> 0:02:48.320 people are about longer term inflation. 0:02:49.560 --> 0:02:49.800 Yeah. 0:02:49.800 --> 0:02:51.560 I think there is a way to make sense of 0:02:51.600 --> 0:02:54.440 the price action this weekly, so, which is partly that 0:02:54.520 --> 0:02:59.080 this soft landing idea narrative and the softer inflation data 0:02:59.080 --> 0:03:02.079 that's come in really well priced into the market. Speaking 0:03:02.120 --> 0:03:06.080 to investors ahead of the CPI release yesterday, it was 0:03:06.160 --> 0:03:08.840 hard to find anyone who really thought that this wasn't 0:03:08.880 --> 0:03:11.519 going to be a very soft print. So I think 0:03:11.520 --> 0:03:14.880 that was already in the price. So then what investors 0:03:14.919 --> 0:03:17.000 are looking at is some of those details, some of 0:03:17.000 --> 0:03:19.680 those trends in the labor market, the longer term trends 0:03:19.680 --> 0:03:22.320 in the economy, and exactly like you're saying, Lisa, if 0:03:22.320 --> 0:03:25.640 the FED is going to be finishing up rate hikes 0:03:25.680 --> 0:03:28.000 and pretty much everyone thinks either they're done or maybe 0:03:28.000 --> 0:03:29.840 they're going to do another twenty five basis points in 0:03:29.880 --> 0:03:32.919 November and be done, then we're looking at where does 0:03:32.919 --> 0:03:35.640 inflation go from here? And do FED officials just need 0:03:35.680 --> 0:03:38.640 to keep policy rates higher for longer? I think that 0:03:38.640 --> 0:03:41.000 that's a discussion that we're going to increasingly be hearing 0:03:41.400 --> 0:03:44.320 amongst FED officials, is increasingly going to play out in 0:03:44.360 --> 0:03:47.400 the market, this idea that maybe just the neutral policy 0:03:47.480 --> 0:03:51.360 rate where policy makers need to leave FED funds in 0:03:51.440 --> 0:03:53.320 the longer term, is going to be higher. 0:03:53.600 --> 0:03:57.320 How much do oil prices do commodity prices feature into this? 0:03:57.400 --> 0:03:59.560 I was looking at a Muhammad al Arian column yesterday 0:04:00.040 --> 0:04:03.120 saying there's an asterisk next to the disinflation that everybody 0:04:03.200 --> 0:04:05.800 was celebrating yesterday, and it has to do with oil 0:04:05.840 --> 0:04:10.680 prices heading toward their seventh weekly gain. Looking at food 0:04:10.680 --> 0:04:13.120 prices which are starting to inflect higher. How much do 0:04:13.200 --> 0:04:16.359 these sort of affect the larger input prices like the 0:04:16.400 --> 0:04:17.960 factory gauge ones that we just got. 0:04:19.279 --> 0:04:21.479 Yeah, so I think the FED really got helped out 0:04:21.480 --> 0:04:24.839 with lower inflation, with gasoline prices coming down, energy prices 0:04:24.839 --> 0:04:29.360 coming down, food prices that stopped rising as quickly, And 0:04:29.480 --> 0:04:31.800 we were saying at that time FED officials should be 0:04:31.800 --> 0:04:34.560 a little bit careful in terms of take credit for 0:04:34.680 --> 0:04:38.720 that down shift in inflation, because FED policy doesn't really 0:04:38.839 --> 0:04:42.960 control oil prices or food prices, and now they may 0:04:43.040 --> 0:04:47.520 start experiencing the opposite scenario where you actually get some 0:04:47.560 --> 0:04:51.919 of these commodity prices moving higher, most notably energy prices. 0:04:51.960 --> 0:04:55.159 So that is something that FED officials economists tend to 0:04:55.200 --> 0:04:58.400 look through to the core measures. But ye know I 0:04:58.440 --> 0:05:01.159 mentioned airfares before. We're going to higher jet fuel prices. 0:05:01.200 --> 0:05:04.160 That's going to boost airfares, and that that August inflation reading, 0:05:04.680 --> 0:05:07.640 we could get a month on month increase on the headline, 0:05:07.839 --> 0:05:11.280 something like zero point four, zero point five, zero point 0:05:11.360 --> 0:05:14.640 six percent month on month, So that could really kind 0:05:14.680 --> 0:05:16.880 of change the narrative in terms of how the numbers 0:05:16.880 --> 0:05:17.640 are coming in. 0:05:17.839 --> 0:05:21.279 Andrew, just a simple question, are we beyond the pandemic? 0:05:21.480 --> 0:05:25.440 Are we back to conventional macroeconomic analysis? 0:05:26.960 --> 0:05:31.640 So I think we can still use conventional macroeconomic analysis, 0:05:32.279 --> 0:05:36.120 and I think that's one way that we've been forecasting 0:05:36.200 --> 0:05:39.560 inflation and thinking about inflation staying higher for longer, the 0:05:39.640 --> 0:05:43.680 idea that tight labor markets do drive inflation over the 0:05:43.720 --> 0:05:46.800 medium term. So I think that framework of analysis has 0:05:46.839 --> 0:05:50.520 actually been a useful one throughout the pandemic and then 0:05:50.640 --> 0:05:53.800 this post pandemic period. But the idea that the economy 0:05:53.880 --> 0:05:56.720 is going to kind of normalize back to where we were, 0:05:57.279 --> 0:05:59.560 you know, let's say twenty twelve or twenty thirteen, I 0:05:59.880 --> 0:06:03.679 just really don't understand that analysis. A lot of people 0:06:03.720 --> 0:06:06.440 would have thought in twenty thirteen things look pretty different 0:06:06.440 --> 0:06:08.320 than where we were in two thousand and five, so 0:06:08.680 --> 0:06:10.880 I'm not sure why there's this belief that we would 0:06:10.920 --> 0:06:11.480 go back there. 0:06:11.520 --> 0:06:13.160 So this is the heart of the question. I'm gonna 0:06:13.160 --> 0:06:15.160 get a little wonky er folks. This is wrapped around 0:06:15.240 --> 0:06:19.599 John Williams our start and and all the theory mumble 0:06:19.680 --> 0:06:22.960 jumble that doctor Hollenhurst is really quite good at the 0:06:23.000 --> 0:06:25.640 school of thought out there, Andrew is that we return 0:06:25.720 --> 0:06:28.960 to a quiescent our start, and then there's debate. I'm 0:06:28.960 --> 0:06:31.480 going to wrap it around what Olivia Blanchard has done, 0:06:31.839 --> 0:06:34.760 where there's a new higher our start set or dare 0:06:34.800 --> 0:06:37.920 I say, people debt worried looking at an even ever 0:06:38.120 --> 0:06:41.000 higher our start Where are you on this? How do 0:06:41.040 --> 0:06:45.760 you position our start out three and five years right now? 0:06:46.760 --> 0:06:49.800 Yeah, I think we have to think about the possibility 0:06:49.839 --> 0:06:52.640 at least that our star is migrating higher. And if 0:06:52.720 --> 0:06:56.760 you take the famous Laubach Williams model, which to your point, 0:06:56.839 --> 0:06:59.839 Tom is full of complexities and the ideas, you're doing 0:06:59.839 --> 0:07:02.200 this so called baysy An update, where you look at 0:07:02.200 --> 0:07:05.560 the account of figure out where our stars, I mean 0:07:05.680 --> 0:07:07.760 you can very simply, you can say, essentially what that 0:07:07.800 --> 0:07:10.520 model is doing is saying, if growth comes in higher 0:07:10.560 --> 0:07:13.560 than we expect, if inflation comes in higher than we expect, 0:07:13.840 --> 0:07:16.600 then it must be the case that the neutral real 0:07:16.680 --> 0:07:19.840 interest rate is higher than we thought it was. Well, 0:07:19.880 --> 0:07:22.480 where's growth come in stronger than we expect it, where's 0:07:22.480 --> 0:07:26.400 inflation come in higher than we expected? So that model, 0:07:26.440 --> 0:07:29.120 over time should start catching up to what we've seen 0:07:29.160 --> 0:07:31.680 in the data that looks like our star is rising. 0:07:32.800 --> 0:07:34.680 I think we're going to hear about this at Jackson Hole. 0:07:34.720 --> 0:07:37.320 I think that that really could be the interesting conversation 0:07:37.400 --> 0:07:39.400 that Powell brings up. Now to your point, new York 0:07:39.440 --> 0:07:42.960 Fed President Williams, the father of the Lavak Williams model. 0:07:43.440 --> 0:07:45.760 I don't think that he thinks that our star has 0:07:45.760 --> 0:07:48.840 moved up yet he's made comments to that effect. So Powell, 0:07:48.880 --> 0:07:51.480 I think, can't kind of completely break away from what 0:07:51.520 --> 0:07:54.360 Williams is talking about. But let's watch Jackson Hole at 0:07:54.360 --> 0:07:55.960 the end of this month. I think we're going to 0:07:56.040 --> 0:07:58.720 hear some discussion about the possibility at least that our 0:07:58.760 --> 0:07:59.480 star is higher. 0:07:59.560 --> 0:08:02.400 How long can the Fed hold rates around these levels 0:08:02.520 --> 0:08:04.200 five and a quarter to five and a half percent 0:08:04.520 --> 0:08:07.840 before it causes recession at a time where perhaps growth 0:08:07.880 --> 0:08:09.520 is still strong but it's coming down. 0:08:10.360 --> 0:08:13.560 Yeah, I think there are lags of monetary policy that 0:08:14.000 --> 0:08:17.800 will vary slowly but surely slow down the economy. We 0:08:17.880 --> 0:08:20.600 see that in the Senior Loan Officer Opinion Survey, where 0:08:20.600 --> 0:08:24.000 you see banks that are still tightening lending standards. You 0:08:24.040 --> 0:08:27.320 think about many people right now have a mortgage at 0:08:27.520 --> 0:08:30.680 three percent three and a half percent. Mortgage rates for 0:08:30.720 --> 0:08:32.880 thirty or fixed rate mortgage are seven percent now, So 0:08:33.040 --> 0:08:36.720 over time people will start slowly but surely resetting into 0:08:36.760 --> 0:08:41.679 those higher mortgages. But those effects that slow the economy 0:08:42.000 --> 0:08:44.840 work with a very long lag. You're not going to 0:08:44.840 --> 0:08:46.960 be very incentivized to sell your house now and go 0:08:46.960 --> 0:08:48.960 pick up a new house at a higher mortgage rate. 0:08:49.559 --> 0:08:51.480 So that will only happen if you have a life event, 0:08:51.520 --> 0:08:54.800 you change your job, or your family size increases. So 0:08:54.840 --> 0:08:56.880 that does slow the economy, but it takes a long time, 0:08:56.920 --> 0:09:00.440 So Lisa, it could be quite a long period of 0:09:00.520 --> 0:09:01.240 higher for longer. 0:09:01.520 --> 0:09:03.880 Andrew Hollanders, thank you so much. You're lighting up the airways. 0:09:03.880 --> 0:09:06.320 You're written in all sorts of emails here, and Andrew Hollanders. 0:09:16.679 --> 0:09:20.400 Emily Rowland joins now cou Chief Investment strategistic John Hancock 0:09:20.559 --> 0:09:23.640 Investment Management. Emily, don't worry, we'll keep him in line. 0:09:23.960 --> 0:09:28.000 Let's talk about China. Emily, do we want stimulus out 0:09:28.000 --> 0:09:30.040 of China right now? If you have a seat at 0:09:30.040 --> 0:09:31.000 the federers. 0:09:30.720 --> 0:09:34.600 F well, I don't know if it's working necessarily. You 0:09:34.640 --> 0:09:36.800 look at some of this lone growth data this morning 0:09:36.880 --> 0:09:39.640 and it's simply not showing up. I think the China 0:09:39.720 --> 0:09:42.720 stimulus narrative is one that the markets have really loved 0:09:42.720 --> 0:09:45.400 and embraced, and we're getting a bit of a reality 0:09:45.520 --> 0:09:48.079 check on that as it relates to commodity prices. All 0:09:48.120 --> 0:09:50.560 of this news of stimulus has certainly pushed them up, 0:09:50.600 --> 0:09:54.160 pushed inflation expectations higher, and that's become a big problem 0:09:54.200 --> 0:09:56.959 for the Fed here, who certainly has not yet claimed 0:09:57.040 --> 0:10:00.720 victory on inflation. So we're watching that really cool here, 0:10:01.040 --> 0:10:03.080 but a lot of mixed messages. And by the way, 0:10:03.080 --> 0:10:06.080 speaking of mixed messages, I understand trying to get to 0:10:06.120 --> 0:10:09.000 the weekend here. As you've said all morning long, if 0:10:09.000 --> 0:10:12.120 you watch the macro and you watch the fundamentals, this week, 0:10:12.160 --> 0:10:14.600 the market action didn't really make a ton of sense. 0:10:15.320 --> 0:10:15.520 You know. 0:10:15.559 --> 0:10:18.000 Of course, we had the treasury auction that you talked about, 0:10:18.040 --> 0:10:21.000 pushing yields higher, but at the same time, the economic 0:10:21.040 --> 0:10:24.160 data were pretty disappointing. You know, you had softer inflation, 0:10:24.800 --> 0:10:27.480 you had initial claims picking up, you had dubvish comments 0:10:27.480 --> 0:10:30.240 from the Fed. Meanwhile, the tenure treasureyeld sort of right 0:10:30.280 --> 0:10:33.600 where we started, and European equities trading on another planet 0:10:33.679 --> 0:10:34.080 right now. 0:10:34.320 --> 0:10:36.439 And Emily, it was in your note you talk about 0:10:36.480 --> 0:10:39.520 whipsaw and I think it's perfect if there's one big 0:10:39.559 --> 0:10:42.280 group whipsaw here over the last number weeks, whatever anybody's 0:10:42.600 --> 0:10:45.600 belief with that said, in the group whipsaw that we're 0:10:45.600 --> 0:10:49.040 in right now. How do you position out one year 0:10:49.160 --> 0:10:52.200 or two year in my depleted two to oh one K. 0:10:53.840 --> 0:10:56.880 Yeah, it's tough. So the macro signals right now are 0:10:56.960 --> 0:10:59.880 like a stoplight. They're going from red to green and 0:11:00.360 --> 0:11:02.920 back to red. And we look at the macro messages 0:11:03.000 --> 0:11:05.560 right now is more of a yellow. You know, you 0:11:05.600 --> 0:11:07.680 want to maybe take your foot off the gas a 0:11:07.679 --> 0:11:10.120 little bit. You want to look both ways, You want 0:11:10.120 --> 0:11:13.320 to proceed with caution. So we're starting to see this 0:11:13.400 --> 0:11:16.280 big shift in sentiment. It's been pulled back a little 0:11:16.280 --> 0:11:18.920 bit over the last couple of weeks from fear to greed, 0:11:19.000 --> 0:11:22.040 and you're starting to see more cyclical, higher beta parts 0:11:22.040 --> 0:11:25.160 of the market outperforming. We would be mindful of taking 0:11:25.200 --> 0:11:27.640 too much risk in this environment. Again, we still want 0:11:27.679 --> 0:11:30.760 to be invested. We still like higher quality stocks. We 0:11:30.800 --> 0:11:33.479 think bonds can do more heavy lifting in a portfolio. 0:11:33.760 --> 0:11:36.560 But look, the leading economic indicators have been negative for 0:11:36.679 --> 0:11:39.600 twelve straight months. The yield curve has been inverted for 0:11:39.679 --> 0:11:43.400 thirteen straight months. I mean, it's just become exhausting. But 0:11:43.440 --> 0:11:46.200 we need to stick to our premise here. We need 0:11:46.240 --> 0:11:47.960 to stick to our work that tells us that our 0:11:48.000 --> 0:11:51.360 recession is likely to unfold due to the lagged impact 0:11:51.360 --> 0:11:54.800 of FED tightening. It's becoming difficult to stay patient for sure. 0:11:55.080 --> 0:11:56.520 I just want to pick up on what you said 0:11:56.520 --> 0:11:59.560 about European equity is trading on another planet, what do 0:11:59.559 --> 0:12:01.360 you mean, And just the fact that they haven't sold 0:12:01.360 --> 0:12:03.720 off more aggressively in the face of China weakness. 0:12:04.559 --> 0:12:07.200 Yeah, I think it's notable to look at the strength 0:12:07.280 --> 0:12:11.760 particularly versus domestic equities. As of late, Europe has certainly 0:12:11.840 --> 0:12:15.439 been more tied to China stimulus. You've seen that, You've 0:12:15.440 --> 0:12:17.880 seen a big momentum trade there. I think is some 0:12:18.000 --> 0:12:20.960 short covering has resulted in a lot of gains in 0:12:21.000 --> 0:12:24.400 that market, and you're seeing some major companies in Europe 0:12:24.480 --> 0:12:28.200 disappointing on the earnings front, some solvency issues there. You know, 0:12:28.320 --> 0:12:31.160 markets really seem to be very much enamored with Europe. 0:12:31.200 --> 0:12:33.920 They're very much enamored with this China story, and it 0:12:34.000 --> 0:12:36.640 just doesn't match up with the macroeconomic dan look at 0:12:36.640 --> 0:12:40.000 the City Group Economic Surprise Index. It's surging in the 0:12:40.120 --> 0:12:42.760 United States right now, and it's about negative one hundred 0:12:42.800 --> 0:12:45.800 in Europe, and yet those markets are outperforming to US 0:12:45.880 --> 0:12:49.280 as macro investors. We want to continue to emphasize domestic 0:12:49.320 --> 0:12:52.160 equities because of the relative economic strength here. 0:12:52.440 --> 0:12:56.120 That said, US tech underperformed this year. This week, I 0:12:56.120 --> 0:12:58.800 should say not this year. This year, they've outperformed tremendously. 0:12:58.880 --> 0:13:01.360 But how much is that going to be a real 0:13:01.480 --> 0:13:03.520 challenge to your thesis if it continues. 0:13:04.679 --> 0:13:06.760 Yeah, we've definitely seen a pull back there, and of 0:13:06.800 --> 0:13:10.199 course valuations were stretched and we were expecting to potentially 0:13:10.280 --> 0:13:13.880 see you know, a bit of a profit taking there. 0:13:14.000 --> 0:13:16.800 And you know, I still wonder if tech is the 0:13:16.840 --> 0:13:20.080 biggest issue that market should be focused on. It's hard 0:13:20.120 --> 0:13:22.400 not to like quality in this type of a market, 0:13:22.480 --> 0:13:24.959 and of course tech is your poster child there. I 0:13:25.000 --> 0:13:28.360 think over three five years we've seen the US technology 0:13:28.559 --> 0:13:32.199 sector has produced of the best earnings globally. Of course, 0:13:32.200 --> 0:13:34.480 we want to diversify from some of that. Look at 0:13:34.480 --> 0:13:36.600 some of the ways the sectors that are starting to 0:13:36.640 --> 0:13:39.760 perk up a little bit here. Healthcare one of our favorites. 0:13:39.800 --> 0:13:42.480 It's trading at a meaningful discount to the S and 0:13:42.520 --> 0:13:45.559 P five hundred. It's got the quality metrics that we love, 0:13:45.640 --> 0:13:48.080 great balance sheets, good return on equity, and it's more 0:13:48.120 --> 0:13:50.680 defensive so I do think that the baton can be 0:13:50.800 --> 0:13:53.400 passed here in the back hap of the year into 0:13:53.480 --> 0:13:56.360 next year to some of these more defensive sectors in 0:13:56.440 --> 0:13:59.040 order to create that balance away from the tech sector. 0:13:59.160 --> 0:14:01.400 Emily, final question, and you on the strong doll to 0:14:01.440 --> 0:14:04.640 train as well, then yeah, we have been. 0:14:04.679 --> 0:14:06.560 The way that we look at the dollar is where's 0:14:06.600 --> 0:14:10.360 the best relative economic growth and which central bankers globally 0:14:10.400 --> 0:14:13.120 are going to be continuing to tighten the most. And 0:14:13.160 --> 0:14:16.120 because of the relative strength we talked about here in 0:14:16.160 --> 0:14:19.240 the US, we think that's the US Federal Reserve. We 0:14:19.280 --> 0:14:21.880 think the US economy is doing the best. We also 0:14:21.920 --> 0:14:24.600 think if a recession on folds, which is our base case, 0:14:24.640 --> 0:14:25.880 there should be a bit. 0:14:25.800 --> 0:14:26.760 For US dollars. 0:14:26.800 --> 0:14:29.080 I don't know that the dollar goes gangbusters like it 0:14:29.160 --> 0:14:31.840 did in the first few quarters of twenty twenty two, 0:14:32.200 --> 0:14:34.920 but I would say I would fade any weaker dollar 0:14:35.000 --> 0:14:35.520 trade here. 0:14:35.720 --> 0:14:37.720 You're got to pay Malkes on another planet. That's the 0:14:37.720 --> 0:14:40.120 headline from every island of John Hancock. Whether we intended 0:14:40.160 --> 0:14:43.000 that's the headline or not, it will be heavily. Thank you. 0:14:47.040 --> 0:14:49.240 To brief you forward in the next week. Joseph Feldman 0:14:49.280 --> 0:14:51.840 Joins just senior research analysts. You working with Dana Telsea 0:14:51.920 --> 0:14:54.160 at the Telsia Advisory Group. They've been in a fire 0:14:54.760 --> 0:14:56.520 the last forty eight hours. Joe, I want to get 0:14:56.520 --> 0:14:59.640 the big box, but I really want to frame out 0:14:59.640 --> 0:15:03.560 the different here at Tarja. I've got a women's boxy 0:15:03.800 --> 0:15:09.240 zip up denim jacket wild Fable Blue denim for thirty 0:15:09.280 --> 0:15:13.240 five dollars. That's what you're looking at, your colleague in crime, 0:15:13.320 --> 0:15:16.800 Dana Telsey's looking at the MEDUSA ninety five. Do a 0:15:16.880 --> 0:15:19.920 leap of denim jacket over at for Sachi for one 0:15:19.960 --> 0:15:23.440 three d and fifty dollars. When all this is done 0:15:23.560 --> 0:15:26.080 three years out, is there going to be anything left 0:15:26.120 --> 0:15:32.600 in the middle between Coach Corps, Versace or LVMH and Target. 0:15:32.720 --> 0:15:35.080 What's the middle end up doing in the coming years. 0:15:35.840 --> 0:15:38.640 Yeah, the middle is kind of squeezed right now, and 0:15:38.680 --> 0:15:42.359 that's where we're seeing that middle has been trading down 0:15:42.440 --> 0:15:44.680 and then the upper end is kind of staying where 0:15:44.680 --> 0:15:48.600 they are. It's that aspirational customer has traded down a little, 0:15:48.600 --> 0:15:50.880 the middle has traded down. So I think that still 0:15:50.920 --> 0:15:56.000 positions Target and Walmart pretty well. Data. I think likes 0:15:56.080 --> 0:16:00.200 the deal with Tapestry and Capri in the sense you 0:16:00.200 --> 0:16:02.840 can bring these two companies together. There are a house 0:16:02.880 --> 0:16:04.640 of brands, and I know there are more of those 0:16:04.720 --> 0:16:09.280 middle aspirational type brands, but you can operate them more efficiently, 0:16:09.400 --> 0:16:11.920 and maybe the way you allocate resources to the different 0:16:11.920 --> 0:16:14.400 brands and do the back end can make it more 0:16:14.440 --> 0:16:18.000 profitable and make them more of a stronger venture to 0:16:18.040 --> 0:16:20.240 go forward. So I think that we kind of like 0:16:20.400 --> 0:16:24.600 that lineup and the strategy there. And you know, honestly, 0:16:24.640 --> 0:16:27.560 the Capricecide has been kind of languishing for a little bit, 0:16:27.640 --> 0:16:29.360 and so I think that now if you put it together, 0:16:29.400 --> 0:16:31.760 you could maybe make a go of it, make it stronger. 0:16:32.200 --> 0:16:34.680 That all said, the near term, the consumer's still under 0:16:34.680 --> 0:16:38.320 a lot of pressure. Discretionary sales have been slow, and 0:16:38.440 --> 0:16:41.920 especially big ticket discretionary sales have been slow. And so 0:16:42.080 --> 0:16:44.560 that's where we're at heading into this earning season. And 0:16:44.560 --> 0:16:46.120 why we like Walmart. 0:16:45.760 --> 0:16:49.960 Engineer well Walmart yet today outperformance target by massive margin 0:16:50.080 --> 0:16:53.160 underperformance from Target outperformance from Walmart. 0:16:53.320 --> 0:16:53.520 Joe. 0:16:53.520 --> 0:16:56.320 There's a word I really don't like around the retail names. 0:16:56.400 --> 0:16:58.800 It's shrink. Why don't they just call it what it is? 0:16:59.520 --> 0:17:01.360 Theft and how much are we going to be talking 0:17:01.400 --> 0:17:02.320 about that next week? 0:17:03.400 --> 0:17:04.960 Yeah, I think we're going to hear a lot about 0:17:04.960 --> 0:17:08.200 Shrink next week. You know. Target has laid it out 0:17:08.240 --> 0:17:10.560 and told us, you know, they're expecting around five hundred 0:17:10.560 --> 0:17:14.480 million of incremental strength this year. Walmart's got a big 0:17:14.560 --> 0:17:16.800 number as well. Now they haven't quantified it, but it 0:17:16.920 --> 0:17:20.280 is big and Home Depot and Low's and Best Buying, 0:17:20.320 --> 0:17:22.240 you go down the list, and it's been a big 0:17:22.280 --> 0:17:25.399 problem for everybody. I mean, theft has really kicked in 0:17:25.520 --> 0:17:28.840 higher you know, the shrink side. Yeah, there's always been 0:17:28.960 --> 0:17:32.840 damages for turns that you can't really sell, things that 0:17:32.920 --> 0:17:34.960 maybe walk out the store with an employee every once 0:17:34.960 --> 0:17:37.679 in a while, things like that. But this organized crime 0:17:37.760 --> 0:17:40.119 that's happening in retail is really a big problem for 0:17:40.160 --> 0:17:44.000 this especially for these big box retailers. You know, Dana 0:17:44.240 --> 0:17:46.840 actually recently was in Beverly Hills and witness at firsthand 0:17:46.840 --> 0:17:49.080 one of those grabbing gos somebody just running out of 0:17:49.720 --> 0:17:52.800 the high end store and literally right in front of her, 0:17:52.800 --> 0:17:55.880 And it's just it's frustrating to see and it's scary 0:17:56.560 --> 0:17:58.120 for the average consumer to see that. 0:17:58.080 --> 0:18:01.159 Happen, and it's something that we've seen, particularly with respect 0:18:01.200 --> 0:18:04.440 to a lot of drug stores, particularly in city centers. 0:18:04.520 --> 0:18:07.439 I'm wondering how much this pushes the emphasis then on 0:18:07.480 --> 0:18:10.119 the online presences of some of these companies, and I 0:18:10.160 --> 0:18:13.520 think of Walmart in particular, which is actually putting up 0:18:13.560 --> 0:18:16.520 competition to the likes of Amazon with what they can 0:18:16.560 --> 0:18:17.760 offer in e commerce. 0:18:19.200 --> 0:18:21.560 Yeah. Absolutely, I mean the e commerce side of the 0:18:21.560 --> 0:18:25.160 business at Walmart, at Target, really many of the big 0:18:25.160 --> 0:18:30.960 boxes improved significantly. They're very robust, and we see Walmart 0:18:31.359 --> 0:18:33.560 is going toe to toe with Amazon, especially on the 0:18:33.560 --> 0:18:36.560 retail side of it. It's clearly Walmart doesn't have AWS, 0:18:36.960 --> 0:18:39.399 but on the retail side and the physical presence, to 0:18:39.520 --> 0:18:43.000 leverage the physical with the digital is a real advantage, 0:18:43.080 --> 0:18:46.280 especially relevant to Amazon at the moment. Now Amazon wants 0:18:46.320 --> 0:18:49.440 to get more physical. They're trying to open grocery stores. 0:18:49.480 --> 0:18:51.560 I think we'll see that accelerate once they've kind of 0:18:51.560 --> 0:18:55.240 figured out the box that they want. But there's definitely 0:18:55.320 --> 0:18:57.399 this conflict is going to be around for a while, 0:18:57.760 --> 0:19:00.520 and you can get great value of both of these tailers, 0:19:02.080 --> 0:19:05.359 adding Target, adding Costco, adding all the other big box guys, 0:19:05.400 --> 0:19:08.040 And you're absolutely right, you know, that is a way 0:19:08.080 --> 0:19:11.800 around this. We have seen East commerce sales decelerate a 0:19:11.800 --> 0:19:14.879 little bit, you know, broadly speaking in retail as people 0:19:14.920 --> 0:19:16.840 have returned to the stores a bit more. But that's 0:19:16.880 --> 0:19:21.399 definitely a strong area of opportunity for the retailers forward. 0:19:21.520 --> 0:19:24.160 Walmart's kind of a confusing read on the US consumer 0:19:24.280 --> 0:19:26.320 because on one hand, if it does well, that's a 0:19:26.320 --> 0:19:28.200 good thing. People are spending money. On the other hand, 0:19:28.240 --> 0:19:30.320 it's been people who are trading down, who are trying 0:19:30.320 --> 0:19:32.480 to spend less, who are going from Whole Foods or 0:19:32.560 --> 0:19:35.480 whole paycheck is Ton likes to call it to Walmart 0:19:35.600 --> 0:19:39.960 and looking for a bargain. So is Walmart's gain everybody 0:19:39.960 --> 0:19:43.000 else's pain? Is it sort of a counter indicator of 0:19:43.080 --> 0:19:43.960 consumer strength. 0:19:45.000 --> 0:19:48.439 Well, that's a great point, you know that it is 0:19:48.640 --> 0:19:51.280 an indicator of where the health of the consumer is now. 0:19:51.320 --> 0:19:54.520 The good sign is the consumer is still spending, they 0:19:54.560 --> 0:19:56.800 are trying to save money. They may be trading down, 0:19:56.840 --> 0:19:59.399 they may be trading in. But Walmart has done a 0:19:59.440 --> 0:20:02.359 really good job over the past few years and making 0:20:02.640 --> 0:20:06.159 that their business model stickier, and so they're retaining a 0:20:06.200 --> 0:20:09.280 lot of those customers. So they've seen trade down and 0:20:09.359 --> 0:20:12.600 trade into the business, but they're seeing those people stay. 0:20:12.920 --> 0:20:15.479 So yes, that's not great for the rest of retail. 0:20:15.480 --> 0:20:18.040 It just shows that Walmart's gaining market share. But some 0:20:18.080 --> 0:20:21.119 of their latest formats, especially the ones over in New 0:20:21.200 --> 0:20:24.640