Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
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Speaker 1: All right, let's talk about the global energy space. I'm
Speaker 1: looking at WTI coude oil a little bit higher today,
Speaker 1: about six to nine dollars about. There's a lot going
Speaker 1: on there. We got some deals going on there. We
Speaker 1: got Netherlands closing a gas field when there rushes at
Speaker 1: a war with Ukraine. I have no idea what's going on.
Speaker 1: Scott Levine does, and Fernando vli He also does. They
Speaker 1: both cover the energy space for Bloomberg Intelligence. Fernando joins
Speaker 1: us via Zoom and Scott Levine is here in our
Speaker 1: Bloomberg Interactive Brokers studio. So Scott, let's start with you here.
Speaker 1: We've got an m and a deal in the energy space,
Speaker 1: in the shale space. Talk to us about what's happening today, Yes.
Speaker 3: Paul, So basically what we have is Patterson Uti, which
Speaker 3: is the number two land driller in the US buying
Speaker 3: or merging with you look at it a company called
Speaker 3: Next Tier oil Field Solutions, which is a top four
Speaker 3: player in pressure pumping. And you know, basically Patterson has
Speaker 3: been rumored to be disinterested in fracking over the years
Speaker 3: and will effectively be the number two player in both
Speaker 3: spaces and really the only major player in both fracking
Speaker 3: and pressure pumping. So this is probably the largest deal
Speaker 3: that we've seen since twenty twenty, and you know, raises
Speaker 3: a lot of interesting questions about what we're looking at
Speaker 3: in a potentially slowing shale market.
Speaker 4: Fernando, I want to bring you into this conversation. What's
Speaker 4: your take on oil demand growth moving forward?
Speaker 5: Well, I think there are two paradigms. The short term,
Speaker 5: where you know, as aviate I was saying about interest
Speaker 5: rates and impacting demand that ultimately will translate into lower
Speaker 5: oil them in because of lower consumption. Oil still used
Speaker 5: in the majority of our transportation, especially for industrials and
Speaker 5: for all of our retails.
Speaker 6: So if that.
Speaker 5: Is at a lower level because of higher interest rates globally,
Speaker 5: then oil demand should also falter. But then in the
Speaker 5: longer term. You know, we saw the E I E
Speaker 5: I should say, coming out with their prediction that peak
Speaker 5: oil demand is within the decade.
Speaker 6: We're a little slower on that.
Speaker 5: We think there's still a lot of hurdles to clear
Speaker 5: before we can start weaning off of oil. You know,
Speaker 5: as a reminder of five billion people in the emergent
Speaker 5: market still consume a very small amount of still consume
Speaker 5: a very small amount of energy, and oil will be
Speaker 5: critical in improving their standard of living and continuing to grow.
Speaker 1: Hey, Scott, when we see an m and a deal
Speaker 1: of this size and this magnitude in the shale space,
Speaker 1: what does it tell you about kind of where we
Speaker 1: are in the cycle, where the next several years of
Speaker 1: the shale business looks like because it's been such a
Speaker 1: growth area for domestic US energy.
Speaker 3: Yeah, no, I think it clearly suggests that we're heading
Speaker 3: in the wrong direction here. Really, the rig coount has
Speaker 3: fallen close to ten percent this year. I think the
Speaker 3: messaging initially was that it was due almost entirely to
Speaker 3: pull back in natural gas drilling resulting from the collapse
Speaker 3: seventy five percent collapse in Henry hub prices. You know,
Speaker 3: the messaging was that we'd see a strengthen the oil
Speaker 3: side compensating for the weakness and the gas side, but
Speaker 3: we've yet to see that in the rig counts. Recounts
Speaker 3: have gone down by almost fifty rigs in the last
Speaker 3: month or so, and so the appeal here, you know,
Speaker 3: more than anything else, seems to be the two hundred
Speaker 3: mill and synergies that Patterson will realize on this deal.
Speaker 3: And so while seventy dollars oil is not the worst
Speaker 3: thing in the world for the industry, given some of
Speaker 3: the broader macro concerns that are out there, this suggests
Speaker 3: to me that we're heading through a slow patch at
Speaker 3: a minimum, and that you know, this is more of
Speaker 3: a defensive deal than an offensive one.
Speaker 4: Do you have a particular target, Scott when it comes
Speaker 4: to if you're looking at US CREUD prices versus BRIN
Speaker 4: at year end versus what those could be at the
Speaker 4: end of twenty twenty four.
Speaker 3: Yeah, No, I think the expectation, you know, would be
Speaker 3: that we're about at and Fernando probably can elaborate on
Speaker 3: this a little bit more as well on the oil side,
Speaker 3: that maybe we're looking at stability, maybe some slight improvement potentially,
Speaker 3: but I can definitely say that what we've seen so
Speaker 3: far this year in the US has been weaker than
Speaker 3: we would have expected, and I think anybody would have expected.
Speaker 3: And you know, I would turn it over to Fernando,
Speaker 3: you know, to elaborate further on oil price.
Speaker 4: Specific Yeah, Fernando, what are your thoughts as far as
Speaker 4: the trajectory when you're looking at US versus Brent?
Speaker 5: And we think, you know, you can't fight the FED
Speaker 5: right now. And we we along with Mike mcglowane, we
Speaker 5: have talked a lot about how we think it's lower
Speaker 5: at first, because the demand side of the equation is
Speaker 5: going to be the most important. We think opex cuts
Speaker 5: are lowering the supply of Brent. That's widened the differential
Speaker 5: between WTI and Brent. And then now we've had a
Speaker 5: small amount of acquisitions in the strategic Patrol and reserve
Speaker 5: boosting that wt I demand a little bit, So that's
Speaker 5: widened that gap, and we think we could go above
Speaker 5: five dollars a barrow, maybe five point fifty in the
Speaker 5: discount between WTI and Brent for the remainder of the year.
Speaker 1: Hey, hey, Fernando, I see in a news here that
Speaker 1: our good friends in Holland are closing Europe's biggest gas field.
Speaker 1: What's going on there? Don't they know? There's war in
Speaker 1: Ukraine and gases short? I mean, what's going on there?
Speaker 7: They do?
Speaker 5: It's long been planning a plan to close the Groningen field,
Speaker 5: as you said, the Europe's largest field, because of earth
Speaker 5: tremors in the Netherlands. They actually were supposed to close
Speaker 5: last year and they've extended it because of the war.
Speaker 5: But now with the inventory is refilled, they feel more
Speaker 5: comfortable closing that closing that field, you know, it's probably
Speaker 5: not the greatest decision from an energy security standpoint. Perhaps
Speaker 5: a little bit of security again false sense of security
Speaker 5: because we had such a mild winter this past year,
Speaker 5: and it definitely makes Europe lean more on USLNG imports.
Speaker 1: Hey Scott, just real quick thirty seconds. Are we going
Speaker 1: to see more emine activity and kind of your space
Speaker 1: the energy space?
Speaker 7: Yeah?
Speaker 3: Now for services, I think we may see some more activity,
Speaker 3: particularly in the US. All you know, this is again
Speaker 3: the first survey, This is deal that we've seen in
Speaker 3: recent memory of a public to public as opposed to
Speaker 3: the EMP space where has put a ton of deal making.
Speaker 3: So particularly if the outlook continues to deteriorate and rigganfraccounts
Speaker 3: move lower, I think you could look for an increase
Speaker 3: an M and A activity from here.
Speaker 1: All right, guys, thanks so much for joining us. Love
Speaker 1: getting that roundtable on global energy. We've got some M
Speaker 1: and A going on there in the services side in
Speaker 1: the US, and we've of course got the global supply
Speaker 1: and demand for energy. Scott Levine and Fernando Valle, both
Speaker 1: senior analysts covering the energy space for Bloomberg Intelligence, joining
Speaker 1: us here, so we appreciate getting their thoughts.
Speaker 6: You're listening to the team.
Speaker 8: Ken's a our live program Bloomberg Markets weekdays at ten
Speaker 8: am Eastern.
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Speaker 1: Jess Man, Paul Sweene here in the Bloomberg Interactor Brokers
Speaker 1: a studio, want to get right for our next guest,
Speaker 1: Eric Lynch. He's a managing director part of the investment
Speaker 1: committee at Sharf Investments are based out there in the
Speaker 1: West Coast in the Bay Area. Eric Joins is live
Speaker 1: here on a Bloomberg and Active Brookers studio, Eric, thanks
Speaker 1: so much for joining us here, boy, twenty four hours.
Speaker 1: We've had a lot of ego data, a lot of
Speaker 1: central banks to Federal Reserve yesterday, the ECB today, they're
Speaker 1: both talking tough here. How do you guys in Shriff
Speaker 1: Investments put it all together and think about what you
Speaker 1: want to do for your clients.
Speaker 9: Yeah, it's a great question. Thanks for having me, Paul.
Speaker 9: You know, I think this is a great reminder that
Speaker 9: as investors, it's important to remember to follow this signal,
Speaker 9: not the noise, and signals earnings. Right, we're already in
Speaker 9: a three quarter kind of tracking earnings recession. And so
Speaker 9: even if the FED is going to go higher for
Speaker 9: longer interest rates, and I think FED made it quite
Speaker 9: I think the FED made it quite clear yesterday that
Speaker 9: they will slow things down. So we think earnings are
Speaker 9: going to be restricted going forward. So, you know, I
Speaker 9: think it's time for an earnings playbook, if you will.
Speaker 4: So I'm glad you brought that up, because especially if
Speaker 4: you looked at the S and P five hundred last
Speaker 4: year excluding earnings, or the energy sector in particular, when
Speaker 4: you were looking at that, the Arenas recession actually began
Speaker 4: in the second quarter of last year, So you kind
Speaker 4: of the flip side of that, where energy sort of
Speaker 4: masking some of the brighter times that other industries are
Speaker 4: seeing there. So even when you were looking at that,
Speaker 4: there's an expectation when you're excluding energy that we're going
Speaker 4: to see double digit growth again for those other sectors.
Speaker 4: Where are you in particular when it comes to some
Speaker 4: of these sectors looking that sees more bright spots?
Speaker 9: Yeah, no, good question. I think there's three ways to
Speaker 9: kind of play this. One is to play this transition
Speaker 9: of spending consumption from goods to services, right. I think
Speaker 9: it's really interesting that investors are still a little slow
Speaker 9: to the draw on this. Last month flash PMI came
Speaker 9: out for services and manufacturing, and services blew it away.
Speaker 9: Manufacturing was in a contraction, so as a leading indicator,
Speaker 9: we're seeing that also on the ground level, right with
Speaker 9: travel companies blowing away earnings and then meanwhile home depot
Speaker 9: target goods companies reducing guidance. So this kind of revenge travel,
Speaker 9: revenge servicing, elective surgeries. You saw the medical loss ratios
Speaker 9: increasing for the insurance under riders yesterday because the older
Speaker 9: folks are having revenge surgeries. And so that's a way
Speaker 9: to get some writings growth for sure. Another way is
Speaker 9: I think just stick to defensive companies with low GDP correlation.
Speaker 9: The average lag between a recession and when the FED
Speaker 9: pauses since nineteen eighty nine four instrate cycles has been
Speaker 9: one year, and so I think it's a little premature
Speaker 9: to bake in forecast for a big earnings ramp going forward.
Speaker 9: And so I think it's still time to be kind
Speaker 9: of defensive.
Speaker 4: Interesting because then your recession take would be you're expecting
Speaker 4: one to happen later this year.
Speaker 9: It's hard to say. I think it's a full zerrand
Speaker 9: to time it, as we've all been reminded this year,
Speaker 9: right as we've been constantly looking around the corner for
Speaker 9: this recession to occur.
Speaker 4: But where would it be driven by? I mean, I
Speaker 4: would think it have to be consumer spending, but we're
Speaker 4: not necessarily seeing that happen yet. Even retail sales this
Speaker 4: morning came in stronger than expected.
Speaker 9: Yeah, no, they were very strong, and so that's definitely
Speaker 9: the boldcase. I think the baarcase would be, you know,
Speaker 9: I think the operative words in Howe's presser yesterday, where
Speaker 9: people are suffering, right, and I think we need to
Speaker 9: remind ourself that only I think the top ten percent
Speaker 9: of wealth in this country owns eighty percent of stocks.
Speaker 9: And so if you look at the FEDS mandates clearly
Speaker 9: full employment or inflation, we're fully employed. So I think
Speaker 9: power made it clear that price inflation they're going to
Speaker 9: squash it. Historically, to answer your question, the only way
Speaker 9: to do that is to increase you know, unemployment slow
Speaker 9: things down, which obviously creates a slow down in consumption.
Speaker 9: So historically, yeah, employment is what precipitates a recession. And
Speaker 9: really the last general standing are in fact GDP growth
Speaker 9: and employment.
Speaker 1: All right, So in terms of a recession or earning's
Speaker 1: playbook here earnings recession playbook, I kind of feel like
Speaker 1: there still may be some earnings risk left in this market.
Speaker 1: We still get the S and P five hundred. Earnings
Speaker 1: are two hundred and twenty bucks roughly for this year.
Speaker 1: Some people are saying it could be two hundred, maybe
Speaker 1: even below that. So how do you guys think about
Speaker 1: earnings recession and kind of how that influence is kind
Speaker 1: of what stocks you look at.
Speaker 9: Yeah, I think we're still think there's risks to the
Speaker 9: downside to that two twenty five number. As you mentioned,
Speaker 9: you know, the issue there is that baked into that
Speaker 9: consensus is nine percent year via growth for Q four.
Speaker 9: It just seems a little unrealistic. It's possible, for sure,
Speaker 9: to your point, things were hanging in there, consumption wising
Speaker 9: that today's consumer spending numbers where we tell the sales numbers,
Speaker 9: were interesting. But nevertheless, you know, we're a little worried
Speaker 9: about the impact the lagged effect of the monetary tightening,
Speaker 9: the credit tightening specifically, is probably going to in our opinion,
Speaker 9: starts going things down further as year progresses. The other
Speaker 9: thing that I don't think is giving enough play and
Speaker 9: investor kind of discussions is that the net profit margins
Speaker 9: seysm P five hundred are still at all time highs,
Speaker 9: and so there's been a structural increase the last twenty years.
Speaker 9: It's been it's accounted for over half of ANNUIPS growth,
Speaker 9: and so if you look at that, it was low
Speaker 9: financial expenses, a global arbitrage of labor and supply chains,
Speaker 9: low transportation. All those tailwes are now headwinds. And then
Speaker 9: you had companies passing on price during the pandemic. So
Speaker 9: we topped out at thirteen percent on net profit margins
Speaker 9: during the pandemic. They're down to eleven baked in that
Speaker 9: consensus number for next year is twelve percent, which should
Speaker 9: still be twenty percent higher than the level they were
Speaker 9: before the pandemic. So I think even independent of the economy,
Speaker 9: what you're seeing on a micro level with companies guidance
Speaker 9: is they keep referring to margins margins being kind of
Speaker 9: constricted going forward.
Speaker 4: So I think that that's the real issue as far
Speaker 4: as especially when it comes to margins. Geenamoorton Adams at
Speaker 4: Bloomberg Intelligence was saying, some of the pain may have
Speaker 4: already been passed and potentially troughing in that first quarter
Speaker 4: moving forward. I mean, what are you seeing and what
Speaker 4: are you hearing from your clients on that end?
Speaker 9: Yeah, I mean, just anecdotally, as investment managers managing a portfolio,
Speaker 9: we're still seeing margin kind of compression or discussions with
Speaker 9: our companies that are reporting on Q one, and none
Speaker 9: of them are really saying, hey, you know, it looks
Speaker 9: better at Q two Q three. Even wages. You know,
Speaker 9: if you look at labor as percentage of GDP, it
Speaker 9: really troughed a couple of years ago in terms of
Speaker 9: a fifty year low, and it's still a point or
Speaker 9: two percentage points lower than average. And so you see
Speaker 9: that with the bargaining power of employees with low unemployment.
Speaker 9: So I think, I think this wage pressure is still there,
Speaker 9: and I think therefore that's what sixty percent or something
Speaker 9: of operating expenses. So I don't think we're done.
Speaker 1: All right, Eric, great stuff. I appreciate you stopping by.
Speaker 10: Eric Lynch.
Speaker 1: He's a managing director on the investment community of Sharf.
Speaker 1: Sharf Investments based in Los Gatos, California, also the home
Speaker 1: of Netflix, little stock out there. So neighbors there in
Speaker 1: Los Gatos and kind of in the Bay are very
Speaker 1: very cool area out there.
Speaker 10: Appreciate it.
Speaker 1: Looking at the markets right here, S and P five
Speaker 1: hundred and a half of one percent, the NASDAK, I'm sorry,
Speaker 1: the Nasdaq is up about half and one percent as well.
Speaker 4: SMB five hundred on track for six consecutive days of games.
Speaker 4: It beats longest streak since November twenty twenty one.
Speaker 1: Running out a little bit too, it some of the
Speaker 1: market folks are telling us, which is good news. It's
Speaker 1: not just Apple and Amazon right pushing this.
Speaker 8: Higher you're listening to the tape cans are live program
Speaker 8: Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio,
Speaker 8: the tune in app, Bloomberg dot Com, and the.
Speaker 6: Bloomberg Business App.
Speaker 8: You can also listen live on Amazon Alexa from our
Speaker 8: flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Speaker 4: Just men.
Speaker 1: Paul Swene here in the Bloomberg Interactive Brokers a studio.
Speaker 1: Want to get right to our next guest, Eric Lynch.
Speaker 1: He's a managing director, part of the investment community. It's
Speaker 1: Sharf Investments are based out there in the West Coast
Speaker 1: in the Bay Area. Eric Joins is live here in
Speaker 1: on our Bloomberg Active Brokers studio. Eric, thanks so much
Speaker 1: for joining us here. Boy, twenty four hours. We've had
Speaker 1: a lot of EGO data, a lot of Central banks
Speaker 1: to Federal Reserve yesterday, the ECB today. They're both talking
Speaker 1: tough here. How do you guys in Sharf Investments put
Speaker 1: it all together and think about what you want to
Speaker 1: do for your clients.
Speaker 9: Yeah, it's a great question. Thanks for having me, Paul.
Speaker 9: You know, I think this is a great reminder that
Speaker 9: as investors it's important to remember to follow this signal,
Speaker 9: not the noise, and signals earnings. Right, We're already in
Speaker 9: a three quarter kind of tracking earnings recession. And so
Speaker 9: even if the FED is going to go higher for
Speaker 9: longer interest rates, and I think FED made it quite
Speaker 9: I think the FED made it quite clear yesterday that
Speaker 9: they will slow things down. So we think earnings are
Speaker 9: going to be restrict did going forward. So you know,
Speaker 9: I think it's time for an earnings playbook, if you will.
Speaker 4: So I'm glad you brought that up, because, especially if
Speaker 4: you looked at the S and P five hundred last
Speaker 4: year excluding earnings or the energy sector in particular, when
Speaker 4: you were looking at that, the aarians recession actually began
Speaker 4: in the second quarter of last year, so you kind
Speaker 4: of the flip side of that, where energy sort of
Speaker 4: masking some of the brighter times that other industries are
Speaker 4: seeing there. So even when you were looking at that,
Speaker 4: there's an expectation when you're excluding energy that we're going
Speaker 4: to see double digit growth again for those other sectors.
Speaker 4: Where are you in particular when it comes to some
Speaker 4: of these sectors looking that sees more bright spots?
Speaker 9: Yeah, no, good question. I think there's three ways to
Speaker 9: kind of play this. One is to play this transition
Speaker 9: of spending consumption from goods to services, right. I think
Speaker 9: it's really interesting that investors are still a little slow
Speaker 9: to the draw on this last month flash PMI came
Speaker 9: out for services and manufacturing, and you know, services blew
Speaker 9: it away. Manufacturing was in a contraction. So as a
Speaker 9: leading indicator, we're seeing that also on the ground level,
Speaker 9: right with travel companies blowing away earnings and then meanwhile
Speaker 9: home depot target goods companies reducing guidance. So this kind
Speaker 9: of revenge travel, revenge servicing, elective surgeries. You saw the
Speaker 9: medical loss ratios increasing for the insurance under riders yesterday
Speaker 9: because the older folks are having revenge surgeries, and so
Speaker 9: that's the way to get some writings growth for sure.
Speaker 9: Another way is I think just stick to defensive companies
Speaker 9: with low GDP correlation. The average lag between a recession
Speaker 9: and when the Fed pauses since nineteen eighty nine four
Speaker 9: interest rate cycles has been one year, and so I
Speaker 9: think it's a little premature to bake in forecasts for
Speaker 9: a big earnings ramp going forward, and so I think
Speaker 9: it's still time to be kind of defensive.
Speaker 4: Interesting because then your recession take would be you're expecting
Speaker 4: one to happen later this year.
Speaker 9: It's hard to say. I think it's a full Zerran
Speaker 9: to time it, as we've all been reminded this year, right,
Speaker 9: as we've been constantly looking around the corner for this
Speaker 9: recession to occur.
Speaker 4: But where would it be driven by? I mean, I
Speaker 4: would think it have to be consumer spending, but we're
Speaker 4: not necessarily seeing that happen yet. Even retail sales this
Speaker 4: morning came in stronger than expected.
Speaker 9: Yeah, no, they were very strong, and so that's definitely
Speaker 9: the boldcase. I think the baarcase would be. You know,
Speaker 9: I think the operative words in Pale's presser yesterday where
Speaker 9: people are suffering, right, and I think we need to
Speaker 9: remind ourselves that only I think the top ten percent
Speaker 9: of wealth in this country owns eighty percent of stocks.
Speaker 9: And so if you look at the FEDS mandates clearly
Speaker 9: full employment or inflation, we're fully employed. So I think
Speaker 9: power made it clear that price inflation they're going to
Speaker 9: squash it. And historically, to answer your question, the only
Speaker 9: way to do that is to increase, you know, unemployment
Speaker 9: slow things down, which obviously creates a slow down in consumption.
Speaker 9: So historically, yeah, employment is what precipitates a recession, and
Speaker 9: really the last general standing are in fact GDP growth
Speaker 9: and employment.
Speaker 1: All right, So in terms of a recession or earnings
Speaker 1: playbook here earnings recession playbook, I kind of feel like
Speaker 1: there still may be some earnings risk left in this market.
Speaker 1: We still get the S and P five hundred earnings
Speaker 1: are two hundred and twenty bucks roughly for this year.
Speaker 1: Some people are saying it could be two hundred, maybe
Speaker 1: even below that. So how do you guys think about
Speaker 1: earnings recession and kind of how that influence is kind
Speaker 1: of what stocks you look at.
Speaker 9: Yeah, I think we're still thinking there's risks to the
Speaker 9: downside to that two twenty five number. As you mentioned,
Speaker 9: you know, the issue there is that baked into that
Speaker 9: consensus is nine percent year of VIA growth for Q four.
Speaker 9: It just seems a little unrealistic. It's possible, for sure,
Speaker 9: to your point, things were hanging in there, consumption wising
Speaker 9: that today's consumer spending numbers where we tell the sales
Speaker 9: numbers were interesting, but nevertheless, you know, we're a little
Speaker 9: wororried about the impact the lagged effect of the monetary tightening.
Speaker 9: The credit tightening specifically, is probably going to, in our opinion,
Speaker 9: start slowing things down further as year progresses. The other
Speaker 9: thing that I don't think is given enough play and
Speaker 9: investor kind of discussions is that the net profit margins
Speaker 9: stetsm F five hundred are still at all time highs,
Speaker 9: and so there's been a structural increase the last twenty years.
Speaker 9: It's been it's accounted for over half of ANNOIPS growth,
Speaker 9: and so if you look at that, it was low
Speaker 9: financial expenses, a global arbitrage of labor and supply chains,
Speaker 9: low transportation. All those tailwes are now headwinds. And then
Speaker 9: you had companies passing on price during the pandemic. So
Speaker 9: we topped out at thirteen percent on net profit margins
Speaker 9: during the pandemic. They're down two eleven baked in that
Speaker 9: consensus number for next year is twelve percent, which should
Speaker 9: still be twenty percent higher than the level they were
Speaker 9: before the pandemic. So I think even independent of the economy,
Speaker 9: what you're seeing in on a micro level with companies
Speaker 9: guidance is they keep referring to margins margins being kind
Speaker 9: of constricted going forward. So I think that's the real
Speaker 9: issue as.
Speaker 4: Far as especially when it comes to margins. Genomorton Adams
Speaker 4: at Bloomberg Intelligence was saying, some of the pain may
Speaker 4: have already been passed and potentially troughing in that first
Speaker 4: quarter moving forward. I mean, what are you seeing and
Speaker 4: what are you hearing from your clients on that end?
Speaker 9: Yeah, I mean, just anecdotally, as investment managers managing a portfolio,
Speaker 9: we're still seeing margin kind of compression or discussions with
Speaker 9: our companies that are reporting on Q one, and none
Speaker 9: of them are really saying, hey, you know, it looks
Speaker 9: better at Q two Q three.
Speaker 6: Even wages.
Speaker 9: You know, if you look at labor as a percentage
Speaker 9: of GDP, it really troughed a couple of years ago
Speaker 9: in terms of a fifty year low, and it's still
Speaker 9: a point or two percentage points lower than average. And
Speaker 9: so you see that with the bargaining power of employees
Speaker 9: with low unemployment. So I think this wage pressure is
Speaker 9: still there, and I think therefore that's what sixty percent
Speaker 9: or something of operating expenses. So I don't think we're done.
Speaker 1: All right, Eric, great stuff, appreciate you stopping buy Eric Lynch.
Speaker 1: He's a managing director on the investment community of Sharf.
Speaker 1: Sharf Investments based in Los Gatos, California, also the home
Speaker 1: of Netflix, little stock out there. So neighbors there in
Speaker 1: Los Gatos and kind of in the Bay are very
Speaker 1: very cool area out there.
Speaker 10: Appreciate it.
Speaker 1: Looking at the markets right here, S and P five
Speaker 1: hundred and a half of one percent the NASDAK, I'm sorry,
Speaker 1: the Nasdaq is up about a half a one percent
Speaker 1: as well.
Speaker 4: SMB five hundred on track for six consecutive days of games.
Speaker 4: It beats longest streak since November twenty twenty one.
Speaker 1: Running out a little bit too with some of the
Speaker 1: market folks are telling us, which is good news. It's
Speaker 1: not just Apple and Amazon right pushing this higher.
Speaker 8: You're listening to the Team Can't Live program Bloomberg Markets
Speaker 8: weekdays at ten am Eastern on Bloomberg dot Com, the
Speaker 8: iHeartRadio app and the Bloomberg Business app.
Speaker 6: Or listen on demand wherever you get your podcast.
Speaker 1: All right, let's get back to kind of what's been
Speaker 1: the story for markets earlier the last twenty four thirty
Speaker 1: six hours.
Speaker 10: Decisions exactly, and then keep coming.
Speaker 4: You mentioned we have the big Japan overnight.
Speaker 1: Okay, so we'll keep an eye on that. But of
Speaker 1: course we have that PBOCC ECB, lots of initials out there,
Speaker 1: but we know what they are mean, and so does
Speaker 1: our next guest, doctor Vania Starvrakeva. She is a professor
Speaker 1: of economics at the London Business School. Professor, thanks so
Speaker 1: much for joining us here. I mean again, can you
Speaker 1: put in the context for us kind of how you
Speaker 1: frame out what we've heard from the US Federal Reserve
Speaker 1: and the European Central Bank over the last twenty four hours.
Speaker 1: How does that impact your view?
Speaker 11: So thank you so much for having me. It's always
Speaker 11: a pleasure to participate. So I think what might happen
Speaker 11: in the future is we might see an interesting divergence
Speaker 11: potentially between the US and Europe. So we often tend
Speaker 11: to see the US being the leader in terms of
Speaker 11: like the beginning of the hiking cycle, the the word
Speaker 11: the first to move, followed by banking and an ECB. Now,
Speaker 11: usually you might expect that the US is going to
Speaker 11: be the leader in terms of when they're going to
Speaker 11: stop hiking. So the FED of course decided to pose
Speaker 11: for essentially one round, and then there's quite a lot
Speaker 11: of speculation that this is a bit unusual because there
Speaker 11: were positive surprises regarding real GDP growth and unvariable, so
Speaker 11: no one expected them to pose given that actually the
Speaker 11: data on economic performance was better than expected. My opinion
Speaker 11: is that actually what might be happening is we're seeing
Speaker 11: potentially the beginning of the FAT preparing us for a
Speaker 11: higher inflation target. So that is not something that I
Speaker 11: here discussed a lot, but all central banks acknowledging that
Speaker 11: is going to take at least two years to go
Speaker 11: back to the inflation target. I don't believe that necessarily
Speaker 11: they would actually want to go back to two percent.
Speaker 11: I think the FED might be preparing markets to probably
Speaker 11: a higher inflation target. Now it will be interesting because
Speaker 11: easy b if ecipit decides to change the inflation target,
Speaker 11: it will be significantly harder. Given the history of Germany,
Speaker 11: we all know that Germany hates inflation, so we might
Speaker 11: see interesting divergence in policymaking, which is quite unusual these
Speaker 11: days across the large central banks, and I think that's
Speaker 11: something that one should keep an eye on.
Speaker 4: Is the diversion also because of the way that our
Speaker 4: economy is structured quite differently when you think of it
Speaker 4: more services driven than say, how economies in Europe are.
Speaker 11: Also the majority of the economies in Europe are also
Speaker 11: serve is driven as well. Now what's different, of course,
Speaker 11: is that with ECB we have many different business cycles.
Speaker 11: So what we're seeing is that inflation, for example, is
Speaker 11: falling faster in some parts of Europe where the label
Speaker 11: markets are essentially less tight. So Germany, the course topr
Speaker 11: inflation is still higher than many southern European economies. Now
Speaker 11: what was interesting is that, you know, during the zero
Speaker 11: or bound period, effectively some people blame the CIP that
Speaker 11: they're putting too high of a weight on the German
Speaker 11: economy relative to the rest of the year arozone, the
Speaker 11: thing might be happening now, So essentially it might be
Speaker 11: the case that sat in Europe and other parts of
Speaker 11: the Eurozone now don't necessarily need as much tightening. But
Speaker 11: we might see that ECB prioritizes Germany more, not just
Speaker 11: because of the size of the country. So I think
Speaker 11: it will be interesting to see to what extent ECB
Speaker 11: is going to continue with its stands on we're really
Speaker 11: tough on inflation, we have to go back down to
Speaker 11: two percent or they might become a little bit more
Speaker 11: lineent and consider high inflation target.
Speaker 1: As zone and professor to the extent that the Fed does,
Speaker 1: you know, maybe lift their inflation target going forward. That
Speaker 1: would be a big change for them. Is that would
Speaker 1: that be an incredibility issue for them?
Speaker 11: It will, But to be honest, they haven't delivered the
Speaker 11: target in a very long time, right, So here the
Speaker 11: trade off is we keep promising something that we haven't
Speaker 11: delivered for for many years. So even during the zero
Speaker 11: or bound, inflation was below the target. Yep, that's why
Speaker 11: they moved towards average inflation targeting. I think there are
Speaker 11: I mean, we know that there are a lot of
Speaker 11: theoretical reasons why high inflation target is beneficial. So for example,
Speaker 11: we knew that during the zero Laura bound, a lot
Speaker 11: of economists, including only via blanchepe Call, the chief economist
Speaker 11: of the kind of essentially was pushing towards the inflation
Speaker 11: target of four percent. The reason why that's the case
Speaker 11: is because if you stucky the zero Laura bound, this
Speaker 11: is going to give you real rates of minus four percent, right,
Speaker 11: so it could really help stimulate growth. So there are
Speaker 11: many big benefits to high inflation target, and I think actually,
Speaker 11: if there is a time to change the inflation target,
Speaker 11: it might be better than pretending that we're going down
Speaker 11: to two percent and being above two percent for two
Speaker 11: three years. I think it's more dangerous in terms of
Speaker 11: what we're seeing. We're already worried about wage inflation expectations
Speaker 11: getting un anchored. Actually the UK is the worst in
Speaker 11: terms of wage inflation expectations. So as you saw the
Speaker 11: private sector, wage inflation was particularly high in the UK.
Speaker 11: So I feel markets are starting not to believe the
Speaker 11: story that we're going to die to two percent. So
Speaker 11: I believe that actually it might be a good time
Speaker 11: to adjust the target to something more reasonable.
Speaker 4: What do you think would be more reasonable?
Speaker 11: So four percent between three percent I think probably is
Speaker 11: more realistic.
Speaker 4: That's for the US better reserve, So.
Speaker 11: Yes, so for the US, but technically the UK has
Speaker 11: a bigger problem, right, So in terms of the data,
Speaker 11: the UK is the worst than the furthest away from
Speaker 11: the target. So I wouldn't be surprised that the UK
Speaker 11: is going to also potentially entertain the idea of high
Speaker 11: inflation target, but they're going to wait for the US.
Speaker 11: I don't believe that any country is going to even
Speaker 11: entertain the idea of phrasing the inflation target unless the
Speaker 11: US does it.
Speaker 1: So, Professor, We've spoken to some European and UK fund
Speaker 1: managers and strategists this morning about the ECB's action and
Speaker 1: a lot of folks are just kind of exacerbated, exacerbated
Speaker 1: with the ec being to the extent that they feel
Speaker 1: like the ECB is pushing the euro Zone into recession
Speaker 1: or a deeper recession or more prolonged recession. How do
Speaker 1: you view that risk?
Speaker 11: But the problem again is coming from the heterogenetica across
Speaker 11: countries and what we mentioned that Germany receives the higher
Speaker 11: weight Germany, So the history of CB is effectively it
Speaker 11: stands on the shoulders of the Deutsche Bundesbank that is
Speaker 11: known to be very tough on inflation, which is coming
Speaker 11: from the World Wars in Germany where they had when
Speaker 11: they had higher inflation, so their political economy reasons why
Speaker 11: it would be hard for CIP not to be tough
Speaker 11: on inflation. And Germany receives a very high weight here
Speaker 11: and core CPI inflation is high for Germany. Well, of
Speaker 11: course you're correct that if you take the overall performance
Speaker 11: numbers of the Eurozone, that might appear that the economy
Speaker 11: doesn't need as much tightening, but here is seeing political
Speaker 11: economy issues also at playing.
Speaker 4: I feel when it comes to some of these Southern
Speaker 4: European countries that are highly indebted, which ones in particular
Speaker 4: stand out to you as far as having a tough
Speaker 4: time moving forward when it comes to that growth.
Speaker 11: I think the usual corporate right now is Italy again
Speaker 11: primarily for sovereign that sustainability were in a very uncomfortable situation,
Speaker 11: whereas it be is still purchasing Italian debt while selling
Speaker 11: German debt right doing quantitative titling with respect to the
Speaker 11: German sovereign that but quantitative vision with respect to the
Speaker 11: Italian that I feel that it's a very uncomfortable situation
Speaker 11: the sovereign. The sustainability issue is not resolved with respect
Speaker 11: to Italy, and I feel this is still an elephant
Speaker 11: in the room with respect to the Eurozone that there
Speaker 11: has to be a solution for because we can't have
Speaker 11: easy b be the marginal order of Italian government debt
Speaker 11: and there is still one hundred and fifty percent of
Speaker 11: the two GDP, so the number is very large, and
Speaker 11: I think it is itb is still struggling with that,
Speaker 11: and I don't believe they have found a proper solution
Speaker 11: for it.
Speaker 1: Professor back here in the US, are you of the
Speaker 1: opinion that this federal Reserve will raise interest rates? And
Speaker 1: if this year? And if so, but maybe how many
Speaker 1: times and what degree?
Speaker 11: So I think they post in order also to see
Speaker 11: what is going to happen to create a contraction. So
Speaker 11: we saw that the banking sect that lost about one
Speaker 11: trillion of deposits, and in total there's about seventeen trillion
Speaker 11: in the whole banking industry. So given that these primarily
Speaker 11: regional small banks that lend a lot to small and
Speaker 11: medium enterprises, they want to see what the impact on
Speaker 11: employment will be. So small and medium enterprises are the
Speaker 11: main employer effectively in the US, so to the extent
Speaker 11: that there might be a create contraction in terms of
Speaker 11: small and medium enterprises, they want to see how it's
Speaker 11: going to play out at this point. Now, again looking
Speaker 11: at the numbers, they technically shouldn't have posed if truly
Speaker 11: they were data driven, right, so they discussed that their
Speaker 11: data driven. So the action was a bit surprising to
Speaker 11: me to be honest, The only way I can explain
Speaker 11: it is that they might be tinkering with the idea
Speaker 11: of moving the inflation target and just admitting that they
Speaker 11: will not be easily be able to go down to
Speaker 11: two percent or come up with a regime that is
Speaker 11: much more flexible rather than just a well different target.
Speaker 1: All Right, doctor, thank you very much for giving us
Speaker 1: some of your time. We really appreciate it. Doctor Vanya
Speaker 1: rick stop Rakava, professor of economics at the London Business School,
Speaker 1: joining us. We really appreciate getting some of her time
Speaker 1: talking about kind of the action we've seen over the
Speaker 1: last twenty four hours with the first of Federal Reserve
Speaker 1: and now the ECB.
Speaker 6: Today you're listening to.
Speaker 8: The tape Cat's are live program Bloomberg Markets weekdays at
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Speaker 1: Let's look retail sales. We get some retail sales reported today.
Speaker 1: You know they were less than the prior month, but
Speaker 1: a little bit better than the market.
Speaker 4: Was looking for a strong consumer I think so.
Speaker 1: I mean, it still seems pretty solid out there. But
Speaker 1: our next guest is a real expert on this, Marie Driscoll,
Speaker 1: luxury retail analyst at Core Site Research. Marie, what's your
Speaker 1: takeaway from the retail sales data we got today and
Speaker 1: then maybe extrapolate that out there to what you're hearing
Speaker 1: and seeing from some of the other retailers.
Speaker 10: Sure.
Speaker 12: Sure, thank you for having me.
Speaker 11: It's great to be here.
Speaker 13: The numbers were were great. Really, they came in line
Speaker 13: with expectations. The consumer is feeling constrained. We really didn't
Speaker 13: see any surprise. Clothing was flat or you know, off
Speaker 13: off to twenty basis points versus a year ago. Department
Speaker 13: stores pulled down general merchandise general merchandise stores grew up
Speaker 13: two percent. The real winner this this month and really
Speaker 13: year to date has been health and beauty that showed
Speaker 13: a solid seven point eight percent game year over year.
Speaker 13: And this just goes to really, there's the lipstick effect
Speaker 13: if you want to look at look at it.
Speaker 4: That as an economic indicator.
Speaker 5: I love that one.
Speaker 13: So, but beauty is self care, it's an accessible luxury.
Speaker 13: It changes how we feel, and it has great utility.
Speaker 4: You use it daily, So think of that as a
Speaker 4: staple instead of a discretionary.
Speaker 13: Well, you know, I think that the way we define
Speaker 13: discretionary and staple is a lot in the eyes of
Speaker 13: the user. When I look at teen retailers, it's like
Speaker 13: you and I might say this is discretionary. For them,
Speaker 13: it's an absolute must have. There's just no discretion about it.
Speaker 13: So it really depends on whose money it is, you know.
Speaker 13: But you know, beauty shares a lot of the same
Speaker 13: qualities as luxury, excepts it's at a much lower price point.
Speaker 12: So beauty did really well.
Speaker 13: You know, clothing, when you look at what people are
Speaker 13: spending on there, they're really reducing on clothing, Furniture down
Speaker 13: dramatically at six point four percent year over year, and electronics,
Speaker 13: no surprise, down five percent. Consumers had really spent on
Speaker 13: those items during the pandemic and are looking to do
Speaker 13: are really looking to be more social and out there.
Speaker 13: Food and services, which are in did in this retail
Speaker 13: sales report. We're up to the strongest year over year
Speaker 13: at eight percent. A lot of that's inflation, but people continued,
Speaker 13: people want experiences, want to be out, want to be social,
Speaker 13: they're spending there. Another call out Worth mentioned like general
Speaker 13: merchandise stores up two percent year over year. We think
Speaker 13: it was, you know, really stronger than that at companies
Speaker 13: like Walmart, which are benefiting from all the essentials that
Speaker 13: they sell, the food that they sell along with selected merchandise.
Speaker 13: The fact that more people are coming into their stores
Speaker 13: than pre COVID because they captured more mind share during COVID. Frankly,
Speaker 13: can they hold on to that higher income customer in
Speaker 13: a post COVID world?
Speaker 12: And I think that they're doing their best to try
Speaker 12: and do that.
Speaker 4: It's interesting. I was speaking with a portfolio manager recently
Speaker 4: who was talking about how stocks like stay Lauder he
Speaker 4: wasn't going to get rid of because he felt like
Speaker 4: they were recessioned for you knew, his daughters, his wife,
Speaker 4: We're still going to buy those products. I wanted to
Speaker 4: pick your brain about the latest retail earning season, especially
Speaker 4: since we just got this retail sales data. I mean,
Speaker 4: we had companies like Macy's that cut their outlook just
Speaker 4: because of what they were seeing with the demandrens. But
Speaker 4: then you look at Lululemon, which is very niche at
Speaker 4: leisure and a bit expensive if you were thinking about
Speaker 4: some of their products, and they still had an opposite
Speaker 4: kind of take, and we're seeing consumers go in. So
Speaker 4: what exactly does that tell us about the economy right now?
Speaker 13: So Lululemon is a retailer, but it's a brand, and
Speaker 13: it's a life style and it's the kind of like
Speaker 13: in the last twenty years, it has become increasingly okay
Speaker 13: to wear yoga pants and the comfortable pants that.
Speaker 12: They that they make with the pandemic all day long,
Speaker 12: right and.
Speaker 13: We're wearing them from the workout routine, to the coffee
Speaker 13: in the afternoon to make you put on a nice top,
Speaker 13: and to the theater at night.
Speaker 12: So like Lulu Lemon has become a backbone of many
Speaker 12: people's closets.
Speaker 13: And frankly, it's not just an American brand, it's a
Speaker 13: global brand. There's incredible pent up demand in China for Lululemon,
Speaker 13: so there's legs for that company.
Speaker 12: But again, it's partly lifestyle. And Macy's is very much
Speaker 12: you know, it's the middle of the mall the middle.
Speaker 13: It's a mass it's not mass market, it's a department store,
Speaker 13: but but it's for Middle America where there where there
Speaker 13: is constraint, Lulu Lemon might be that little bit of
Speaker 13: a higher income consumer.
Speaker 12: Frankly, though, across the board, everybody is.
Speaker 13: You know, from the data, we're seeing people are impacted
Speaker 13: by inflation, and they're being choiceful as they.
Speaker 12: Make their spending choice, as they make their purchase choices.
Speaker 1: Hey, Marie can talk to us about kind of just
Speaker 1: the state of luxury right now. I'm just guessing that
Speaker 1: the inflation that we're all feeling out there, it's probably
Speaker 1: not impacting our good friends up at the luxury level.
Speaker 1: What are you seeing and hearing from those companies?
Speaker 12: You know, it's mixed.
Speaker 13: Some luxury companies cannot meet their demand, and that would
Speaker 13: be an Armez and a Louis Vuitton, but many other
Speaker 13: brands are struggling with this. The American consumer who was
Speaker 13: shopping poor luxury during COVID attracted new consumers, younger consumers.
Speaker 13: People luxury provides an experience, and when there were no
Speaker 13: experiences to be had, many people bought a hand egg
Speaker 13: to feel better, an Armez cuff, and you got new
Speaker 13: people into luxury brands, and they're feeling a pinch this
Speaker 13: year with inflation.
Speaker 12: You'd like to think that luxury is sticky and people
Speaker 12: will continue to want it.
Speaker 13: I don't think that you're going to see the kind
Speaker 13: of growth that we experienced in twenty one and twenty
Speaker 13: two domestically, and you are seeing as people return to travel,
Speaker 13: luxury spending will diversify. Americans spent a lot on luxury
Speaker 13: in Europe last summer because they were able to travel
Speaker 13: again and the strength of the dollar. So luxury continues
Speaker 13: to better benefit from the one percent, the top ten
Speaker 13: percent across the board. Except for that top one percent,
Speaker 13: people are impacted by inflation. It's changing their luxury spend.
Speaker 13: Some brands are not impacted at all, but in the aggregate,
Speaker 13: luxury is impacting all right, Marie.
Speaker 1: Thank you so much for joining us. Always appreciate getting
Speaker 1: the lay of the retail land with You've got great
Speaker 1: experience in the space and great insights. Marie Driscoll, she's
Speaker 1: a luxury retail analyst at Coresites Research and she's been
Speaker 1: doing that for a long time.
Speaker 8: Listening to the tape, can's our live program, Bloomberg Markets
Speaker 8: weekdays at ten am Eastern on Bloomberg Radio.
Speaker 6: The tune in app Bloomberg dot Com and the Bloomberg
Speaker 6: Business App.
Speaker 8: You can also listen live on Amazon Alexa from our
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Speaker 7: I about this.
Speaker 1: Were good friends up in Connecticut. Connecticut just agreed to
Speaker 1: a budget signing the largest marginal tax cut rate in
Speaker 1: Connecticut history and the first tax cut for Connecticut in
Speaker 1: three decades. I'm sure my buddies up there are happy
Speaker 1: about that. Let's get the latest on all things the
Speaker 1: state of the state in Connecticut with Ned Lamont. He's
Speaker 1: the governor of the State of Connecticut. Governor, thanks so
Speaker 1: much for joining us. Talk to us about this budget
Speaker 1: and kind of the tax cuts you're getting across in Connecticut.
Speaker 10: Yeah, I can have to do the ball Look, I
Speaker 10: come out of the business world. People like a little
Speaker 10: bit of certainty. They don't want to know where your
Speaker 10: state's going to be done us now, But for the
Speaker 10: next five years, we've had five ballanced budgets in a row,
Speaker 10: and this year we've gotten place the biggest middle class
Speaker 10: tax cut in the history of the state. It's about
Speaker 10: five hundred million dollars, say folks, about ten or fifteen
Speaker 10: percent on their tax bills, and a lot of our
Speaker 10: neighboring streets have been raising taxes where we held the line.
Speaker 10: Now reducing them a little bit. I hope it sends
Speaker 10: a signal it's a good place to live, a good
Speaker 10: place to grow your business.
Speaker 4: Who qualifies for these tax cuts? Come again, jess, who
Speaker 4: qualifies for these tax cuts.
Speaker 10: Family's up to about three hundred thousand dollars in annual income.
Speaker 1: So Governor also saw for the state of Connecticut, you
Speaker 1: guys have this unique bond program. We like talking about
Speaker 1: the bond market here on Bloomberg Radio. Municipal bonds. We're
Speaker 1: big fans of that. Here talk to us about kind
Speaker 1: of these baby bonds program in the state of Connecticut.
Speaker 10: Yeah, I'm working with Treasurer Eric Russell. We got that
Speaker 10: passed this last cycle. Got that funded. More importantly, so,
Speaker 10: any kid born into poverty, born I'm under Medicaid, We'll
Speaker 10: get a thirty two hundred dollars set aside for that
Speaker 10: little baby. And at the age of eighteen or twenty
Speaker 10: five up the age thirty, you've got to cash in
Speaker 10: that bond and that could be used for education or
Speaker 10: down payment in the house, help you start a business,
Speaker 10: help you with job training expenses. It's aspirational, gives our
Speaker 10: kids a reason to stay in Connecticut. They know, at
Speaker 10: the age of eighteen or as soon they're after they're
Speaker 10: going to have the opportunity to use that money.
Speaker 4: It looks like President Biden is actually supposed to be
Speaker 4: headed to Connecticut on Friday to talk about the state's
Speaker 4: leadership when it comes to gun safety. What do you
Speaker 4: expect to discuss with the President?
Speaker 10: Oh, it's great, he'll be up here at the University
Speaker 10: of Hartford tomorrow afternoon. I think doing two things. One
Speaker 10: saluting the fact that Connecticut has really been a leader
Speaker 10: when it comes to a gun safety and anti crime.
Speaker 10: We just passed one of the most significant gun safety
Speaker 10: law in the country in the last few weeks, getting
Speaker 10: those illegal ghost guns off the street and getting those
Speaker 10: repeat offenders off the street. And at the same time,
Speaker 10: our Senator Chris Murphy has taken a lot of the
Speaker 10: Connecticut ideas and brought them down to Washington, d c.
Speaker 10: And about a year ago they passed on a bipartisan
Speaker 10: basis some significant gun safety laws. So we can work
Speaker 10: by ourselves as a small state. It's a lot better
Speaker 10: if we work as a region. Even better if we
Speaker 10: work as a nation.
Speaker 1: Governor, you mentioned you know that you came from the
Speaker 1: business world. Give us a sense of kind of if
Speaker 1: I wanted to open a business or relocate a business,
Speaker 1: talk to me about the advantages and disadvantages of coming
Speaker 1: to Connecticut.
Speaker 10: Yeah, I like that question. I'll tell you first off,
Speaker 10: we like to move fast in the business world, and
Speaker 10: I find too often government has a bad case of
Speaker 10: the slows. So we're really trying to speed up that process.
Speaker 10: We're one phone call away. You always can get me
Speaker 10: or the head of you know, DECD, Economic Community Development,
Speaker 10: white shoe treatment. Make sure we get you through see
Speaker 10: and get that business started up. I think people should
Speaker 10: have some confidence with this tax cut. This is a
Speaker 10: place where we're getting our fiscal house in order. We're
Speaker 10: not having to raise taxes, we're not looking at deficits,
Speaker 10: and we're paying down our unfunded pension liabilities. So from
Speaker 10: a fiscal stability point of view, I think people feel
Speaker 10: pretty good. And we kept our schools open when a
Speaker 10: lot of other places had them closed, so it gives
Speaker 10: us sort of signal about where you can be. We
Speaker 10: kept our manufacturing and construction open all during COVID, so
Speaker 10: I think people have a sense of them it's a
Speaker 10: good place to do business.
Speaker 4: Since we are in a pre election year, wanted to
Speaker 4: get your thoughts on Trump's legal issues and what that
Speaker 4: means to you as far as when we're heading into
Speaker 4: the election year next year.
Speaker 10: Boy, I can't bear going through all that Trump distraction
Speaker 10: for another six years if he got elected. I like
Speaker 10: President Biden. I like his infrastructure bill. I like the
Speaker 10: fact that with the money we got for infrastructure, we're
Speaker 10: going to be able to speed up your commute by ten, fifteen,
Speaker 10: twenty minutes over the next seven or eight years. You know,
Speaker 10: for a state like Connecticut, where our location is so
Speaker 10: strategic between New York City, the global capital, financial capital
Speaker 10: of the world, and Boston with the life sciences, access
Speaker 10: there is really important. You probably not have to be
Speaker 10: there five days a week, but able to get in
Speaker 10: and out is so important. That's part of what the
Speaker 10: infrastructure bill does.
Speaker 1: Governor, you're you know, Connecticut's a unique stake for many,
Speaker 1: many reasons, one of which is just a geography you mentioned.
Speaker 1: I mean, half the state's Yankee fans the other half
Speaker 1: are Red Sox fans. So you know about managing division
Speaker 1: and diversity in the state. I'd love to get your
Speaker 1: view just from the macro level kind of in this country,
Speaker 1: the level of divisiveness has just never been better, and
Speaker 1: we even have names for it. Red state, Blue state.
Speaker 1: However you want to frame, how do you think about that?
Speaker 1: And is there a way forward to kind of bridge
Speaker 1: that and kind of minimize some of the differences.
Speaker 10: We got to get to know each other better as people,
Speaker 10: not simply as ideological targets, and Washington is broken in
Speaker 10: that sense. I'm really pleased that McCarthy and Biden were
Speaker 10: able to get that debt sealing thing solved on a
Speaker 10: reasonably bipartisan basis. I thought that was important. You know,
Speaker 10: here in Connecticut, support for our budget was almost universal,
Speaker 10: thirty five to one in the state Senate.
Speaker 6: Not bad.
Speaker 10: And you know, we're a smaller state. We know each
Speaker 10: other and we know the compromise is not a dirty word.
Speaker 4: Any sort of ambitions to run for president.
Speaker 10: Look, I was just re elected here as governor, and
Speaker 10: I'll tell you just I love the job. I mean,
Speaker 10: if you come out of the business world being a
Speaker 10: senator or congressman, it's just not the same thing. As
Speaker 10: being an executive, have a chance to make a difference
Speaker 10: in your own state, and I love exactly what I'm
Speaker 10: doing right.
Speaker 1: Now governor the Republican nomination, it's you know, there is
Speaker 1: a presumed leader front runner and president, former President Trump,
Speaker 1: but there's a lot of other folks getting into the race.
Speaker 1: How do you view kind of what's shaping up to
Speaker 1: be a pretty crowded Republican primary season.
Speaker 10: I guess the more people in the race, the better
Speaker 10: it is for Donald Trump. So I'd like to think
Speaker 10: that the Republicans will sort this out pretty soon, you know,
Speaker 10: after Super Tuesday, and make it a one on one
Speaker 10: race and give the Republican primary voters a real and
Speaker 10: clear choice. There's a guy I know, I know the
Speaker 10: governor is pretty well. His name is Doug Bergham. He's
Speaker 10: the governor of North Dakota. I think he's the most
Speaker 10: substantive on that side of the I R running for president,
Speaker 10: solid guy and governor.
Speaker 1: What would you suggest that, you know, in terms of
Speaker 1: kind of bridging that divide, What are some of the
Speaker 1: ways that you would suggest to kind of, you know,
Speaker 1: go into a red state or blue state and kind
Speaker 1: of bridge a broader discussion with people. What what do
Speaker 1: you find could be effective?
Speaker 10: I think go to places where you don't think that
Speaker 10: people necessarily are like you, not necessarily red or blue.
Speaker 10: Make sure you go where you can have a really
Speaker 10: frank discussion. Go to places where you can sort of
Speaker 10: break the stereotype they may have of a Republican or
Speaker 10: a Democrat. You know, people are willing to listen, people
Speaker 10: are willing to give you a shot, but sometimes have
Speaker 10: to go to their place to make your case.
Speaker 4: And I know that you just recently signed a voting
Speaker 4: rights Act into law. Tells more about that.
Speaker 10: That was a big deal. I mean, Connecticut is a
Speaker 10: leader on so many issues, not un early voting. We
Speaker 10: were one of the slow polks there, and now we
Speaker 10: pass the law that says you can vote up to
Speaker 10: two weeks before that general election and also advance voting
Speaker 10: for primaries as well. Look, in this day and age,
Speaker 10: you don't have total control over your schedule. Maybe you're commuting,
Speaker 10: maybe you're out of state part of the day. It
Speaker 10: just makes sense. You know, during COVID, we allowed no
Speaker 10: excuses absentine balloting, and you know a vast majority of
Speaker 10: our people took advantage of it. I wanted to make
Speaker 10: it easier for people to vote and vote with integrity.
Speaker 1: Hey, Governor, I want to just thank you so much
Speaker 1: for giving us a few minutes of your time, Ned Lamont, Governor,
Speaker 1: the State of Connecticut giving us the state of the state,
Speaker 1: as they say, so I think what the government. One
Speaker 1: of the messages I think the Governor's been trying to
Speaker 1: get through over the last period of time is that
Speaker 1: the state of Connecticut is open for business. And again,
Speaker 1: they just passed their budget with substantial tax cuts. And
Speaker 1: I know a lot of folks in the metro area
Speaker 1: here have left the metro area, whether it's Connecticut or
Speaker 1: New York or New Jersey because of the high right
Speaker 1: tax regime and going to lower tax regimes and.
Speaker 4: So middle income tax cuts.
Speaker 1: Yeah, so it's important here. So let's see how that
Speaker 1: plays out for our good friends up in Connecticut. I'm
Speaker 1: a big fan of Connecticut good stuff. Sometimes I get
Speaker 1: caught on the Connecticut term bike like all the time
Speaker 1: on nine to ninety five, But otherwise all good stuff there.
Speaker 6: You're listening to the tape.
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Speaker 1: All right, I'm We'll get on a stock on the
Speaker 1: downside here today. Kroger, the supermarket chain of four percent.
Speaker 1: They reported some numbers. The profit topped expectations as far
Speaker 1: as I can tell, but I know the sales come
Speaker 1: up a little bit shy. So that's causing people to say,
Speaker 1: uh oh, maybe the consumer's pulling back a little bit.
Speaker 1: But let's bring on someone who does this stuff for
Speaker 1: a living. Those the real expert here on the supermarket
Speaker 1: business and retail in general. That's Jen Bartasha's senior industry
Speaker 1: analysts for Bloomberg Intelligence. So Jen, people not buying as
Speaker 1: much food?
Speaker 6: What's going on?
Speaker 7: Hi, Paul, So what's really happening. Kroger, by all accounts,
Speaker 7: had a pretty decent quarter, and there are a lot
Speaker 7: of things to be optimistic about, but it's really the
Speaker 7: backdrop of the weaker consumer that's pulling down the stock,
Speaker 7: and it's really kind of weighing on expectations of how
Speaker 7: much growth really can they can achieve over the course
Speaker 7: of the rest of the year.
Speaker 4: Were you able to extrapolate from the report what items
Speaker 4: consumers were pulling back on in which ones they were
Speaker 4: still buying.
Speaker 7: Well, I think one of the interesting takeaways from Kroger's
Speaker 7: conversation today is that companies that have the capability to
Speaker 7: segregate their consumer base into different segments is becoming increasingly important.
Speaker 7: We've all talked about the bifurcation of the consumer, how
Speaker 7: low income consumers are under a lot of pressure and
Speaker 7: those that are in hir income households are behaving like
Speaker 7: normal and that's playing through with Kroger as well. And
Speaker 7: so the consumers that are pulling back are the ones
Speaker 7: who are suffering from you know, dwindling snap payments, increase,
Speaker 7: pressure from inflation, higher cost of living, and that segment
Speaker 7: is really what's under a lot of stress and continues
Speaker 7: to be undertood I'll.
Speaker 6: Say what I do, Jess.
Speaker 1: I don't know if you do it, but this is
Speaker 1: for the first time in my life as a shopper.
Speaker 1: I don't even consider trading down, but I am trading
Speaker 1: down to the store brands. Yes, I'll do a lot
Speaker 1: of this stuff.
Speaker 4: And because being exactly the same, it's materially.
Speaker 1: Cheaper than the brands. So Jen, I mean, boy, if
Speaker 1: it's happening to me, like I'd never even thought about
Speaker 1: that stuff before, and.
Speaker 7: That is a trend. Private label so far this year
Speaker 7: has just been on fire across the board for many,
Speaker 7: many retailers, and it's precisely because there's been a lot
Speaker 7: of investment in the last few years in improving the
Speaker 7: quality and the selection of those private label products, and
Speaker 7: when customers trade into them for need, they're discovering that
Speaker 7: they really are very good substitutes for national brands. And
Speaker 7: so that momentum and private label is really expected to
Speaker 7: continue through the end of the next year and into
Speaker 7: twenty twenty four. But it's also good for retailers because
Speaker 7: those items have much higher margin for the retailers than
Speaker 7: the national brands do.
Speaker 4: Something I'm curious about, too, is when we've continued to
Speaker 4: see a number of these companies pass on those price
Speaker 4: increases for the past few quarters, and we're able to
Speaker 4: successfully do that, but Campbell's Soup actually signaled recently that
Speaker 4: shoppers are becoming less willing to put up with those
Speaker 4: price increases, Whereas and then you hear from General Mills.
Speaker 4: They had an investor day last week where they started
Speaker 4: talking about how the raising the cost of its products
Speaker 4: would likely become more difficult even as inflation is cooling.
Speaker 4: Are you getting a sense that we're going to hear
Speaker 4: more of those themes potentially coming up once we get
Speaker 4: earning season. It's going to be a little bit a while,
Speaker 4: as you know, because a lot of those retailers were
Speaker 4: at the tail end of that. But could there be
Speaker 4: early indications when you hear from like a Campbell's, General Mills.
Speaker 7: Yeah, it's a great question. We've been actually warning on
Speaker 7: this coming for quite a while at Bloomberg Intelligence, and
Speaker 7: really what we're saying is that even as inflation comes down,
Speaker 7: the consumer has hopped out and means that they've adjusted
Speaker 7: their shopping patterns, they're spending where they're spending, and the
Speaker 7: volume of goods is going to become much more important
Speaker 7: again because all these companies have enjoyed top top line
Speaker 7: growth spurred by inflation, so the kind of an artificial
Speaker 7: increase in price is driven growth. Now as inflation comes
Speaker 7: down and prices are starting to come down, it's going
Speaker 7: to become much more important that they drive volume again
Speaker 7: and increase the volume of goods sold. What we think
Speaker 7: is that as inflation comes down, there's going to be
Speaker 7: a lag. So we could be in for a couple
Speaker 7: of tough quarters for both the CpG companies and some
Speaker 7: of the retailers until volume starts to catch up to
Speaker 7: where inflation comes down.
Speaker 1: Jen, just give us an overview of kind of the
Speaker 1: industry structure these days. I know there's I think there's
Speaker 1: some M and A. I mean, give us a sense
Speaker 1: of who the big players are. Will there be more
Speaker 1: M and A? Is everybody just trying to compete against Walmart?
Speaker 6: Where are we?
Speaker 7: Well? Walmart is by far the biggest food retailer in
Speaker 7: the United States coming and over fifty percent of Walmart's
Speaker 7: revenue comes from food and grocery here. It is a
Speaker 7: tremendous business.
Speaker 4: But also Target recently got moved to Staples because of
Speaker 4: their percentage of groceries as well. It actually happened to
Speaker 4: more Target got moved over to the Staples of the
Speaker 4: S and P five Punt than a Dollar Tree, Dollar
Speaker 4: General exactly.
Speaker 7: So all of these and all of these companies are
Speaker 7: selling more and more food to consumers. What that means
Speaker 7: is that it is a very consolidated industry. So in
Speaker 7: terms of M and A, everyone is really waiting and
Speaker 7: watching on the fate of the Albertson's and Kroger merger
Speaker 7: and whether that will successfully go through and if so,
Speaker 7: how many stores are going to be required to be divested.
Speaker 7: I don't see a lot of other M and A
Speaker 7: coming until we get a real sense for where, you know,
Speaker 7: where the acceptance level is based on that merger. But
Speaker 7: it is already a fairly consolidated market. What that means
Speaker 7: is that there is scale for these companies, and so
Speaker 7: you know, the good news for consumers is that that
Speaker 7: scale will translate into prices coming down perhaps faster than
Speaker 7: they have historically, just by virtue of how big these
Speaker 7: companies are now can.
Speaker 1: They get people to work in these stores house the
Speaker 1: labor situation for a lot of the big companies you follow.
Speaker 7: Labor has been a challenge, but I would say that
Speaker 7: across the board, retention rates are fairly stable. They haven't
Speaker 7: gotten worse. These companies have invested a lot ever since
Speaker 7: since about twenty sixteen. They've invested a lot in wages,
Speaker 7: They've invested in training and on a comparative basis. You know, people,
Speaker 7: if they can make a decent wage working in a store,
Speaker 7: that's pulling some talent away from other big hiring sectors
Speaker 7: like restaurants as an example. And so at this point,
Speaker 7: the labor situation I would say is fairly stable, but
Speaker 7: it's still expensive and they're going to have to continue
Speaker 7: to invest in wages to retain people as they go forward.
Speaker 1: Well, you were absolutely spot on this one, Jenna, and
Speaker 1: I never doubt you. But I mean, I just pulled
Speaker 1: up the p GEO function for Walmart. Man Groceries is
Speaker 1: just the biggest business. It is amazing how big and
Speaker 1: you just don't even think about it, or I don't,
Speaker 1: but the largest grocer in the US and the industry
Speaker 1: pretty cool stuff. Jen Bartash is senior industry analyst for
Speaker 1: Bloomberg Intelligence. He's based at our lovely Princeton campus down
Speaker 1: there in Princeton, So we appreciate getting a few minutes
Speaker 1: of Jen's time here.
Speaker 2: Thanks for listening to the Bloomberg Markets podcasts. You can
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Speaker 9: I'm Matt Miller.
Speaker 2: I'm on Twitter at Matt Miller nineteen seventy three and
Speaker 2: I'm Faul Sweeney.
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