WEBVTT - Retailers Face Long, Tough Road As Unsold Inventory Builds 0:00:02.640 --> 0:00:05.360 Welcome to the Bloomberg Penel podcast. I'm Paul swing you 0:00:05.360 --> 0:00:07.680 along with my co host Lisa Brahma Waits. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.320 --> 0:00:12.520 you and your money, whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.959 podcast or wherever you listen to podcasts, as well as 0:00:18.000 --> 0:00:21.239 at Bloomberg dot com. Paul, I'm going to go out 0:00:21.239 --> 0:00:23.680 in a limb here and guess that when people work 0:00:23.720 --> 0:00:27.040 from home, they're not putting on a suit and tie, 0:00:27.120 --> 0:00:30.720 and they may still be in their pajamas, depending on 0:00:30.760 --> 0:00:33.479 who you are. And there's a question of will they 0:00:33.479 --> 0:00:36.120 ever put on a suit again, and will they find 0:00:36.159 --> 0:00:39.800 themselves and pajamas more often going forward as they increasingly 0:00:39.840 --> 0:00:44.000 work from home, regardless of the progress or the progression 0:00:44.200 --> 0:00:47.720 of the pandemic. Joining us is James Fallon, editorial director 0:00:47.760 --> 0:00:50.360 of Women's Where Daily, to talk about pajamas and the 0:00:50.360 --> 0:00:54.560 new workplace attire. James, aside from being tongue in cheek, 0:00:54.640 --> 0:00:58.880 there's been an absolute ravaging of the retail landscape, with 0:00:59.480 --> 0:01:02.080 hundreds of thousands of people furloughed or laid off within 0:01:02.160 --> 0:01:06.400 the industry and a real exerstential question facing the entire 0:01:06.520 --> 0:01:09.080 industry of whether we'll ever recover. Can you give us 0:01:09.120 --> 0:01:12.280 a sense just right now of what the thinking is 0:01:12.360 --> 0:01:16.600 among major retailers and fashion houses in terms of whether 0:01:16.640 --> 0:01:18.440 they think that a lot of these people can be 0:01:18.480 --> 0:01:22.080 brought back and be restarted after this as things get 0:01:22.120 --> 0:01:26.080 back to normal. I think the sense li says that 0:01:26.360 --> 0:01:31.319 they will come back, but very very slowly. And um, 0:01:31.360 --> 0:01:33.959 you had the announcement from CA Prix Holdings this morning 0:01:34.200 --> 0:01:37.640 that they were furloughing set their seven thousand North American 0:01:37.720 --> 0:01:41.880 retail employees and they're saying their stores now won't reopen 0:01:41.959 --> 0:01:45.440 until June one, and that's probably one of the latest 0:01:45.520 --> 0:01:50.840 dates we've seen of stores being reopened. Um. So if 0:01:50.960 --> 0:01:54.160 consumers aren't being able to go to a store for 0:01:54.240 --> 0:01:59.440 six months of and this sole social distancing becomes part 0:01:59.520 --> 0:02:02.320 of our every day norm, I just don't see people 0:02:02.440 --> 0:02:07.000 rushing out by, you know, clothing right away, um, beyond essentials. 0:02:07.040 --> 0:02:12.120 So you're looking probably if then before people begin to 0:02:12.240 --> 0:02:18.360 behave quote normally and stop the arnking suits and pajamas together. So, Jim, 0:02:18.360 --> 0:02:20.600 what a retailer is actually going to do with the 0:02:20.639 --> 0:02:23.679 inventory that's been sitting in the store for months, that's 0:02:23.680 --> 0:02:26.000 the key question. I mean a lot of it will go, 0:02:26.080 --> 0:02:29.560 of course into the off price channel, but even the 0:02:29.600 --> 0:02:31.720 t j x IS and Ross stores can only take 0:02:31.760 --> 0:02:34.720 so much of it. Um. You had many Chariko PVH 0:02:34.840 --> 0:02:37.600 last week saying that what they're looking at doing is 0:02:37.639 --> 0:02:41.360 taking some of the existing more classic spring summer merchandise 0:02:42.560 --> 0:02:46.280 and basically putting in a warehouse until spring and then 0:02:46.280 --> 0:02:49.040 bringing it out again. Um. You know, a pair of 0:02:49.120 --> 0:02:51.959 Chinos is a pair of chinos, so that will last. 0:02:52.600 --> 0:02:56.680 The downstream effect that will have on manufacturers, however, will 0:02:56.720 --> 0:02:59.320 of course be significant. I mean they're all their orders 0:02:59.360 --> 0:03:02.240 already or in cut for fall. If suddenly for spring, 0:03:03.280 --> 0:03:07.600 they're basically getting of what they normally are expecting to get. 0:03:07.960 --> 0:03:10.000 That again, it's going to have a real impact on 0:03:10.760 --> 0:03:15.760 overseas manufacturers, particularly in China. Jim, is it's just accelerating 0:03:15.760 --> 0:03:19.920 a trend away from brick and mortar. Yes, really, I 0:03:19.960 --> 0:03:22.760 mean it's it's a systemic change, and the US was 0:03:22.840 --> 0:03:26.359 overstored for decades, and so this is probably going to 0:03:26.480 --> 0:03:30.840 be a major shaking out of whether the consumer returns. 0:03:31.440 --> 0:03:33.680 Once we're all allowed to leave our houses. We may 0:03:33.720 --> 0:03:39.000 actually find the stores an escape mechanism. But I think again, 0:03:39.040 --> 0:03:42.520 it will very much shake out the weaker players and 0:03:42.560 --> 0:03:45.200 even some of the medium level players, and will begin 0:03:45.680 --> 0:03:49.040 adjusting the square footage per consumer that's needed to be 0:03:49.080 --> 0:03:52.280 adjusted for years. Jim, what do you think the impact 0:03:52.440 --> 0:03:57.120 is going to be on luxury luxury? You're probably going 0:03:57.120 --> 0:03:59.880 to I mean they're already down again. I mean in 0:04:00.120 --> 0:04:03.840 China they were down, etcetera. I mean luxury may come 0:04:03.840 --> 0:04:07.920 back faster, but again depending upon the nature of Wall Street. 0:04:08.000 --> 0:04:11.240 I mean, luxury, of course rebounded pretty quickly after the 0:04:11.240 --> 0:04:15.840 two thousand two thous financial crisis. If the stocks come 0:04:15.880 --> 0:04:20.479 back and those people start making money again, definitely, But 0:04:20.640 --> 0:04:23.400 so much of the luxury market was dependent upon the 0:04:23.520 --> 0:04:26.600 Chinese that it will be depending on whether the Chinese 0:04:26.600 --> 0:04:30.479 consumer comes back. We're already seeing anecdotal evidence of that 0:04:30.560 --> 0:04:34.080 consumer beginning to spend in China, but a lot of 0:04:34.120 --> 0:04:37.240 that luxury spending also was dependent upon the Chinese tourist, 0:04:37.680 --> 0:04:40.520 and I don't see the tourists coming from China again, 0:04:40.760 --> 0:04:43.800 certainly through the second half of the year. So when 0:04:43.800 --> 0:04:47.520 you talk about the acceleration in the shift away from 0:04:47.520 --> 0:04:52.240 brick and mortar to an online presence. I'm wondering about 0:04:52.400 --> 0:04:54.960 an increase in bankruptcy since there are a number of 0:04:55.000 --> 0:04:58.320 retailers that have been holding on by their clause to 0:04:58.440 --> 0:05:01.400 their existence free years and have a lot of debt 0:05:01.720 --> 0:05:04.560 that have been enabled to do so by their investors. 0:05:04.640 --> 0:05:06.479 Do you think that this will actually lead to a 0:05:06.560 --> 0:05:09.960 shakeout with increasing bankruptcies or do you think that there 0:05:10.000 --> 0:05:13.080 will be sort of tripping along here on an ongoing basis. 0:05:13.880 --> 0:05:17.200 I think you will see more bankruptcies coming through. I mean, 0:05:17.240 --> 0:05:20.320 if you take the number I think I saw Moody, 0:05:20.480 --> 0:05:23.320 seventy seven percent of the bad debt within Moonies was 0:05:23.400 --> 0:05:26.200 really held by six companies, Um you know j C. 0:05:26.360 --> 0:05:29.520 Penny and Jay Crew being amongst them. So you already 0:05:29.560 --> 0:05:34.080 saw the reports. Others than us have written that Neiman 0:05:34.160 --> 0:05:38.120 Marcus is maybe looking at a bankruptcy. So you are 0:05:38.160 --> 0:05:41.560 going to see more bankruptcies, probably even during this let 0:05:41.600 --> 0:05:44.200 alone coming out of this. Absolutely, I don't think the 0:05:44.200 --> 0:05:47.160 Week can hang on if they're not getting any business 0:05:47.200 --> 0:05:49.880 for six months, they can't. They can't hang on forever. 0:05:50.960 --> 0:05:52.760 Jim Fallon, thanks so much for joining us. We really 0:05:52.800 --> 0:05:56.160 appreciate your commentary. Jim Fallon, editorial director of Woman's Where 0:05:56.560 --> 0:05:58.360 Uh Daily. At least I thought that was a good question. 0:05:58.400 --> 0:06:01.320 I think, you know, it's certainly reasonable to assume that 0:06:01.360 --> 0:06:03.640 there will be a This will cause a big shakeout 0:06:04.000 --> 0:06:06.280 in the retail space, a lot more store closings, which 0:06:06.320 --> 0:06:08.400 is a theme we've heard about. Yeah, I think that 0:06:08.440 --> 0:06:10.919 it's going to be brutal, and it's brutal for for 0:06:11.000 --> 0:06:12.880 the tens of thousands of people who have been laid 0:06:12.880 --> 0:06:16.080 off from the industry. I also do wonder how it 0:06:16.120 --> 0:06:19.120 will change style going forward. I mean, it seems almost 0:06:20.240 --> 0:06:23.400 silly chat to think about something like that, but I 0:06:23.440 --> 0:06:26.880 feel like working from home will change people's perspectives at 0:06:26.960 --> 0:06:29.200 least a little bit going forward, and what people want 0:06:29.200 --> 0:06:30.760 to get dressed up and go out or does that 0:06:30.839 --> 0:06:32.440 what that seemed full of has given what we've just 0:06:32.480 --> 0:06:34.640 gone through. Or on the other side, were people just 0:06:34.760 --> 0:06:37.839 really want to you know, rip loose done. You know, 0:06:38.520 --> 0:06:41.280 I'm actually voting more on that side. I gotta be honest, 0:06:41.279 --> 0:06:46.080 looking around, but just saying, you're listening to Bloomberg Markets 0:06:46.120 --> 0:06:49.760 with Lisa Abrama, Eds and Paul Sweeney on Bloomberg Radio, 0:06:50.400 --> 0:06:52.719 you know that's a real question right now of whether 0:06:52.800 --> 0:06:56.200 the pendulum has swung too far to the bearish side 0:06:56.360 --> 0:06:59.400 or whether it's not bearish enough, And that is a 0:06:59.480 --> 0:07:03.600 question the analysts are trying to answer completely blind, since 0:07:03.640 --> 0:07:06.640 you cannot model chaos, and since you cannot know a 0:07:06.680 --> 0:07:09.359 lot of the questions or answers to the questions currently 0:07:09.440 --> 0:07:11.520 in the market. Joining us right now is Marco Paypeck, 0:07:11.920 --> 0:07:15.560 chief strategist for clock Tower Group, and he has a 0:07:15.600 --> 0:07:19.200 compelling view of this which actually goes against consensus. I 0:07:19.200 --> 0:07:22.440 would argue, Marco, you argue that people are perhaps a 0:07:22.440 --> 0:07:26.360 little too pessimistic. Am I getting that right? Yes? I 0:07:26.400 --> 0:07:28.600 would say that that's the case. Thank you for having 0:07:28.600 --> 0:07:32.680 me on, Lisa. Okay, So why well, because I think 0:07:33.080 --> 0:07:36.640 one of the things that's happening in all the modeling 0:07:36.680 --> 0:07:39.480 community out there is whether it's you know, looking at 0:07:39.600 --> 0:07:42.840 the medical data, whether it's looking at the economic data, 0:07:43.040 --> 0:07:48.040 is that we're largely linearly extrapolating from really really bad data. 0:07:48.920 --> 0:07:52.320 The data on the virus itself is universally poor on 0:07:52.440 --> 0:07:57.000 almost every single um characteristic. The only thing that we 0:07:57.040 --> 0:07:59.440 really know about the virus, the only thing that we 0:07:59.520 --> 0:08:02.560 have pretty good data with is that it does attack 0:08:02.640 --> 0:08:06.360 different age cohorts in different way. Other than that, we 0:08:06.400 --> 0:08:09.040 don't really know the mortality rate. We don't really know, uh, 0:08:09.080 --> 0:08:11.920 the intaction rate. Um. So that's the first thing. The 0:08:11.920 --> 0:08:15.480 second thing is we don't really know, um how how 0:08:15.480 --> 0:08:18.120 the economy is going to develop over the next several months. 0:08:18.400 --> 0:08:20.200 And one of the reasons we don't know that is 0:08:20.240 --> 0:08:24.120 that we don't really understand how policy about social distancing 0:08:24.200 --> 0:08:27.520 will change over the next several weeks or months. And 0:08:27.600 --> 0:08:29.880 so what I propose is that we kind of think 0:08:29.920 --> 0:08:34.439 about how policy reacts to something like a balance between 0:08:35.000 --> 0:08:38.480 you know, um, a virus and economic impact. And I 0:08:38.480 --> 0:08:41.200 think what's going to happen over time is that the 0:08:41.320 --> 0:08:45.160 unit cost of fear is going to rise. And what 0:08:45.200 --> 0:08:46.920 I mean by that is that at the beginning of 0:08:46.920 --> 0:08:50.520 a crisis like this, fear is cheap. I mean, there's 0:08:50.559 --> 0:08:53.520 no real cost to staying at home for the first week, 0:08:53.600 --> 0:08:56.720 second week, third week. But as uneflorymed amounts, as people 0:08:56.760 --> 0:09:00.000 start to project their own economic well being into the future, 0:09:00.400 --> 0:09:03.560 you will see the unit cost of your rise, and 0:09:03.640 --> 0:09:06.839 that will then compel policymakers to alter the current social 0:09:06.880 --> 0:09:11.520 bustancing policies in some way. Thus, mitigating the ultimate economic 0:09:11.559 --> 0:09:14.760 impact of the virus itself. That's a dynamic argument. It's 0:09:14.760 --> 0:09:18.480 really difficult to model, but it's not just linearly extrapolating 0:09:18.480 --> 0:09:20.839 for where we are today um to the next two 0:09:20.840 --> 0:09:24.160 to three months, which obviously would produce a very bearish forecast. 0:09:24.400 --> 0:09:26.920 All right, So Marco pencil aap force if you would 0:09:26.960 --> 0:09:29.920 kind of your g d P a look for you know, 0:09:29.960 --> 0:09:32.920 the remainder of because there's a question and I guess 0:09:32.960 --> 0:09:36.079 initially people thought it might be a v quick snap back, 0:09:36.120 --> 0:09:38.600 then maybe you maybe not so quick, and then maybe 0:09:38.600 --> 0:09:40.480 even something like an l which is we're in this 0:09:40.559 --> 0:09:44.360 for a long term. Okay, well, let's let's go back 0:09:44.400 --> 0:09:47.000 a little bit and think about what is currently priced 0:09:47.040 --> 0:09:50.120 stin in terms of GDP kind of outcomes. And I 0:09:50.160 --> 0:09:53.200 think that um on March three, we hit an intra 0:09:53.280 --> 0:09:58.880 day low of SP that's a thirty six percent draw down, 0:09:58.960 --> 0:10:01.400 which is, you know, just the average draw down in 0:10:01.400 --> 0:10:04.880 a recession. So I think the SMP five really really 0:10:04.960 --> 0:10:10.319 quickly priced in a relatively bad outcome for the economy. 0:10:10.840 --> 0:10:13.040 What I would say is that you know that was March, 0:10:14.440 --> 0:10:16.559 we already had at that point about a week worth 0:10:16.559 --> 0:10:20.079 of social distancing policies. Um, clearly we're gonna have them 0:10:20.080 --> 0:10:24.480 throughout April. According to the o E c D, each 0:10:24.600 --> 0:10:29.360 one of those months will produce a two decline in 0:10:29.400 --> 0:10:32.480 the annualized GDP. So I think it's fair to say 0:10:32.520 --> 0:10:36.679 that globally speaking, we're probably gonna lose for sure from 0:10:36.679 --> 0:10:39.920 an annual growth perspective. FO So instead of three and 0:10:39.920 --> 0:10:42.800 a half, we're already down at negative zero point five, 0:10:43.280 --> 0:10:45.720 we could say maybe another half a month or month 0:10:45.760 --> 0:10:48.280 of that. So I think that on an annualized basis, 0:10:48.320 --> 0:10:50.760 we're going to be at minus one, minus one and 0:10:50.760 --> 0:10:54.880 a half percent global GDP growth, which is obviously absolutely terrible. 0:10:55.600 --> 0:11:00.400 But then there is this dynamic aspect where we see 0:11:00.440 --> 0:11:06.000 social distancing policies alterned, alternated, mitigated, reduced, and then you 0:11:06.040 --> 0:11:09.240 have the wall of tsunami coming behind you, this wave 0:11:09.320 --> 0:11:13.480 of fiscal stimulus that is absolutely unprecedented, and it is 0:11:13.520 --> 0:11:16.880 something that I think the market didn't price in on Marche. 0:11:17.320 --> 0:11:19.680 The speed with which we priced in a recession tells 0:11:19.679 --> 0:11:21.880 you two things. One, we have no idea, as you said, 0:11:22.120 --> 0:11:24.000 Lisa at the beginning, we have no idea how to 0:11:24.120 --> 0:11:26.440 price chaos. So that was one of the reasons we 0:11:26.440 --> 0:11:28.520 fell down so hard. The second thing is that I 0:11:28.520 --> 0:11:31.319 think most investors, and I know because we speak to 0:11:31.360 --> 0:11:34.040 a lot of macro hedge fund at the firm that 0:11:34.200 --> 0:11:37.840 is their business. Um, you know, most of them did 0:11:37.880 --> 0:11:41.199 not expect anything like this. Most of them use the 0:11:41.200 --> 0:11:45.240 two thousand nine stimulus playbook as the best case scenario. 0:11:45.559 --> 0:11:48.120 And then on top of that, many said, well, politics 0:11:48.120 --> 0:11:52.120 of the upcoming election will actually there delay some of 0:11:52.120 --> 0:11:56.000 these stimulus efforts. Yes, this is sort of game theory, right. 0:11:56.040 --> 0:11:57.920 It's basically how bad does it have to get before 0:11:57.960 --> 0:12:00.880 the tsunami of money gets even bigger? And that basically 0:12:01.200 --> 0:12:05.200 this sort of feedback loop will provide a backstop to markets. 0:12:05.200 --> 0:12:09.040 Am I getting that right? Well, here's what I would say, Actually, Lisa, 0:12:09.080 --> 0:12:12.280 I don't even think you need to get better much worse. So, 0:12:12.360 --> 0:12:14.960 for example, right now, I think you can objectively say 0:12:15.000 --> 0:12:17.360 that things are actually getting better. You know, once the 0:12:17.400 --> 0:12:19.960 market saw that Italy and Spain and figure this out, 0:12:20.720 --> 0:12:22.520 it doesn't matter how bad it gets into the US 0:12:22.679 --> 0:12:26.480 this week. In other words, once we as market participants 0:12:26.480 --> 0:12:30.160 can kind of check off that a relatively incompetent O 0:12:30.480 --> 0:12:33.920 C D country I Italy can get a handle of 0:12:33.920 --> 0:12:36.600 this issue. It doesn't matter if we have two bad 0:12:36.600 --> 0:12:39.200 weeks going forward into us that will be kind of 0:12:39.200 --> 0:12:42.560 like priced out. So I actually think that in terms 0:12:42.600 --> 0:12:44.920 of what's coming down the pipeline on the stimulus front, 0:12:45.600 --> 0:12:47.680 it doesn't even have to get worse for us to 0:12:47.720 --> 0:12:51.120 get more of it because paulicy makers now have figured 0:12:51.160 --> 0:12:54.199 out that they can use this as the reason to 0:12:54.280 --> 0:12:56.280 kind of get a lot of a lot of things 0:12:56.320 --> 0:12:59.880 that can pass in the past. Because of Paul polar Is, 0:13:00.679 --> 0:13:02.920 they're not putting like a shopping list together for the 0:13:03.000 --> 0:13:06.040 infrastructure plan. There may be a month away that could 0:13:06.080 --> 0:13:09.480 be wanted to trillion dollars without really even needing that 0:13:09.640 --> 0:13:12.560 extra ten percent of GDP, because remember we're at twelve 0:13:12.559 --> 0:13:15.520 percent of GDP in terms of stimulas. That's more than 0:13:15.600 --> 0:13:20.240 double what in two and nine the American Reinvestment and 0:13:20.280 --> 0:13:24.040 Recovery Acts m basically gave us. We're already double that, 0:13:24.520 --> 0:13:26.920 and we may get more no matter how bad things 0:13:26.960 --> 0:13:29.839 get over the next couple of weeks. And Marco, thanks 0:13:29.880 --> 0:13:32.800 so much for joining us. We appreciate your point of view. Certainly, 0:13:32.800 --> 0:13:35.080 I think that more optimistic than I think we've heard 0:13:35.120 --> 0:13:38.000 generally speaking over the less several days Marco topic partner 0:13:38.040 --> 0:13:40.040 Chief Strategies for the clock Tower Group, based out of 0:13:40.080 --> 0:13:42.200 Santa Monica, California. So that was at least a certainly 0:13:42.240 --> 0:13:44.520 a different take on how this could all proceed to 0:13:44.520 --> 0:13:46.840 over the next several weeks and months. I see how 0:13:47.679 --> 0:13:51.200 pandemic mentality is allowing people to lobby for things that 0:13:51.320 --> 0:13:54.840 they might have wanted anyway. I'm certainly getting lobbied at 0:13:54.840 --> 0:13:58.040 home for all sorts of electronic devices that they had 0:13:58.120 --> 0:14:01.000 wanted anyway, and me being my too, are willing to 0:14:01.040 --> 0:14:04.040 sell out to keep them occupied. So there is so 0:14:04.080 --> 0:14:05.960 there is that. I mean, you've got my own fiscal 0:14:06.000 --> 0:14:13.000 stimulus going on right here. This is Bloombird Markets with 0:14:13.120 --> 0:14:17.560 Lisa RAMOWDZ and Paul Sweeney on Bloomberg Radio. Well, like 0:14:17.640 --> 0:14:20.400 all financial markets, the municipal bond market has certainly been 0:14:20.480 --> 0:14:23.760 racked by volatility over the last couple of months. But 0:14:23.840 --> 0:14:27.520 the upcoming and potential fourth fiscal stimulus plan is likely 0:14:27.560 --> 0:14:30.400 to include a pretty big slug for infrastructure. The question 0:14:30.400 --> 0:14:32.120 for a lot of investors is what would that mean 0:14:32.520 --> 0:14:35.120 for the music bond market. Fortunately, we have Michael Jays 0:14:35.160 --> 0:14:38.880 as chief US Public Policy and musicipal strategist from Morgan 0:14:38.960 --> 0:14:41.480 Stanley joining us. Michael, thanks so much for joining us. 0:14:41.640 --> 0:14:44.040 Let's start by just giving us a lay of the land. 0:14:44.480 --> 0:14:46.360 What it's been like to be a mimunicipal bond investor 0:14:46.480 --> 0:14:51.120 over the past couple of months. It hasn't been fun. 0:14:52.000 --> 0:14:57.000 Um the volatility that you've seen over the last three 0:14:57.040 --> 0:15:00.760 to four weeks. Uh, it's prettiest on the So the 0:15:01.080 --> 0:15:03.520 movie you had from basically the types of the muni 0:15:03.560 --> 0:15:07.160 bond markets to the wides, we're both bigger and magnitude 0:15:07.200 --> 0:15:09.960 and speed by several degrees than what you had in 0:15:09.960 --> 0:15:15.120 the global financial crisis. So, uh, you know, is this 0:15:15.200 --> 0:15:18.000 is not something that is necessarily unexpected because you've got 0:15:18.000 --> 0:15:20.200 a muni market structure which is given to about the 0:15:20.280 --> 0:15:23.280 volatility and you saw this in Taper tantrum, and you 0:15:23.320 --> 0:15:29.440 saw this, but this is this was just degrees further 0:15:29.840 --> 0:15:33.080 off the chart, literally quite literally off the charts. Michael. 0:15:33.200 --> 0:15:36.440 There's a question about just the volatility that comes from 0:15:36.480 --> 0:15:39.000 a market that's not as liquid as a treasuries. And 0:15:39.040 --> 0:15:41.400 then there's a volatility stemming from the question of whether 0:15:41.400 --> 0:15:44.960 we're gonna start seeing municipal defaults. And I'm just gonna 0:15:45.000 --> 0:15:47.880 go full catastrophic. Here is a subway system in New 0:15:47.920 --> 0:15:53.680 York City going to default. Um, you know that's that's 0:15:53.680 --> 0:15:56.200 actually that's a more complicated question to answer than you 0:15:56.200 --> 0:15:58.800 would think. That's not what I want to hear. The 0:15:58.840 --> 0:16:02.200 answer is no, these major metropolitan areas are solvent and 0:16:02.280 --> 0:16:04.440 we're going to be fine. Is that not the reality 0:16:04.480 --> 0:16:08.200 that we're talking about? Well, well, major must politan areas, 0:16:08.200 --> 0:16:12.760 different subway system. Here's what I say. The chief of 0:16:12.800 --> 0:16:16.000 the mt A basically expressed the view that they need 0:16:16.040 --> 0:16:20.680 extra cash flow support because they're down ridership, and I 0:16:20.720 --> 0:16:24.640 don't think that's necessarily Probably now, in the bill that 0:16:24.720 --> 0:16:26.760 was just passed by Congress, they got about three point 0:16:26.760 --> 0:16:30.440 eight billion dollars worth of external support, So from a 0:16:30.600 --> 0:16:34.480 you know, from a cash flow perspective, once they're saying 0:16:34.480 --> 0:16:37.080 that they need more than that, uh, and probably a 0:16:37.080 --> 0:16:39.400 lot of this is going to be contingent on how 0:16:39.480 --> 0:16:42.600 long ridership is depressed. As it is, I wouldn't necessarily 0:16:42.640 --> 0:16:44.720 conflete what's going out with the m t A as 0:16:44.760 --> 0:16:49.360 being indicative with kind of broader metro areas generally, right, 0:16:49.400 --> 0:16:51.200 the mt A sort of its own system. New York 0:16:51.200 --> 0:16:54.200 city government is its own sort of separate balance sheet 0:16:54.240 --> 0:16:56.600 and income statement per se. So I think we have 0:16:56.640 --> 0:16:58.640 to be a little bit careful about looking at credit 0:16:58.720 --> 0:17:01.000 like the MTA, which has a lot of debt and 0:17:01.120 --> 0:17:04.880 is experiencing a substantial decline in ridership, and extrapolating from 0:17:04.920 --> 0:17:07.479 that to the broader kind of you know, you know, 0:17:08.040 --> 0:17:13.119 high grade city metropolitan area world of MUNI bonds. So, Michael, 0:17:13.160 --> 0:17:17.159 there is talking the upcoming fiscal Stimus number four that 0:17:17.200 --> 0:17:20.320 there would be again a pretty big piece of infrastructure. 0:17:20.440 --> 0:17:23.359 Hearing that from Speaker Pelosi, how do you think that 0:17:23.480 --> 0:17:26.120 might play out and how kind of the market reacting 0:17:26.119 --> 0:17:30.639 to that kind of potential um At the moment, I 0:17:30.680 --> 0:17:33.480 don't think the market is terribly focused on this, probably 0:17:33.520 --> 0:17:36.560 more focused on whether or not the Fed is going 0:17:36.600 --> 0:17:39.640 to intervene here eventually. But here's what I say about 0:17:39.680 --> 0:17:43.399 infrastructure when it comes to two muni's. Obviously it matters 0:17:43.480 --> 0:17:47.360 quite a bit how the spending is structured. But historically, 0:17:47.800 --> 0:17:50.280 when the federal government has decided to boost the amount 0:17:50.280 --> 0:17:54.320 of infrastructure spending, um, it's doing what's actually done. This 0:17:54.440 --> 0:17:56.440 takes some of the credit pressure off of those state 0:17:56.440 --> 0:17:59.639 and local government. If the thorough government is putting more 0:17:59.680 --> 0:18:01.520 money in of the systems that will government spend a 0:18:01.520 --> 0:18:06.000 little bit less of their own so effectively helps them, uh, 0:18:06.160 --> 0:18:09.200 improves on their capital needs, but not on their dime, 0:18:09.280 --> 0:18:11.840 so to speak. So if you've got that slug of money, 0:18:12.040 --> 0:18:14.080 you know, I kind of viewed it as a modest 0:18:14.160 --> 0:18:17.960 credit positive, uh, not necessarily addressing what are the acute 0:18:17.960 --> 0:18:20.040 needs of the muni credit system right now, But I'd 0:18:20.040 --> 0:18:23.320 say it's some modest positive. I guess the reason why, 0:18:23.359 --> 0:18:25.000 the reason why I asked about subway system, and yes, 0:18:25.040 --> 0:18:29.040 that's an idiosyncratic credit, I guess on a broader level. 0:18:29.080 --> 0:18:31.479 And you're talking about the amount of money that's going 0:18:31.520 --> 0:18:34.800 to get injected in states municipalities from the Care Act 0:18:34.880 --> 0:18:38.560 and from Congress, and I'm just struggling to understand the 0:18:38.640 --> 0:18:42.240 depth of the pain. You have a slowdown in local economies, 0:18:42.320 --> 0:18:45.400 you have an incredible increase in spending trying to build 0:18:45.440 --> 0:18:48.680 out the health care infrastructure. Is there a high chance 0:18:48.720 --> 0:18:51.800 that we're going to see muni defaults in a significant way, 0:18:51.800 --> 0:18:54.000 in a way that we've never seen before, especially when 0:18:54.000 --> 0:18:59.000 you throw in the pensions and the underfunded status there. Yeah, Well, 0:18:59.080 --> 0:19:01.480 if you have to answer the question sector by sector. 0:19:01.640 --> 0:19:03.280 I guess the first thing I would say is that 0:19:03.760 --> 0:19:06.399 hundred fifty billion dollars out of this bill going to 0:19:06.520 --> 0:19:10.320 state ends up being somewhere around kind of two to 0:19:10.440 --> 0:19:16.320 five percent of general fund revenues of states. Now, our 0:19:16.359 --> 0:19:20.160 economists have us UH in real GDP terms being down 0:19:20.240 --> 0:19:21.720 over the course of the year about five and a 0:19:21.760 --> 0:19:26.960 half per cent. So if you assume and I don't 0:19:26.960 --> 0:19:28.640 know if it's a good assumption it or not, we're 0:19:28.640 --> 0:19:30.479 still doing our own work on it, but you assume 0:19:30.560 --> 0:19:33.720 that UH state reve state tax revenues might be done 0:19:33.720 --> 0:19:36.840 at least that much, then it's probably fair to say 0:19:36.880 --> 0:19:39.120 that we've only addressed part of the kind of year 0:19:39.200 --> 0:19:43.359 term shortfall. And if you're a state, then you're gonna 0:19:43.400 --> 0:19:46.000 have to either draw down on your own reserves, do 0:19:46.119 --> 0:19:50.840 some casual borrowing, or undertake some austerity, or probably some 0:19:50.960 --> 0:19:54.160 combination of all of those. And you know, state, this 0:19:54.200 --> 0:19:56.879 is this, You know, the severity of this downturn is 0:19:57.000 --> 0:20:00.240 much greater than anyone expected. But coming in to this, 0:20:00.320 --> 0:20:02.080 I think it was it was fair to say that 0:20:02.760 --> 0:20:06.760 governments had necessarily build reserves back up the levels where 0:20:06.800 --> 0:20:09.240 before the global financial crisis they would have been able 0:20:09.320 --> 0:20:12.800 to just rely on their reserves. So it's a sector 0:20:12.840 --> 0:20:14.880 we've been underway for a while, and I think you're 0:20:14.880 --> 0:20:17.679 still supposed to look at it that way. But if 0:20:17.680 --> 0:20:20.679 you're looking at something like airports, for example, which you know, 0:20:21.640 --> 0:20:24.959 on the surface could look pretty scary because no one's flying, 0:20:25.680 --> 0:20:29.360 the liquidity in the reserve position of airports is um 0:20:29.400 --> 0:20:31.520 almost off the charge on the other side, so we 0:20:31.560 --> 0:20:34.480 think there's a lot more opportunities there. Michael Jesus, thank 0:20:34.480 --> 0:20:36.400 you so much for being with us. Michael Jesus, chief 0:20:36.520 --> 0:20:40.399 US Public Policy and mdicipal strategist for Morgan Stanley, joining 0:20:40.480 --> 0:20:45.840 us putting to bed some of my absolute catastrophic situation extrapolations, 0:20:45.840 --> 0:20:51.360 which is a good thing. My father is a mathematician. 0:20:51.480 --> 0:20:54.240 He and I were talking about how you can't model chaos, 0:20:54.640 --> 0:20:58.240 and we're kind of entering a chaos type situation. So 0:20:58.280 --> 0:21:01.240 there is that when we talk about chaos and sort 0:21:01.280 --> 0:21:03.280 of to fall out, you think about commercial real estate, 0:21:03.280 --> 0:21:05.679 and you think about all those stores that are forced 0:21:05.680 --> 0:21:09.080 to shut her and unable to pay their rents. And 0:21:09.119 --> 0:21:13.199 we're scaring that not only with stores and other businesses, 0:21:13.240 --> 0:21:16.480 but also individuals, which really raises a question what's the 0:21:16.560 --> 0:21:18.760 value of commercial real estate and will ever be the 0:21:18.800 --> 0:21:22.199 same again as people work from home and increasingly choose 0:21:22.240 --> 0:21:24.960 remote work paths rather than going to the office. Kevin 0:21:25.000 --> 0:21:27.440 Thorpe joining us now. I'm really looking forward to this conversation. 0:21:27.520 --> 0:21:31.840 Chief economist and head of global research at Kushman and Wakefield. Kevin, 0:21:32.480 --> 0:21:34.480 you know, we've heard a lot of gloom and doom, 0:21:34.320 --> 0:21:37.760 a massive dislocation the commercial real estate market, with a 0:21:37.800 --> 0:21:40.360 lot of people saying that not only will miss payments 0:21:40.840 --> 0:21:45.080 lead to increasing declines in current values, but a shift 0:21:45.119 --> 0:21:49.560 away from the office place, uh moving, moving the valuation 0:21:49.600 --> 0:21:54.120 permanently lower in the longer term. What's your view on that? Yeah, 0:21:54.200 --> 0:21:56.239 so first thanks thanks for having me on, and I 0:21:56.280 --> 0:21:58.800 do want to give a big salute to all the 0:21:59.320 --> 0:22:02.959 healthcare for fessionals, the doctors and nurses as well as 0:22:03.000 --> 0:22:05.919 you know, the cleaning staffs, building maintenance, just really everyone 0:22:05.920 --> 0:22:08.879 who's on the front line, uh doing their part to 0:22:09.160 --> 0:22:12.200