Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jai Ley.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg This
Speaker 1: is Bloomberg Surveillance. Economics. Productivity is the key to real
Speaker 1: GDP growth. Argue is that inflation is going to be
Speaker 1: moving higher, but it's gonna be moving higher in gradual basis. Clinants,
Speaker 1: I don't think there's a reason to expect the dollar
Speaker 1: to keep going up. We don't realize how good times
Speaker 1: are now. Investment, I'm very pessimistic on stocks. I'm very
Speaker 1: pessimistic on bob. If you're longer term investor, you just
Speaker 1: want to stay a long Bloomberg Surveillance with Tom Keene
Speaker 1: and Jonathan Parow on Bloomberg Radio from New York City
Speaker 1: for audience worldwide. Good morning, Good morning. This is a
Speaker 1: Bloomberg Surveillance Alongside Tom Keene, I'm Jonathan Pharaoh. President Trump
Speaker 1: picking a loyalist to replace Cone cuver Low, signaling he
Speaker 1: supports a tough stance on China. The Senate backing a
Speaker 1: bill to relax post crisis rules, giving smaller banks a break,
Speaker 1: offering Wall Street very little and drowning in debt crushed
Speaker 1: by competition. The toys r US turnaround collapses after turnaround
Speaker 1: efforts fail. In the markets, your thirstday morning price action
Speaker 1: as follows. Futures up fourteen on the doubt, unchanged on
Speaker 1: the SMP five hundred. In the FX markets, some muted
Speaker 1: price action, but some yen strength in there with Dolly
Speaker 1: Yen down for a second straight day. We dropped SETH
Speaker 1: at one oh six at one eighty nine, down four
Speaker 1: tenths of one percent. In the bond market is there's
Speaker 1: some stormy weather brewing in Shortsville. Treasuries yields lower by
Speaker 1: another basis points to almost two a d on a
Speaker 1: US tenure at the front end of the curve were
Speaker 1: unchanged at two point to five percent. And to round
Speaker 1: things out for you, in the commodity ARKT Brent unchanged
Speaker 1: at and w T I positive by just a mere
Speaker 1: two tenths of one percent at sixty one dollars and
Speaker 1: around about ten cents. The main story worldwide is still
Speaker 1: very much China, with the question one question on many
Speaker 1: people's minds. How does the United States counter China? In
Speaker 1: a period of just twenty four hours, the struggles were
Speaker 1: very much underlined. In Beijing, President she was consolidating power,
Speaker 1: unveiling a sweeping diplomatic overhaul to help deliver a decade
Speaker 1: long plan. In Washington, the President fired his top diplomat
Speaker 1: by tweet, letting bear months of policy disputes. I'm really
Speaker 1: pleased to say that Wang in this morning on Bloomberg
Speaker 1: Surveillance is Stephen Roach, the Yale University professor, formerly chairman
Speaker 1: of Morgan's Down the Asia and the firm's economists for
Speaker 1: much of his thirty year career at the company. He
Speaker 1: joins US now professor, Good morning, thanks joining us. So
Speaker 1: how does the United States counter the Chinese approach in
Speaker 1: international trade? Well, there's several things we've gotta do. Number one, Jonathan,
Speaker 1: we have to restart the formal engagement on on on
Speaker 1: economic matters. We used to have something called the Strategic
Speaker 1: and Economic Dialogue. It morphed into the Comprehensive Economic Dialogue,
Speaker 1: and now it's on hold and we really don't talk.
Speaker 1: We don't need a bunch of you know, annual uh
Speaker 1: sort of event planning exercises. We need a permanent secretariat
Speaker 1: to to really engage the Chinese on a regular basis.
Speaker 1: Number one. Number two, we've got to focus on market access,
Speaker 1: and there we've had a negotiations stalled for nine years
Speaker 1: on a bilateral investment treaty which would allow US and
Speaker 1: our multinationals to UM have greater access to rapidly growing
Speaker 1: consumer markets UH in China. We are stymied on this.
Speaker 1: The Chinese are also part of this UM. They want
Speaker 1: access to our markets. Let's if we have a president
Speaker 1: who does deals, Let's do a deal to allow UH
Speaker 1: companies on both sides to actively participate. And Thirdly, there's
Speaker 1: a number of UH sort of UM UH software policy
Speaker 1: issues that need to be addressed. We talked about them
Speaker 1: on television a few minutes ago. The US is completely
Speaker 1: off base and viewing the Chinese bilateral deficit and isolation
Speaker 1: from its multilateral current account and savings problems. We've got
Speaker 1: to get economic analysis back into the issue. And the
Speaker 1: Chinese have soft issues of their own to address in
Speaker 1: terms of their geostrategic contentions UH, their training practice issues UH,
Speaker 1: and cyber issues as well. UH. China's reputation amongst the
Speaker 1: um The intellectual thought leader base in the United States
Speaker 1: is probably an all time low right now, and China
Speaker 1: needs to counter that with more effective UH and reasoned
Speaker 1: responses on their side. How do you expect the Chinese
Speaker 1: to count up the events of the last month, professor,
Speaker 1: because they have been remarkably quiet in the face of
Speaker 1: heights and criticism worldwide. Well, they've been. They've been quiet
Speaker 1: because the actions to date have not really been of
Speaker 1: enormous consequence. The big shoe to fall would be Jonathan
Speaker 1: if the President does impose much UH, higher and broader
Speaker 1: tariffs as part of the so called Section three oh
Speaker 1: one negotiations that his trade representative has been working on
Speaker 1: since last August in areas like intellectual property rights, technology transfer,
Speaker 1: and innovation. And you know, the rumor not so secret
Speaker 1: coming out of Washington is that big tariffs are coming
Speaker 1: UH in response to that, and if the Chinese are
Speaker 1: hit with much bigger tariffs, we will most assuredly retaliate.
Speaker 1: And we'll see how we like it when our third
Speaker 1: largest and most rapidly growing export market puts tariffs on
Speaker 1: US companies, including Boeing. Steve to me, the thing that's
Speaker 1: most charming is a complete miss and standing of game theory.
Speaker 1: And I'm not talking about the sophistication of avanage sticks
Speaker 1: down at Princeton University or the wonderful program at Rice University.
Speaker 1: I'm just talking about basic response. Mr Navarro and Mr
Speaker 1: Ross seemed to be unaware that China will respond. How
Speaker 1: will China respond? What is the game theory? It's Steve
Speaker 1: Roach observes or can predict from Beijing China. We have
Speaker 1: a code, I mean time. We have a codependent economic
Speaker 1: relationship with China, which means that uh, they depend on
Speaker 1: our markets to sell their goods, but we also depend
Speaker 1: on products from China to make ends meet for hard
Speaker 1: press consumers. And by the way, we depend uh hugely
Speaker 1: every year on Chinese buying of treasuries to fund our
Speaker 1: budget deficit, which is of course UH going to get
Speaker 1: considerably larger in the years ahead. So China's got a
Speaker 1: number of options that it can UH think of out
Speaker 1: in response to the US pressure on the trade front
Speaker 1: or on the capital flow front. I mean, I mean
Speaker 1: you should see John Farrell going down Fifth Avenue when
Speaker 1: a Harley Davidson actally something. If they put a tariff
Speaker 1: on Harley Davidson's what's the effect on that for both parties? Well,
Speaker 1: you won't. You won't see John writing as Harley in
Speaker 1: UH in Beijing. Don't just get a little bit more expensive. Yeah,
Speaker 1: well who knows? Um, I think again. Uh, the US
Speaker 1: UH is looking for sources of growth, and our two
Speaker 1: biggest trading partners are Mexico and Canada. Number three in
Speaker 1: terms of and and number one in terms of actual
Speaker 1: growth over the last ten years is China. China's changing
Speaker 1: its economy, Tom, They're becoming more of a middle class
Speaker 1: consumption economy, which is a huge potential market for US
Speaker 1: in terms of both goods and services, provided we do
Speaker 1: a deal on market access through the bilateral investment treaty
Speaker 1: that I just alluded to. So that should be the focus. Uh.
Speaker 1: And you know, the Chinese can choke off that option
Speaker 1: if we play tough with them. So you're right, there
Speaker 1: is no real game theoretic mindset in Washington. They view
Speaker 1: it as a one way street. You know, we can
Speaker 1: stop China, irrespective of the consequences that may have on US. Professor.
Speaker 1: At the moment, though, that development in China is largely
Speaker 1: seen as a threat made in China, this big decade
Speaker 1: long plan. It's seen as a threat not just by
Speaker 1: the United States of America, but by Europe as well,
Speaker 1: and perhaps Germany more specifically. You keep talking about the
Speaker 1: benefits of this relationship with China, and I look at
Speaker 1: the current administration and wonder whether they identify enough shared
Speaker 1: interests right now to really counter the areas of friction.
Speaker 1: Do they look those are those are great questions. Industrial policy,
Speaker 1: whether it you know, was sponsored by UM, the Japanese
Speaker 1: UH in the eighties or now the Chinese right now
Speaker 1: has has been viewed as a threat for systems like
Speaker 1: ours that are based on the creative destruction of Joseph Schumpeter.
Speaker 1: The market knows a lot more. But you know, we
Speaker 1: get engaged a lot in industrial policy. Just look at
Speaker 1: what the Trump administration did with respect to this Qualcom
Speaker 1: UH deal as well. And look at what we've done
Speaker 1: repeatedly UH in intervening in what we think are our
Speaker 1: strategic interests. UH through Scipious and other organizations that UH
Speaker 1: control the way in which UM other companies operate in
Speaker 1: our space. So we're all guilty of intervening UH in
Speaker 1: in markets. And you know, the Chinese do have this
Speaker 1: strategic plan made in China. But look, there's no guarantee
Speaker 1: it's it's actually gonna work out exactly as they say.
Speaker 1: They've got to do a lot of innovation. They're gonna
Speaker 1: move up the value chain, they're gonna be moving into
Speaker 1: new industries. They're gonna put a lot of government support
Speaker 1: into these industries like you know, biotech and information technology
Speaker 1: and environmental remediation. But there's no guarantee it's gonna work
Speaker 1: if they don't have the innovation UH and the breakthroughs
Speaker 1: UH to really bring these industries to the next place.
Speaker 1: Steven right, it's going to have you with us the
Speaker 1: university professor Fumer, chairman of Morgan Stamby Asia and these
Speaker 1: funds economists. For much of his thirty year careit son
Speaker 1: annual visit that we do with Douglas Cass of Sea Breezes.
Speaker 1: We do this for the brackets, we do this for
Speaker 1: spring training and his Florida casts visiting all the stadia
Speaker 1: of the Grapefruit League, and we talked to him about
Speaker 1: the equity markets as well. Dougo, who do you have
Speaker 1: in your bracket? Please let's get that out of the way.
Speaker 1: On the right side, of the bracket. I'm all Philly
Speaker 1: villain over versus Pennsylvania and Quakers go kers. You've got
Speaker 1: the pen makers. I'm being facetious. I think Villanova goes
Speaker 1: all the way. Okay, very good. We're looking boiler up
Speaker 1: here Perdue, John Farrow, Doug Cass is trying to find
Speaker 1: Perdue in the map. If someone to tell me, well
Speaker 1: the duck care, we'll get into that history that. We'll
Speaker 1: do that at our ten o'clock our a topsy me,
Speaker 1: our autopsy meeting this morning. I'm boiler up, Doug Cass,
Speaker 1: boiler up these markets down thousand. Everyone knows you've been
Speaker 1: more than cautious. Are you still short the market? Yes?
Speaker 1: Well I've been long and short, but I see better
Speaker 1: than a fifty percent probability that we've seen a market
Speaker 1: top already this year. Within that, is it about the
Speaker 1: economic growth fragilities that are percolating? Is a simply valuation
Speaker 1: or is it? Jerome Powell? Well, I think history rhymes.
Speaker 1: And we discussed last time when I went along into
Speaker 1: the liquidity dry up owing to the unwind short fall
Speaker 1: and risk parity trades in early February, and um I
Speaker 1: compared it to the last liquidity event that I remember
Speaker 1: in October seven when portfolio insurance crashed the market. So
Speaker 1: of history rhymes, we have a rally off that we
Speaker 1: have a retest, rally and a retest. I think we're
Speaker 1: at the We had the second rally already. I brought
Speaker 1: back my shorts, went long sold into my target around fifty.
Speaker 1: We had a bit of an overshoot. And where I
Speaker 1: stand now as I've been consistently in the last week
Speaker 1: or so re shorting the indices. I made the observation
Speaker 1: to you and to your producer and but my buddy Lee,
Speaker 1: that you know, we live in this interconnected world, world,
Speaker 1: this flat world, so all geography market geographies should really
Speaker 1: correlate to each other. And I made the observation that
Speaker 1: the s that the docks is now back to where
Speaker 1: it was in March two thousand seventeen, which is will
Speaker 1: surprise a lot of people. At that time, the S
Speaker 1: and P was about four five points lower, so you
Speaker 1: get some sense of overvaluations. I don't think this is
Speaker 1: a divergence we can ignore. But there are other warning signs.
Speaker 1: Jonathan mentioned the strong bid and the treasury market high
Speaker 1: yield debt is starting to roll over. Um. We're beginning
Speaker 1: to see the domestic economy stumbling a bit, and the
Speaker 1: more optimistic economic assumptions are not being confirmed by retail sales,
Speaker 1: durable goods, housing starts, automobile sales which have peaked, and
Speaker 1: so there's a developing trend of disappointing economic data as well.
Speaker 1: It's also occurring in the EU. The less couple of
Speaker 1: deaths very pronounced in the Europe. Do yeah, So I
Speaker 1: think the market may be the mirror image of the
Speaker 1: New York Yankees. In the latter case, the best is
Speaker 1: yet to come. In the former case, the market the
Speaker 1: worst is yet to come. Good morning Bloomberg one or
Speaker 1: six one from Boston on a half of all I apologies,
Speaker 1: please please come on, but it's free to be Doug.
Speaker 1: How the Orioles can pop ball five or six in
Speaker 1: a row in a great like No one understands this world,
Speaker 1: John Braining, Look my eyes on the market. My heart
Speaker 1: is on d D and Wede and Bird and Sanchez
Speaker 1: and Hick, and we have to all stand up for
Speaker 1: the judge, so we so we keep it on the market,
Speaker 1: just for a couple of minutes, Just for a couple
Speaker 1: of minutes, before everyone in Boston turns off the radio. UM. Dug.
Speaker 1: If we've come into the new year and everyone is
Speaker 1: completely over enthusiastic about global synchronized growth, Europe picking up,
Speaker 1: the United States picking up. Talk to me about whether
Speaker 1: A we've seen peak growth. From listening to you, you
Speaker 1: think we have, and too, whether we've seen the peak
Speaker 1: for the tenure year this year already. I think we've
Speaker 1: seen peak expectations for growth. UM. I think we are
Speaker 1: market participants, Jonathan, are far too focused on the jobs
Speaker 1: report UM of last Friday. I would emphasize that employment
Speaker 1: data is a notoriously rear view mirror or lacking economic indicator.
Speaker 1: Yesterday morning, the Atlanta Fed said that DP model sees
Speaker 1: first quarter of growth of only one point nine percent,
Speaker 1: down from two I would say that's fairly disappointing, considering
Speaker 1: we have been in a respend and rebuilding period following
Speaker 1: the hurricanes, and we're now nearly three months past the
Speaker 1: passage of meaningful corporate tax cuts. What do you say
Speaker 1: back to people, Doug, that's say those tax cuts won't
Speaker 1: buy until the second quarter, the third quarter. I don't
Speaker 1: I don't understand understand why that would be the case, well,
Speaker 1: for a lot of people, they won't sit in that
Speaker 1: check until later on this quarter. I speak to companies, Jonathan,
Speaker 1: and I don't see an ex a meaningful change in
Speaker 1: their capex UH projections for fiscal and calendar. But this
Speaker 1: is something I wanted to do this with David Kelly
Speaker 1: here in a minute, but let's do it right now
Speaker 1: with Douglas cast. Doug, you and I have seen this
Speaker 1: jillion times where you get a consensus always deserved zeitgeist
Speaker 1: view in this case better economic growth. And it may
Speaker 1: be cyclical and short, it may be structured and long.
Speaker 1: Good morning President Trump, Good morning Mr Cudlow. But but Doug,
Speaker 1: the fact is the percolation and research is it may
Speaker 1: not be there that has a profound ramification on FED
Speaker 1: tone and market tone, doesn't it. I'm beginning to think
Speaker 1: Tom that we're going to see a tour or less
Speaker 1: rate increases, which is far below consensus. Yes, Um, you
Speaker 1: know it's this consensus, Jonathan, is what I call groups
Speaker 1: think and um particularly at a flinch in it. If
Speaker 1: you can identify inflection points, you can make a great
Speaker 1: deal of money. And then now we have this optimism
Speaker 1: about my good buddy pal friend Larry Cudlow, which I do,
Speaker 1: which we should discuss, well, Doug, let's let's just dis
Speaker 1: because of time, we gotta rip up the script here,
Speaker 1: you and I've done Larry for years. Can Larry talk
Speaker 1: back to the president because the critics say he's just
Speaker 1: gonna mouth the Trump date? Isn't his job to say?
Speaker 1: Wait a minute, Mr President? Right? My relationship with Larry
Speaker 1: runs deep. I've been on the Cutlow Report when it
Speaker 1: existed over fifty times, maybe twenty times on his radio show.
Speaker 1: He was at my son's wedding. That's how close we are.
Speaker 1: I think on numerous grounds, this is a very different
Speaker 1: administration than Larry is joining as compared to the one
Speaker 1: that he left when he was working with Reagan years ago.
Speaker 1: I don't think you changed Trump's mind, which is strong
Speaker 1: and long held, becomes with these quick policy decisions and
Speaker 1: seems to stick with them. So speaking truth through his
Speaker 1: power is almost an insurmountable objective for Larry with Trump,
Speaker 1: in my opinion, um is it? Well? I think his
Speaker 1: role is going to primarily be in marking, marketing, selling
Speaker 1: the tax package, and secondarily working with Ross and the
Speaker 1: borrow towards a sensible trade policy. Thirdly, he's gonna obviously
Speaker 1: bridge Washington and Wall Street in the business communities, which
Speaker 1: would be good at But I asked you the the
Speaker 1: following questions. Um, Look, Larry has met more than anyone
Speaker 1: and I know and this is why I respect him.
Speaker 1: He has overcome challenges in the past. But this mountain
Speaker 1: is really high. High. Everyone is saying, especially on your
Speaker 1: competing network, the NBC where he worked, if that Larry
Speaker 1: will have the upper hand against Navarrow and Ross. I
Speaker 1: would ask if Cohen, the former president of Goldman Sachs,
Speaker 1: did not have the upper hand over Ross and the Varl,
Speaker 1: why should we expect Larry this media commentated at the
Speaker 1: upper hand? Okay, I gotta go here for Boston. I
Speaker 1: got an email here from Boston one or six one
Speaker 1: half of where should Aaron Judge be in the Yankees lineup?
Speaker 1: Isn't he like the ultimate leadoff hitter? Would you please?
Speaker 1: He's gonna back? Third, Third, Okay, it'll be magnificent. I
Speaker 1: hope to be down there in a couple of days.
Speaker 1: Maybe Doug, I'll run into you, uh at Steinbrenner Field,
Speaker 1: Douglas Cass series partners with us is why thank you?
Speaker 1: For those comments. Well, a change in the White House
Speaker 1: and in advisors to the President when it comes to
Speaker 1: economic policy, and perhaps you've been a change in markets.
Speaker 1: Gina Martin Adams is a Bloomberg Intelligence expert when it
Speaker 1: comes to all things related to economics and the markets.
Speaker 1: She not always a pleasure. Thanks for being here. Um,
Speaker 1: maybe just let's talk a little bit about contradictions, or
Speaker 1: seemingly contradictions. On the one hand, you have an administration
Speaker 1: that is imposing tariffs on the imports of foreign manufactured
Speaker 1: steel and aluminum. Also, there's a conversation more than a conversation,
Speaker 1: I bet about tariffs or preventing automobiles from being shipped
Speaker 1: to the United States for US consumers. Now you have Ms.
Speaker 1: Larry Cudlow, who is going to be joining the administration
Speaker 1: and has in the past, I believe, been a quote
Speaker 1: free trader. How do you square those two things at
Speaker 1: a time when the budget deficit in the United States
Speaker 1: is ballooning. It's get be tricky. I mean, I think,
Speaker 1: as with all things with this particular administration, it's really
Speaker 1: tough to get a consistent read on where things are headed.
Speaker 1: I think if I were to take a stab at
Speaker 1: how cut Lowell position this. It is probably going to
Speaker 1: be positioned as a president that is attempting to negotiate
Speaker 1: better trade relations, not necessarily restrict trade. That would be
Speaker 1: my guests as to have a spin, guys, is that
Speaker 1: the way investors will take this? I think investors are
Speaker 1: taking it this week as with a big question mark.
Speaker 1: All right. I mean, we started off this week in
Speaker 1: pretty solid territory despite the fact that the trade package
Speaker 1: was passed last week. We had a really strong rally
Speaker 1: on Friday. We failed to follow through on that rally
Speaker 1: on Monday, and it's been a tough week ever since.
Speaker 1: And I think a lot of the reason for that
Speaker 1: tough week, so to speak, is this uncertainty with respect
Speaker 1: to where this administration is headed. If if rates of
Speaker 1: tenure treasuries go above three and a half percent, what
Speaker 1: happens to the US government's ability to employed? Hopeful for that,
Speaker 1: but how how really how does that factor into the
Speaker 1: ability of the U. S Government to finance it's debt
Speaker 1: and pay for it? Yeah, it's going to be really tough.
Speaker 1: I think this is one of the really critical questions
Speaker 1: for this year is you've got a FED that has
Speaker 1: to react to fiscal policy getting easier and easier, reinflating
Speaker 1: the economy, creating some degree of inflation pressure, creating better
Speaker 1: growth conditions. The natural reaction of monetary policymakers is going
Speaker 1: to be continue to tighten. If monetary policymakers continue to
Speaker 1: tighten amid that higher growth pace rates are going to
Speaker 1: go higher, what they need to happen to fund this deficit,
Speaker 1: if for growth to really skyrocket, Because if you do
Speaker 1: have much stronger growth conditions, and as rates are going higher,
Speaker 1: it's not as difficult to fuel. Right, the deficit looks
Speaker 1: much better in a higher growth environment than it does
Speaker 1: in a slow growth environment. Jinor Martin Adams with a
Speaker 1: Bloomberg equity and Bloomberg intelligence, can I throw you a
Speaker 1: curveball question? Of course? And on my way to spring training,
Speaker 1: So I'm right now. Toys r US blew up today
Speaker 1: and there was a certitude about all that debt X
Speaker 1: number of years ago. Are you afeared in a general
Speaker 1: sense that we become so complacent about debt, build up,
Speaker 1: low yield, everything's great, you know, make private equity great again?
Speaker 1: Are we setting her up for more toys? R US
Speaker 1: is right now. In the future, I think we have
Speaker 1: a temporary reprieve from more toys r us as for
Speaker 1: this year, specifically because of all the cash that's coming
Speaker 1: back through repatriation, because of all the tax reform that
Speaker 1: has unlocked a degree of cash for companies. All of
Speaker 1: that's going to make IBADA look a lot better this
Speaker 1: year than it has in the recent past. So some
Speaker 1: of your leverage ratios, particularly those that are debt relative
Speaker 1: to earnings related measures, look a lot better this year.
Speaker 1: So company's capacity to pay improved significantly as their earnings
Speaker 1: are improving. I think Toys r us is a one
Speaker 1: ace in a segment of the U S acuity market
Speaker 1: that is continuing to struggle, and that's retail. But you're
Speaker 1: not really seeing this in the broad sectors. I do
Speaker 1: think should rate skyrocket, Should you get a really rapid
Speaker 1: increase in rates, It makes things look a lot more
Speaker 1: difficult in future years, but it does not necessarily impact
Speaker 1: the stock market or sectors at large in the short run.
Speaker 1: Can I put out on Twitter? You can do it
Speaker 1: for Sears Holdings s h l D. I'm going to
Speaker 1: let I mean talk about comment I try to avoid. Yeah,
Speaker 1: I'm not going there. It's a totally new retail world,
Speaker 1: thank you, Yes, all right, having a totally new tax world.
Speaker 1: I don't know whether you've got a chance to listen
Speaker 1: to some of the presidents re marks yesterday he was
Speaker 1: speaking I believe in St. Louis and um uh, topic
Speaker 1: is taxes and the potential for a second really well,
Speaker 1: I mean I said, there was just a hint of it.
Speaker 1: I'm wanting, you know, in the in the context of
Speaker 1: we got the news today that the Dutch government is
Speaker 1: going to continue with their plan to abolish dividend taxes.
Speaker 1: Is this a race to the bottom when it comes
Speaker 1: to taxes? And do you think we could get another
Speaker 1: tax cut? Wow? This is out of a totally out
Speaker 1: of left I thought the President was looking at walls
Speaker 1: in California yesterday. I wasn't aware of it. Finger his
Speaker 1: finger in the wall. You know. Perhaps I think it's
Speaker 1: a long way off. Gina, I just put up. We
Speaker 1: do this for Gina, Martin Adams and no one else, folks.
Speaker 1: We go to the way to the average cost of capital.
Speaker 1: It's a wonderful function. On the Bloomberg Sears Holdings percent
Speaker 1: debt with a coupon of four point nine percent, which
Speaker 1: is popping conservatively two beats off the tenure yield. I
Speaker 1: mean we'll have we have to have Gina Martin Adams
Speaker 1: back on just to go over these kind of things.
Speaker 1: When you wait the average cost of equity and debt
Speaker 1: within the President Nirvana that he was going to ask
Speaker 1: you to wait the cost of tickets to spring training baseball.
Speaker 1: Thank god, I'll take lay at average cost of capital
Speaker 1: over that any day. We had to sell the middle
Speaker 1: daughter just to be able to swing this. Gina Martin
Speaker 1: had is with his Bloomberg intelligence working on equities, and
Speaker 1: of course she does this with futures up, six down,
Speaker 1: futures up, pim Fox in Tom King. We need to
Speaker 1: get the markets open, this is Bloomberg. Well, I guess
Speaker 1: you can do an r I P for Toys are Us.
Speaker 1: And here to explain how it all happened is Stephanie
Speaker 1: whis sink At Jeffrey's research analyst and managing director. And yes,
Speaker 1: we're talking about the toy retail business. Stephanie, thanks very
Speaker 1: much for being with us. Uh you say that the
Speaker 1: toys are rust liquidation perhaps is going to send ripples
Speaker 1: to the industry in what way? Yeah? I think a
Speaker 1: couple of ways in good morning. I think two things. One, clearly,
Speaker 1: there are a number of toy vendors that support Toys
Speaker 1: r US that will feel the impact of the loss
Speaker 1: of a retailer. And anytime there's a loss of the retailer,
Speaker 1: and that means that there's concentration of share with other retailers,
Speaker 1: and we think the winners are most likely to be
Speaker 1: Amazon and Walmart UM and both of those companies we
Speaker 1: know fight on price, and so as a vendor selling
Speaker 1: toys into the toy industry with two big powerful retailers
Speaker 1: now as your your lead agents for a consumer buying
Speaker 1: means that there's most likely going to be some margin pressure.
Speaker 1: I think secondarily, as we think about Toys r US's
Speaker 1: role in the toy industry, it was definitely a destination
Speaker 1: where consumers discovered new brands and new products within the
Speaker 1: toy space. So I do think for those small and
Speaker 1: midsized companies, they're not going to necessarily have a venue
Speaker 1: to really build and uh develop their brands. So you know,
Speaker 1: we we do look for new venues to potentially unfold
Speaker 1: and emerge where some of the inventors and some of
Speaker 1: the more innovative toy companies that are on the small
Speaker 1: and mediums i've can find homes for their products. Stephanie,
Speaker 1: is this a casebook example where the actual business of
Speaker 1: toy stores is perfectly okay in the sense that you
Speaker 1: want to go and buy a toy, you want to
Speaker 1: go and see it, you want children to go and
Speaker 1: see it before they actually cost you the money to
Speaker 1: do so. But that the sort of not management, but
Speaker 1: the financial engineering behind Toys are Us is what doomed
Speaker 1: the company. Yeah, I think that's a fair observation. I
Speaker 1: think clearly the financial engineering and the financial structure of
Speaker 1: Toys are Us put pressure on its ability to invest
Speaker 1: to stay current with changes in the modern retail marketplace.
Speaker 1: I think second, though we have seen very distinct changes
Speaker 1: in consumer behavior, one of the most unique and I
Speaker 1: think probably most prolific changes in the consumer marketplace is
Speaker 1: the changing leadership of demographics. We've moved now into a
Speaker 1: millennial lead consumer marketplace, and that millennial is a digitally native,
Speaker 1: digitally savvy, and it's clearly shopping more online than prior generation.
Speaker 1: So I think that has also been unfolding in the backdrop.
Speaker 1: Layering on top of this overall financial structure that was prohibitive.
Speaker 1: Stuff was with us with Jefferies right now and not
Speaker 1: only consumer retail and the toy industries. Your reports are
Speaker 1: wonderfully detailed about store closings and liquidations. What's the level
Speaker 1: of sweat right now? It's March. I guess they're really
Speaker 1: beginning to get ready for the fall that went through
Speaker 1: the Christmas season. I don't know what the schedule is.
Speaker 1: There's trade shows to go to forget about it all.
Speaker 1: What's the sweat level of right sizing income statements right now? Well?
Speaker 1: I think certainly as an academic, we need to be
Speaker 1: very thoughtful about what we think the potential residual outcome is,
Speaker 1: and not just the impact of toys are us, but
Speaker 1: how the consumer behavior shifts play into our considerations around
Speaker 1: profit structures. I think in sortinly though, because Toys r
Speaker 1: US is announcing its intent to liquidate across its US,
Speaker 1: UK and portions of Europe and Australia fleet, this may
Speaker 1: take many, many months. One thing that consumers are incredibly
Speaker 1: savvy about is pantry loading product when they find a
Speaker 1: great deal, So we don't necessarily know what the residual
Speaker 1: outcome is going to be in the holiday, which is
Speaker 1: where seventy of toy sales occur typically in the year.
Speaker 1: But if Grandma's out shopping in August and she finds
Speaker 1: some Christmas presents that she can buy at seventy or
Speaker 1: eighty percent off, she might stock up on presents, and
Speaker 1: that might mean that the holiday season looks different than
Speaker 1: it has in the past. As we start to reconcile
Speaker 1: in twenty nineteen, I don't know that we'll see as
Speaker 1: much of an impact, but certainly this is going to
Speaker 1: play out over the course of the next twelve months
Speaker 1: or so before we fully appreciate what the loss of
Speaker 1: toys r US means to the industry. Do we buy
Speaker 1: toys off Amazon? Absolutely? Amazon is the fastest growing and
Speaker 1: one of the largest retailers of joys. I find him,
Speaker 1: I you know, and I mean I don't even needed
Speaker 1: more step for this, Like Omni channel. Omni channel sounds
Speaker 1: like an NBA program you don't name the school. Well,
Speaker 1: I hope omni channel has a lot of money, because
Speaker 1: you're gonna need it. Yeah, I want to ask you
Speaker 1: stefinitely just a little bit here, you know, if we
Speaker 1: just go back to December. Um, there was, of course
Speaker 1: a court hearing about this bankruptcy filing and the bankruptcy judge,
Speaker 1: Keith Phillips, he overruled objections by the US Trustees Office.
Speaker 1: They had the public watchdog right in the East bankruptcy cases,
Speaker 1: and the judge ruled that the retailer could pay its
Speaker 1: seventeen top executives fourteen million dollars in incentive bonuses. Why
Speaker 1: would they do that? Yeah, it's an excellent question. I
Speaker 1: think in the age of transparency, the consumers take issue
Speaker 1: with that when they see that occurring, and frankly in
Speaker 1: some cases the employees do too. And empoyter Us with
Speaker 1: all very very large retailer and employed a significan in
Speaker 1: tens of thousands of people in the United States, and
Speaker 1: I think at holiday time worldwide was extending up into
Speaker 1: the hundred thousand dollars excutingly a hundred thousand person type range.
Speaker 1: So clearly that is a statement about protecting the interests
Speaker 1: of the executive group. But I think in again, in
Speaker 1: the age of transparency, that doesn't necessarily sit well with consumers, infendors,
Speaker 1: and employees. Well, I was going to say and add
Speaker 1: into those investors because toys Arrest used adjusted earnings as
Speaker 1: the benchmark for whether the executives have actually made their
Speaker 1: bonuses right correct, and that's that's not an uncommon approach,
Speaker 1: but it certainly doesn't sit well. So I think it's
Speaker 1: um not a typical many times perform what were adjusted.
Speaker 1: The head of the company, the head of the company,
Speaker 1: Mr Brandon Day Brandon uh hem, I believe his cash
Speaker 1: compensation with six and a half million, and he receives
Speaker 1: other long term incentives and bonuses. It brings his total
Speaker 1: annual camp to twelve and a half million dollars. Stuff.
Speaker 1: At the time we got left with you, I mean,
Speaker 1: I know they're based out of Wayne, New Jersey. Al
Speaker 1: from New Jersey, not from Wayne, New Jersey, I believe.
Speaker 1: Emailed in and said, isn't this all about real estate?
Speaker 1: Did toys r Us hold on so long because they
Speaker 1: had prime real estate that was a bargaining chip? Yeah,
Speaker 1: there is some truth to that if you look at
Speaker 1: the consortum. This goes back to the moment when toys
Speaker 1: Rus went private and when it was a levered buyout
Speaker 1: was used to take it private. One of the three
Speaker 1: parties was a real estate operator, so there was a
Speaker 1: real estate party appetit. They go under they've got some
Speaker 1: primo I'll let you name the property, some primo property.
Speaker 1: What happens that lease, what happens to that property? Yeah.
Speaker 1: I think that was the reason that the real estate
Speaker 1: party was involved in the transaction originally was to protect
Speaker 1: the real estate and protect the leasing structure. Those properties,
Speaker 1: in many cases could be filled by a different retailer.
Speaker 1: If they are in prime locations, they are going to
Speaker 1: be in demand. I think what we're observing broadly in
Speaker 1: the national retail marketplace is that the number of neighborhood
Speaker 1: dense neighborhood nodes where you have these big power centers,
Speaker 1: is being reduced. People are spending less time in traditional
Speaker 1: bricks and mortar, and so is that your in fewer destiny?
Speaker 1: Is that your prediction for the future. I mean, PIM
Speaker 1: and I are seeing a slow audit torture here. I mean,
Speaker 1: I don't need you to comment on sears in that
Speaker 1: we don't have time, but basically Amazon has got the
Speaker 1: high ground and this is this a look for the
Speaker 1: rest of two thousand eighteen. Well, I think it raises
Speaker 1: some very legitimate questions about experienceal retail. I think retail
Speaker 1: that is succeeding in the marketplace today has a high
Speaker 1: emotional connection to the consumer, is in a category where
Speaker 1: there's a high trial and discovery area um and it
Speaker 1: offers the consumers something more than what you can experience
Speaker 1: in a mobile device or online and I need it's
Speaker 1: not ultimately, it is going to be how the consumer
Speaker 1: prioritize their time. If they're given an opportunity to go
Speaker 1: spend time at a restaurant with friends and enjoy an
Speaker 1: evening out, or go into a transactional venue and for product,
Speaker 1: they're most likely to biased towards the experience. And so
Speaker 1: I think the more and more retailers think creatively about
Speaker 1: experiences that draw customers together, build community, connect and ultimately
Speaker 1: community at the community co creates the brand experience. Not
Speaker 1: those are going to succeed. I think for the unfortunate
Speaker 1: thing for toys r US is the seasonality of the
Speaker 1: industry and the fact that the overall toy industry is
Speaker 1: going through these dramatic changes and how kids play today
Speaker 1: versus what they did years ago. I'm underwater, I got
Speaker 1: to get the three thirty one. My elf has been
Speaker 1: blown up. What's your single best by to save me
Speaker 1: for the quarter? Oh boy to save you for this quarter. Yeah, quick, well,
Speaker 1: not in the toy space, we do. We cover the
Speaker 1: beauty space as well, and we would say St. Lauder
Speaker 1: is still one of our favorite. I love it, thank
Speaker 1: you so much, definitely greatly appreciate with with this with Jeffreys.
Speaker 1: That's you know, folks. We make pim and I make
Speaker 1: a lot of fun with it. But literally, if I
Speaker 1: was to do an equity show, I'd call it single
Speaker 1: best buy because you go to a two hour meeting
Speaker 1: with somebody on the South Side and it's blah blah blah.
Speaker 1: What's the single best buy? Stay Louder Stay Lauder? All right?
Speaker 1: You know how many employees us? I heard thirty thousand people,
Speaker 1: seven and forty stores. You know who did the private
Speaker 1: buyout k k R, Yeah, six point six billion. They
Speaker 1: got five billion in debt. We say, good morning. I
Speaker 1: appreciate your attendance. The Dow up thirty nine. Stay with
Speaker 1: us through the day. This is Bloomberg Radio. Thanks for
Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe and listen to
Speaker 1: interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.
Speaker 1: I'm on Twitter at Tom Keane. Before the podcast you
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio.