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Retailers Face Long, Tough Road As Unsold Inventory Builds · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penel podcast. I'm Paul swing you
• 0:05
  Speaker 1: along with my co host Lisa Brahma Waits. Each day
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  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
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  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:18
  Speaker 1: at Bloomberg dot com. Paul, I'm going to go out
• 0:21
  Speaker 1: in a limb here and guess that when people work
• 0:23
  Speaker 1: from home, they're not putting on a suit and tie,
• 0:27
  Speaker 1: and they may still be in their pajamas, depending on
• 0:30
  Speaker 1: who you are. And there's a question of will they
• 0:33
  Speaker 1: ever put on a suit again, and will they find
• 0:36
  Speaker 1: themselves and pajamas more often going forward as they increasingly
• 0:39
  Speaker 1: work from home, regardless of the progress or the progression
• 0:44
  Speaker 1: of the pandemic. Joining us is James Fallon, editorial director
• 0:47
  Speaker 1: of Women's Where Daily, to talk about pajamas and the
• 0:50
  Speaker 1: new workplace attire. James, aside from being tongue in cheek,
• 0:54
  Speaker 1: there's been an absolute ravaging of the retail landscape, with
• 0:59
  Speaker 1: hundreds of thousands of people furloughed or laid off within
• 1:02
  Speaker 1: the industry and a real exerstential question facing the entire
• 1:06
  Speaker 1: industry of whether we'll ever recover. Can you give us
• 1:09
  Speaker 1: a sense just right now of what the thinking is
• 1:12
  Speaker 1: among major retailers and fashion houses in terms of whether
• 1:16
  Speaker 1: they think that a lot of these people can be
• 1:18
  Speaker 1: brought back and be restarted after this as things get
• 1:22
  Speaker 1: back to normal. I think the sense li says that
• 1:26
  Speaker 1: they will come back, but very very slowly. And um,
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  Speaker 1: you had the announcement from CA Prix Holdings this morning
• 1:34
  Speaker 1: that they were furloughing set their seven thousand North American
• 1:37
  Speaker 1: retail employees and they're saying their stores now won't reopen
• 1:41
  Speaker 1: until June one, and that's probably one of the latest
• 1:45
  Speaker 1: dates we've seen of stores being reopened. Um. So if
• 1:50
  Speaker 1: consumers aren't being able to go to a store for
• 1:54
  Speaker 1: six months of and this sole social distancing becomes part
• 1:59
  Speaker 1: of our every day norm, I just don't see people
• 2:02
  Speaker 1: rushing out by, you know, clothing right away, um, beyond essentials.
• 2:07
  Speaker 1: So you're looking probably if then before people begin to
• 2:12
  Speaker 1: behave quote normally and stop the arnking suits and pajamas together. So, Jim,
• 2:18
  Speaker 1: what a retailer is actually going to do with the
• 2:20
  Speaker 1: inventory that's been sitting in the store for months, that's
• 2:23
  Speaker 1: the key question. I mean a lot of it will go,
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  Speaker 1: of course into the off price channel, but even the
• 2:29
  Speaker 1: t j x IS and Ross stores can only take
• 2:31
  Speaker 1: so much of it. Um. You had many Chariko PVH
• 2:34
  Speaker 1: last week saying that what they're looking at doing is
• 2:37
  Speaker 1: taking some of the existing more classic spring summer merchandise
• 2:42
  Speaker 1: and basically putting in a warehouse until spring and then
• 2:46
  Speaker 1: bringing it out again. Um. You know, a pair of
• 2:49
  Speaker 1: Chinos is a pair of chinos, so that will last.
• 2:52
  Speaker 1: The downstream effect that will have on manufacturers, however, will
• 2:56
  Speaker 1: of course be significant. I mean they're all their orders
• 2:59
  Speaker 1: already or in cut for fall. If suddenly for spring,
• 3:03
  Speaker 1: they're basically getting of what they normally are expecting to get.
• 3:07
  Speaker 1: That again, it's going to have a real impact on
• 3:10
  Speaker 1: overseas manufacturers, particularly in China. Jim, is it's just accelerating
• 3:15
  Speaker 1: a trend away from brick and mortar. Yes, really, I
• 3:19
  Speaker 1: mean it's it's a systemic change, and the US was
• 3:22
  Speaker 1: overstored for decades, and so this is probably going to
• 3:26
  Speaker 1: be a major shaking out of whether the consumer returns.
• 3:31
  Speaker 1: Once we're all allowed to leave our houses. We may
• 3:33
  Speaker 1: actually find the stores an escape mechanism. But I think again,
• 3:39
  Speaker 1: it will very much shake out the weaker players and
• 3:42
  Speaker 1: even some of the medium level players, and will begin
• 3:45
  Speaker 1: adjusting the square footage per consumer that's needed to be
• 3:49
  Speaker 1: adjusted for years. Jim, what do you think the impact
• 3:52
  Speaker 1: is going to be on luxury luxury? You're probably going
• 3:57
  Speaker 1: to I mean they're already down again. I mean in
• 4:00
  Speaker 1: China they were down, etcetera. I mean luxury may come
• 4:03
  Speaker 1: back faster, but again depending upon the nature of Wall Street.
• 4:08
  Speaker 1: I mean, luxury, of course rebounded pretty quickly after the
• 4:11
  Speaker 1: two thousand two thous financial crisis. If the stocks come
• 4:15
  Speaker 1: back and those people start making money again, definitely, But
• 4:20
  Speaker 1: so much of the luxury market was dependent upon the
• 4:23
  Speaker 1: Chinese that it will be depending on whether the Chinese
• 4:26
  Speaker 1: consumer comes back. We're already seeing anecdotal evidence of that
• 4:30
  Speaker 1: consumer beginning to spend in China, but a lot of
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  Speaker 1: that luxury spending also was dependent upon the Chinese tourist,
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  Speaker 1: and I don't see the tourists coming from China again,
• 4:40
  Speaker 1: certainly through the second half of the year. So when
• 4:43
  Speaker 1: you talk about the acceleration in the shift away from
• 4:47
  Speaker 1: brick and mortar to an online presence. I'm wondering about
• 4:52
  Speaker 1: an increase in bankruptcy since there are a number of
• 4:55
  Speaker 1: retailers that have been holding on by their clause to
• 4:58
  Speaker 1: their existence free years and have a lot of debt
• 5:01
  Speaker 1: that have been enabled to do so by their investors.
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  Speaker 1: Do you think that this will actually lead to a
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  Speaker 1: shakeout with increasing bankruptcies or do you think that there
• 5:10
  Speaker 1: will be sort of tripping along here on an ongoing basis.
• 5:13
  Speaker 1: I think you will see more bankruptcies coming through. I mean,
• 5:17
  Speaker 1: if you take the number I think I saw Moody,
• 5:20
  Speaker 1: seventy seven percent of the bad debt within Moonies was
• 5:23
  Speaker 1: really held by six companies, Um you know j C.
• 5:26
  Speaker 1: Penny and Jay Crew being amongst them. So you already
• 5:29
  Speaker 1: saw the reports. Others than us have written that Neiman
• 5:34
  Speaker 1: Marcus is maybe looking at a bankruptcy. So you are
• 5:38
  Speaker 1: going to see more bankruptcies, probably even during this let
• 5:41
  Speaker 1: alone coming out of this. Absolutely, I don't think the
• 5:44
  Speaker 1: Week can hang on if they're not getting any business
• 5:47
  Speaker 1: for six months, they can't. They can't hang on forever.
• 5:50
  Speaker 1: Jim Fallon, thanks so much for joining us. We really
• 5:52
  Speaker 1: appreciate your commentary. Jim Fallon, editorial director of Woman's Where
• 5:56
  Speaker 1: Uh Daily. At least I thought that was a good question.
• 5:58
  Speaker 1: I think, you know, it's certainly reasonable to assume that
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  Speaker 1: there will be a This will cause a big shakeout
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  Speaker 1: in the retail space, a lot more store closings, which
• 6:06
  Speaker 1: is a theme we've heard about. Yeah, I think that
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  Speaker 1: it's going to be brutal, and it's brutal for for
• 6:11
  Speaker 1: the tens of thousands of people who have been laid
• 6:12
  Speaker 1: off from the industry. I also do wonder how it
• 6:16
  Speaker 1: will change style going forward. I mean, it seems almost
• 6:20
  Speaker 1: silly chat to think about something like that, but I
• 6:23
  Speaker 1: feel like working from home will change people's perspectives at
• 6:26
  Speaker 1: least a little bit going forward, and what people want
• 6:29
  Speaker 1: to get dressed up and go out or does that
• 6:30
  Speaker 1: what that seemed full of has given what we've just
• 6:32
  Speaker 1: gone through. Or on the other side, were people just
• 6:34
  Speaker 1: really want to you know, rip loose done. You know,
• 6:38
  Speaker 1: I'm actually voting more on that side. I gotta be honest,
• 6:41
  Speaker 1: looking around, but just saying, you're listening to Bloomberg Markets
• 6:46
  Speaker 1: with Lisa Abrama, Eds and Paul Sweeney on Bloomberg Radio,
• 6:50
  Speaker 1: you know that's a real question right now of whether
• 6:52
  Speaker 1: the pendulum has swung too far to the bearish side
• 6:56
  Speaker 1: or whether it's not bearish enough, And that is a
• 6:59
  Speaker 1: question the analysts are trying to answer completely blind, since
• 7:03
  Speaker 1: you cannot model chaos, and since you cannot know a
• 7:06
  Speaker 1: lot of the questions or answers to the questions currently
• 7:09
  Speaker 1: in the market. Joining us right now is Marco Paypeck,
• 7:11
  Speaker 1: chief strategist for clock Tower Group, and he has a
• 7:15
  Speaker 1: compelling view of this which actually goes against consensus. I
• 7:19
  Speaker 1: would argue, Marco, you argue that people are perhaps a
• 7:22
  Speaker 1: little too pessimistic. Am I getting that right? Yes? I
• 7:26
  Speaker 1: would say that that's the case. Thank you for having
• 7:28
  Speaker 1: me on, Lisa. Okay, So why well, because I think
• 7:33
  Speaker 1: one of the things that's happening in all the modeling
• 7:36
  Speaker 1: community out there is whether it's you know, looking at
• 7:39
  Speaker 1: the medical data, whether it's looking at the economic data,
• 7:43
  Speaker 1: is that we're largely linearly extrapolating from really really bad data.
• 7:48
  Speaker 1: The data on the virus itself is universally poor on
• 7:52
  Speaker 1: almost every single um characteristic. The only thing that we
• 7:57
  Speaker 1: really know about the virus, the only thing that we
• 7:59
  Speaker 1: have pretty good data with is that it does attack
• 8:02
  Speaker 1: different age cohorts in different way. Other than that, we
• 8:06
  Speaker 1: don't really know the mortality rate. We don't really know, uh,
• 8:09
  Speaker 1: the intaction rate. Um. So that's the first thing. The
• 8:11
  Speaker 1: second thing is we don't really know, um how how
• 8:15
  Speaker 1: the economy is going to develop over the next several months.
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  Speaker 1: And one of the reasons we don't know that is
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  Speaker 1: that we don't really understand how policy about social distancing
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  Speaker 1: will change over the next several weeks or months. And
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  Speaker 1: so what I propose is that we kind of think
• 8:29
  Speaker 1: about how policy reacts to something like a balance between
• 8:35
  Speaker 1: you know, um, a virus and economic impact. And I
• 8:38
  Speaker 1: think what's going to happen over time is that the
• 8:41
  Speaker 1: unit cost of fear is going to rise. And what
• 8:45
  Speaker 1: I mean by that is that at the beginning of
• 8:46
  Speaker 1: a crisis like this, fear is cheap. I mean, there's
• 8:50
  Speaker 1: no real cost to staying at home for the first week,
• 8:53
  Speaker 1: second week, third week. But as uneflorymed amounts, as people
• 8:56
  Speaker 1: start to project their own economic well being into the future,
• 9:00
  Speaker 1: you will see the unit cost of your rise, and
• 9:03
  Speaker 1: that will then compel policymakers to alter the current social
• 9:06
  Speaker 1: bustancing policies in some way. Thus, mitigating the ultimate economic
• 9:11
  Speaker 1: impact of the virus itself. That's a dynamic argument. It's
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  Speaker 1: really difficult to model, but it's not just linearly extrapolating
• 9:18
  Speaker 1: for where we are today um to the next two
• 9:20
  Speaker 1: to three months, which obviously would produce a very bearish forecast.
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  Speaker 1: All right, So Marco pencil aap force if you would
• 9:26
  Speaker 1: kind of your g d P a look for you know,
• 9:29
  Speaker 1: the remainder of because there's a question and I guess
• 9:32
  Speaker 1: initially people thought it might be a v quick snap back,
• 9:36
  Speaker 1: then maybe you maybe not so quick, and then maybe
• 9:38
  Speaker 1: even something like an l which is we're in this
• 9:40
  Speaker 1: for a long term. Okay, well, let's let's go back
• 9:44
  Speaker 1: a little bit and think about what is currently priced
• 9:47
  Speaker 1: stin in terms of GDP kind of outcomes. And I
• 9:50
  Speaker 1: think that um on March three, we hit an intra
• 9:53
  Speaker 1: day low of SP that's a thirty six percent draw down,
• 9:58
  Speaker 1: which is, you know, just the average draw down in
• 10:01
  Speaker 1: a recession. So I think the SMP five really really
• 10:04
  Speaker 1: quickly priced in a relatively bad outcome for the economy.
• 10:10
  Speaker 1: What I would say is that you know that was March,
• 10:14
  Speaker 1: we already had at that point about a week worth
• 10:16
  Speaker 1: of social distancing policies. Um, clearly we're gonna have them
• 10:20
  Speaker 1: throughout April. According to the o E c D, each
• 10:24
  Speaker 1: one of those months will produce a two decline in
• 10:29
  Speaker 1: the annualized GDP. So I think it's fair to say
• 10:32
  Speaker 1: that globally speaking, we're probably gonna lose for sure from
• 10:36
  Speaker 1: an annual growth perspective. FO So instead of three and
• 10:39
  Speaker 1: a half, we're already down at negative zero point five,
• 10:43
  Speaker 1: we could say maybe another half a month or month
• 10:45
  Speaker 1: of that. So I think that on an annualized basis,
• 10:48
  Speaker 1: we're going to be at minus one, minus one and
• 10:50
  Speaker 1: a half percent global GDP growth, which is obviously absolutely terrible.
• 10:55
  Speaker 1: But then there is this dynamic aspect where we see
• 11:00
  Speaker 1: social distancing policies alterned, alternated, mitigated, reduced, and then you
• 11:06
  Speaker 1: have the wall of tsunami coming behind you, this wave
• 11:09
  Speaker 1: of fiscal stimulus that is absolutely unprecedented, and it is
• 11:13
  Speaker 1: something that I think the market didn't price in on Marche.
• 11:17
  Speaker 1: The speed with which we priced in a recession tells
• 11:19
  Speaker 1: you two things. One, we have no idea, as you said,
• 11:22
  Speaker 1: Lisa at the beginning, we have no idea how to
• 11:24
  Speaker 1: price chaos. So that was one of the reasons we
• 11:26
  Speaker 1: fell down so hard. The second thing is that I
• 11:28
  Speaker 1: think most investors, and I know because we speak to
• 11:31
  Speaker 1: a lot of macro hedge fund at the firm that
• 11:34
  Speaker 1: is their business. Um, you know, most of them did
• 11:37
  Speaker 1: not expect anything like this. Most of them use the
• 11:41
  Speaker 1: two thousand nine stimulus playbook as the best case scenario.
• 11:45
  Speaker 1: And then on top of that, many said, well, politics
• 11:48
  Speaker 1: of the upcoming election will actually there delay some of
• 11:52
  Speaker 1: these stimulus efforts. Yes, this is sort of game theory, right.
• 11:56
  Speaker 1: It's basically how bad does it have to get before
• 11:57
  Speaker 1: the tsunami of money gets even bigger? And that basically
• 12:01
  Speaker 1: this sort of feedback loop will provide a backstop to markets.
• 12:05
  Speaker 1: Am I getting that right? Well, here's what I would say, Actually, Lisa,
• 12:09
  Speaker 1: I don't even think you need to get better much worse. So,
• 12:12
  Speaker 1: for example, right now, I think you can objectively say
• 12:15
  Speaker 1: that things are actually getting better. You know, once the
• 12:17
  Speaker 1: market saw that Italy and Spain and figure this out,
• 12:20
  Speaker 1: it doesn't matter how bad it gets into the US
• 12:22
  Speaker 1: this week. In other words, once we as market participants
• 12:26
  Speaker 1: can kind of check off that a relatively incompetent O
• 12:30
  Speaker 1: C D country I Italy can get a handle of
• 12:33
  Speaker 1: this issue. It doesn't matter if we have two bad
• 12:36
  Speaker 1: weeks going forward into us that will be kind of
• 12:39
  Speaker 1: like priced out. So I actually think that in terms
• 12:42
  Speaker 1: of what's coming down the pipeline on the stimulus front,
• 12:45
  Speaker 1: it doesn't even have to get worse for us to
• 12:47
  Speaker 1: get more of it because paulicy makers now have figured
• 12:51
  Speaker 1: out that they can use this as the reason to
• 12:54
  Speaker 1: kind of get a lot of a lot of things
• 12:56
  Speaker 1: that can pass in the past. Because of Paul polar Is,
• 13:00
  Speaker 1: they're not putting like a shopping list together for the
• 13:03
  Speaker 1: infrastructure plan. There may be a month away that could
• 13:06
  Speaker 1: be wanted to trillion dollars without really even needing that
• 13:09
  Speaker 1: extra ten percent of GDP, because remember we're at twelve
• 13:12
  Speaker 1: percent of GDP in terms of stimulas. That's more than
• 13:15
  Speaker 1: double what in two and nine the American Reinvestment and
• 13:20
  Speaker 1: Recovery Acts m basically gave us. We're already double that,
• 13:24
  Speaker 1: and we may get more no matter how bad things
• 13:26
  Speaker 1: get over the next couple of weeks. And Marco, thanks
• 13:29
  Speaker 1: so much for joining us. We appreciate your point of view. Certainly,
• 13:32
  Speaker 1: I think that more optimistic than I think we've heard
• 13:35
  Speaker 1: generally speaking over the less several days Marco topic partner
• 13:38
  Speaker 1: Chief Strategies for the clock Tower Group, based out of
• 13:40
  Speaker 1: Santa Monica, California. So that was at least a certainly
• 13:42
  Speaker 1: a different take on how this could all proceed to
• 13:44
  Speaker 1: over the next several weeks and months. I see how
• 13:47
  Speaker 1: pandemic mentality is allowing people to lobby for things that
• 13:51
  Speaker 1: they might have wanted anyway. I'm certainly getting lobbied at
• 13:54
  Speaker 1: home for all sorts of electronic devices that they had
• 13:58
  Speaker 1: wanted anyway, and me being my too, are willing to
• 14:01
  Speaker 1: sell out to keep them occupied. So there is so
• 14:04
  Speaker 1: there is that. I mean, you've got my own fiscal
• 14:06
  Speaker 1: stimulus going on right here. This is Bloombird Markets with
• 14:13
  Speaker 1: Lisa RAMOWDZ and Paul Sweeney on Bloomberg Radio. Well, like
• 14:17
  Speaker 1: all financial markets, the municipal bond market has certainly been
• 14:20
  Speaker 1: racked by volatility over the last couple of months. But
• 14:23
  Speaker 1: the upcoming and potential fourth fiscal stimulus plan is likely
• 14:27
  Speaker 1: to include a pretty big slug for infrastructure. The question
• 14:30
  Speaker 1: for a lot of investors is what would that mean
• 14:32
  Speaker 1: for the music bond market. Fortunately, we have Michael Jays
• 14:35
  Speaker 1: as chief US Public Policy and musicipal strategist from Morgan
• 14:38
  Speaker 1: Stanley joining us. Michael, thanks so much for joining us.
• 14:41
  Speaker 1: Let's start by just giving us a lay of the land.
• 14:44
  Speaker 1: What it's been like to be a mimunicipal bond investor
• 14:46
  Speaker 1: over the past couple of months. It hasn't been fun.
• 14:52
  Speaker 1: Um the volatility that you've seen over the last three
• 14:57
  Speaker 1: to four weeks. Uh, it's prettiest on the So the
• 15:01
  Speaker 1: movie you had from basically the types of the muni
• 15:03
  Speaker 1: bond markets to the wides, we're both bigger and magnitude
• 15:07
  Speaker 1: and speed by several degrees than what you had in
• 15:09
  Speaker 1: the global financial crisis. So, uh, you know, is this
• 15:15
  Speaker 1: is not something that is necessarily unexpected because you've got
• 15:18
  Speaker 1: a muni market structure which is given to about the
• 15:20
  Speaker 1: volatility and you saw this in Taper tantrum, and you
• 15:23
  Speaker 1: saw this, but this is this was just degrees further
• 15:29
  Speaker 1: off the chart, literally quite literally off the charts. Michael.
• 15:33
  Speaker 1: There's a question about just the volatility that comes from
• 15:36
  Speaker 1: a market that's not as liquid as a treasuries. And
• 15:39
  Speaker 1: then there's a volatility stemming from the question of whether
• 15:41
  Speaker 1: we're gonna start seeing municipal defaults. And I'm just gonna
• 15:45
  Speaker 1: go full catastrophic. Here is a subway system in New
• 15:47
  Speaker 1: York City going to default. Um, you know that's that's
• 15:53
  Speaker 1: actually that's a more complicated question to answer than you
• 15:56
  Speaker 1: would think. That's not what I want to hear. The
• 15:58
  Speaker 1: answer is no, these major metropolitan areas are solvent and
• 16:02
  Speaker 1: we're going to be fine. Is that not the reality
• 16:04
  Speaker 1: that we're talking about? Well, well, major must politan areas,
• 16:08
  Speaker 1: different subway system. Here's what I say. The chief of
• 16:12
  Speaker 1: the mt A basically expressed the view that they need
• 16:16
  Speaker 1: extra cash flow support because they're down ridership, and I
• 16:20
  Speaker 1: don't think that's necessarily Probably now, in the bill that
• 16:24
  Speaker 1: was just passed by Congress, they got about three point
• 16:26
  Speaker 1: eight billion dollars worth of external support, So from a
• 16:30
  Speaker 1: you know, from a cash flow perspective, once they're saying
• 16:34
  Speaker 1: that they need more than that, uh, and probably a
• 16:37
  Speaker 1: lot of this is going to be contingent on how
• 16:39
  Speaker 1: long ridership is depressed. As it is, I wouldn't necessarily
• 16:42
  Speaker 1: conflete what's going out with the m t A as
• 16:44
  Speaker 1: being indicative with kind of broader metro areas generally, right,
• 16:49
  Speaker 1: the mt A sort of its own system. New York
• 16:51
  Speaker 1: city government is its own sort of separate balance sheet
• 16:54
  Speaker 1: and income statement per se. So I think we have
• 16:56
  Speaker 1: to be a little bit careful about looking at credit
• 16:58
  Speaker 1: like the MTA, which has a lot of debt and
• 17:01
  Speaker 1: is experiencing a substantial decline in ridership, and extrapolating from
• 17:04
  Speaker 1: that to the broader kind of you know, you know,
• 17:08
  Speaker 1: high grade city metropolitan area world of MUNI bonds. So, Michael,
• 17:13
  Speaker 1: there is talking the upcoming fiscal Stimus number four that
• 17:17
  Speaker 1: there would be again a pretty big piece of infrastructure.
• 17:20
  Speaker 1: Hearing that from Speaker Pelosi, how do you think that
• 17:23
  Speaker 1: might play out and how kind of the market reacting
• 17:26
  Speaker 1: to that kind of potential um At the moment, I
• 17:30
  Speaker 1: don't think the market is terribly focused on this, probably
• 17:33
  Speaker 1: more focused on whether or not the Fed is going
• 17:36
  Speaker 1: to intervene here eventually. But here's what I say about
• 17:39
  Speaker 1: infrastructure when it comes to two muni's. Obviously it matters
• 17:43
  Speaker 1: quite a bit how the spending is structured. But historically,
• 17:47
  Speaker 1: when the federal government has decided to boost the amount
• 17:50
  Speaker 1: of infrastructure spending, um, it's doing what's actually done. This
• 17:54
  Speaker 1: takes some of the credit pressure off of those state
• 17:56
  Speaker 1: and local government. If the thorough government is putting more
• 17:59
  Speaker 1: money in of the systems that will government spend a
• 18:01
  Speaker 1: little bit less of their own so effectively helps them, uh,
• 18:06
  Speaker 1: improves on their capital needs, but not on their dime,
• 18:09
  Speaker 1: so to speak. So if you've got that slug of money,
• 18:12
  Speaker 1: you know, I kind of viewed it as a modest
• 18:14
  Speaker 1: credit positive, uh, not necessarily addressing what are the acute
• 18:17
  Speaker 1: needs of the muni credit system right now, But I'd
• 18:20
  Speaker 1: say it's some modest positive. I guess the reason why,
• 18:23
  Speaker 1: the reason why I asked about subway system, and yes,
• 18:25
  Speaker 1: that's an idiosyncratic credit, I guess on a broader level.
• 18:29
  Speaker 1: And you're talking about the amount of money that's going
• 18:31
  Speaker 1: to get injected in states municipalities from the Care Act
• 18:34
  Speaker 1: and from Congress, and I'm just struggling to understand the
• 18:38
  Speaker 1: depth of the pain. You have a slowdown in local economies,
• 18:42
  Speaker 1: you have an incredible increase in spending trying to build
• 18:45
  Speaker 1: out the health care infrastructure. Is there a high chance
• 18:48
  Speaker 1: that we're going to see muni defaults in a significant way,
• 18:51
  Speaker 1: in a way that we've never seen before, especially when
• 18:54
  Speaker 1: you throw in the pensions and the underfunded status there. Yeah, Well,
• 18:59
  Speaker 1: if you have to answer the question sector by sector.
• 19:01
  Speaker 1: I guess the first thing I would say is that
• 19:03
  Speaker 1: hundred fifty billion dollars out of this bill going to
• 19:06
  Speaker 1: state ends up being somewhere around kind of two to
• 19:10
  Speaker 1: five percent of general fund revenues of states. Now, our
• 19:16
  Speaker 1: economists have us UH in real GDP terms being down
• 19:20
  Speaker 1: over the course of the year about five and a
• 19:21
  Speaker 1: half per cent. So if you assume and I don't
• 19:26
  Speaker 1: know if it's a good assumption it or not, we're
• 19:28
  Speaker 1: still doing our own work on it, but you assume
• 19:30
  Speaker 1: that UH state reve state tax revenues might be done
• 19:33
  Speaker 1: at least that much, then it's probably fair to say
• 19:36
  Speaker 1: that we've only addressed part of the kind of year
• 19:39
  Speaker 1: term shortfall. And if you're a state, then you're gonna
• 19:43
  Speaker 1: have to either draw down on your own reserves, do
• 19:46
  Speaker 1: some casual borrowing, or undertake some austerity, or probably some
• 19:50
  Speaker 1: combination of all of those. And you know, state, this
• 19:54
  Speaker 1: is this, You know, the severity of this downturn is
• 19:57
  Speaker 1: much greater than anyone expected. But coming in to this,
• 20:00
  Speaker 1: I think it was it was fair to say that
• 20:02
  Speaker 1: governments had necessarily build reserves back up the levels where
• 20:06
  Speaker 1: before the global financial crisis they would have been able
• 20:09
  Speaker 1: to just rely on their reserves. So it's a sector
• 20:12
  Speaker 1: we've been underway for a while, and I think you're
• 20:14
  Speaker 1: still supposed to look at it that way. But if
• 20:17
  Speaker 1: you're looking at something like airports, for example, which you know,
• 20:21
  Speaker 1: on the surface could look pretty scary because no one's flying,
• 20:25
  Speaker 1: the liquidity in the reserve position of airports is um
• 20:29
  Speaker 1: almost off the charge on the other side, so we
• 20:31
  Speaker 1: think there's a lot more opportunities there. Michael Jesus, thank
• 20:34
  Speaker 1: you so much for being with us. Michael Jesus, chief
• 20:36
  Speaker 1: US Public Policy and mdicipal strategist for Morgan Stanley, joining
• 20:40
  Speaker 1: us putting to bed some of my absolute catastrophic situation extrapolations,
• 20:45
  Speaker 1: which is a good thing. My father is a mathematician.
• 20:51
  Speaker 1: He and I were talking about how you can't model chaos,
• 20:54
  Speaker 1: and we're kind of entering a chaos type situation. So
• 20:58
  Speaker 1: there is that when we talk about chaos and sort
• 21:01
  Speaker 1: of to fall out, you think about commercial real estate,
• 21:03
  Speaker 1: and you think about all those stores that are forced
• 21:05
  Speaker 1: to shut her and unable to pay their rents. And
• 21:09
  Speaker 1: we're scaring that not only with stores and other businesses,
• 21:13
  Speaker 1: but also individuals, which really raises a question what's the
• 21:16
  Speaker 1: value of commercial real estate and will ever be the
• 21:18
  Speaker 1: same again as people work from home and increasingly choose
• 21:22
  Speaker 1: remote work paths rather than going to the office. Kevin
• 21:25
  Speaker 1: Thorpe joining us now. I'm really looking forward to this conversation.
• 21:27
  Speaker 1: Chief economist and head of global research at Kushman and Wakefield. Kevin,
• 21:32
  Speaker 1: you know, we've heard a lot of gloom and doom,
• 21:34
  Speaker 1: a massive dislocation the commercial real estate market, with a
• 21:37
  Speaker 1: lot of people saying that not only will miss payments
• 21:40
  Speaker 1: lead to increasing declines in current values, but a shift
• 21:45
  Speaker 1: away from the office place, uh moving, moving the valuation
• 21:49
  Speaker 1: permanently lower in the longer term. What's your view on that? Yeah,
• 21:54
  Speaker 1: so first thanks thanks for having me on, and I
• 21:56
  Speaker 1: do want to give a big salute to all the
• 21:59
  Speaker 1: healthcare for fessionals, the doctors and nurses as well as
• 22:03
  Speaker 1: you know, the cleaning staffs, building maintenance, just really everyone
• 22:05
  Speaker 1: who's on the front line, uh doing their part to
• 22:09
  Speaker 1: battle the outbreak. I'm truly in awe of these people,
• 22:12
  Speaker 1: and I think I heard earlier the earlier point made
• 22:16
  Speaker 1: that you can't really model chaos, and I couldn't agree
• 22:20
  Speaker 1: more that ultimately the commercial real estate sector, you know,
• 22:24
  Speaker 1: has strong, strong links, strong correlations to the broader economy,
• 22:27
  Speaker 1: and there's just so much that's unknowable. The path of
• 22:30
  Speaker 1: the virus, duration, it's severity all. I mean, all of
• 22:34
  Speaker 1: these factors are central to our ability to model the
• 22:37
  Speaker 1: impact on property, and right now there's just just too
• 22:41
  Speaker 1: many unknowns. This is why forecasts are just all over
• 22:44
  Speaker 1: the map on this and and consistently being revised downwards weekly.
• 22:48
  Speaker 1: I mean, what we do know is that ten million
• 22:50
  Speaker 1: people just over the last few weeks have applied for
• 22:52
  Speaker 1: unemployment benefits, and that recession is truly just a given
• 22:56
  Speaker 1: at this point. In terms of property, I mean, in pricing, uh,
• 23:01
  Speaker 1: it's it's difficult. It's not impossible to price risk right
• 23:04
  Speaker 1: in this environment. And so what we're seeing is that
• 23:07
  Speaker 1: many lenders and investors have just adopted this wait and
• 23:10
  Speaker 1: see posture. UM, but would emphasize that this is not
• 23:14
  Speaker 1: the great financial crisis, right, that households and balance sheets
• 23:18
  Speaker 1: are in much better shape. There's last cycle. Dry powder
• 23:22
  Speaker 1: wasn't there when when you called at this time it
• 23:24
  Speaker 1: probably will be UM. And I do think that the
• 23:27
  Speaker 1: big institutions remember the missed opportunities and not to blank
• 23:31
  Speaker 1: capital towards the bottom. So a lot of unknowns, but
• 23:35
  Speaker 1: you know, certainly there's different scenarios where the capital markets
• 23:38
  Speaker 1: and property could could come come storming back once we
• 23:42
  Speaker 1: have more certainty. So, Kevin, give us a sense of
• 23:45
  Speaker 1: how the commercial real estate industry fared in the context
• 23:50
  Speaker 1: of the two trillion dollar fiscal stimulus plan. Yeah. So, um, well,
• 23:55
  Speaker 1: I think the really starts without I'll come at from
• 23:58
  Speaker 1: the perspective of the land lords, of the building owners
• 24:01
  Speaker 1: to landlords, and it's um, you can't emphasize enough that
• 24:06
  Speaker 1: the landlords are being impacted by the decline in the economy,
• 24:09
  Speaker 1: right that's really the central issue. And many businesses are
• 24:12
  Speaker 1: just struggling to make money right now that through no
• 24:15
  Speaker 1: no fault of their own, just paying rent is just
• 24:18
  Speaker 1: already difficult for some, and if this drags out, it
• 24:21
  Speaker 1: will become increasingly difficult for many. And so you know,
• 24:25
  Speaker 1: the Care Act, any really any policy that aims to
• 24:28
  Speaker 1: get the economy back on its feet more rapidly, is
• 24:32
  Speaker 1: generally good for landlord, generally good for tenants. And so
• 24:34
  Speaker 1: what the Care Act does, then it does a lot
• 24:37
  Speaker 1: um It provides, you know, qualifying tenants with different liquidity options.
• 24:42
  Speaker 1: It allows some of them to apply for aid their
• 24:45
  Speaker 1: tax provisions, and then sort of their feed through impacts
• 24:48
  Speaker 1: on the consumer side with the cash payments to households
• 24:52
  Speaker 1: and expanding on employment benefits. I think all of that
• 24:55
  Speaker 1: should help. I will say that, you know, we are
• 24:58
  Speaker 1: encouraged by what we're being so far. So landlords and
• 25:01
  Speaker 1: tenants are, you know, they're they're working on solutions together.
• 25:05
  Speaker 1: They do recognize it's just a horrible thing that it
• 25:08
  Speaker 1: came out of nowhere. It's no one's fault, and so
• 25:11
  Speaker 1: you know, there's a very much it let's work together
• 25:13
  Speaker 1: to get through this mentality. Yeah, and Kevin, to your
• 25:16
  Speaker 1: point about first responders and healthcare workers. At seven pm
• 25:19
  Speaker 1: every night, everyone opens their windows here in New York
• 25:22
  Speaker 1: City and cheers for the first responders. And yesterday people
• 25:25
  Speaker 1: cheered for three straight minutes and had pots and pans
• 25:28
  Speaker 1: that they were banging, and it was it's getting more
• 25:30
  Speaker 1: and more robust with every day. I do want to
• 25:33
  Speaker 1: get to the question though, of how we're going to
• 25:35
  Speaker 1: emerge from this and some of the sea changes that
• 25:38
  Speaker 1: people are going to experience, and and the office place
• 25:42
  Speaker 1: really has been in the center of that do you
• 25:45
  Speaker 1: foresee a time in which a much greater proportion of
• 25:49
  Speaker 1: the workforce does start to work remotely, and we do
• 25:52
  Speaker 1: see the office space take less relevance in downtown in
• 25:56
  Speaker 1: metropolitan areas become less crowded. Well, I do think that
• 26:01
  Speaker 1: what you'll see is every you know, almost all businesses
• 26:04
  Speaker 1: are are stopping or thinking, let's let's take another look
• 26:08
  Speaker 1: at that. Uh. What I would emphasize and we're we're
• 26:12
  Speaker 1: thinking through that all of that right now and studying
• 26:14
  Speaker 1: this and talking to different scenarios with our clients. I
• 26:17
  Speaker 1: would emphasize that there, this isn't the first time that
• 26:20
  Speaker 1: real estate has had to adapt to just changing a
• 26:23
  Speaker 1: changing macro environment. And you kind of go back to
• 26:25
  Speaker 1: last ten to fifteen years, we've we've observed so many
• 26:29
  Speaker 1: disruptions when you think about property in real estates with
• 26:31
  Speaker 1: these technology shifts, coworking, the movement towards density, you know,
• 26:36
  Speaker 1: packing more people in recessions and real estate does you
• 26:41
  Speaker 1: know evolved through these through these macro shifts. And I
• 26:44
  Speaker 1: do think teleworking is kind of a good example, especially
• 26:47
  Speaker 1: right now, where you know, people have been able to
• 26:50
  Speaker 1: connect to the internet and work from home for a
• 26:53
  Speaker 1: long time is going on, you know, fifteen twenty years,
• 26:57
  Speaker 1: and demand for office space has continued to grow, right
• 27:00
  Speaker 1: so the throughout that period. So the world continues to
• 27:03
  Speaker 1: build office buildings for the for the I think the
• 27:06
  Speaker 1: simple reason that there is strong demand for them. And
• 27:10
  Speaker 1: so yeah, I do think this event will cause businesses
• 27:12
  Speaker 1: to take another look at their space. But you know
• 27:15
  Speaker 1: the I do have confidence the property markets will adapt
• 27:18
  Speaker 1: to continue to play an import role in the economy. So, Kevin,
• 27:21
  Speaker 1: you know, I think there's a fairly obviously very good
• 27:23
  Speaker 1: consensus about the second quarter GDP UH contraction is gonna
• 27:27
  Speaker 1: be very deep, very severe, But obviously they're probably a
• 27:30
  Speaker 1: little bit more of UH confusion or just you know,
• 27:34
  Speaker 1: I think people discussion about how the country will come
• 27:37
  Speaker 1: out of that second quarter contraction. How are you thinking
• 27:40
  Speaker 1: about it at Kushman and Wakefield in terms of you know,
• 27:42
  Speaker 1: third quarter, fourth quarter in sure and and you know,
• 27:46
  Speaker 1: very just doing back of the envelope math when we
• 27:48
  Speaker 1: model this, you you get to a negative twenty Q
• 27:52
  Speaker 1: two GDP g g P number UH in the second quarters.
• 27:56
  Speaker 1: To your point. The other other point I would make
• 27:58
  Speaker 1: is just mathematically, just in terms of arithmetic, even if
• 28:01
  Speaker 1: it's not a super strong, you know, rebound in the
• 28:05
  Speaker 1: third quarter. It may look strong just because you're coming
• 28:08
  Speaker 1: the math of it has lowered your base so much
• 28:10
  Speaker 1: on g d P coming off of Q two, I
• 28:12
  Speaker 1: think timing this again is just nearly impossible. So the
• 28:17
  Speaker 1: way I I we've started to think about is what's
• 28:19
  Speaker 1: the framework for recovery, and I do think that's becoming clear.
• 28:22
  Speaker 1: So there's the phase one, which is where I think
• 28:24
  Speaker 1: we are now, this defensive phase, which has contained the
• 28:28
  Speaker 1: virus as much as possible, mitigate the economic damage through
• 28:32
  Speaker 1: robust policy measures, and you know, I think that's where
• 28:34
  Speaker 1: we are. Phase two is the disaster recovery phase, and
• 28:39
  Speaker 1: so that's likely to be a partial reopening of the economy.
• 28:42
  Speaker 1: People start easing back to work, confidence begins, UH sort
• 28:46
  Speaker 1: of incrementally coming back, as as as hopefully the infections
• 28:50
  Speaker 1: begin to abate. And then there's Phase three, which is
• 28:53
  Speaker 1: the sort of the march back to healthy, let's call
• 28:55
  Speaker 1: it march back to healthy GDP gross domestic product. And economically,
• 28:59
  Speaker 1: we're certainly aiming for the v shape, a snapback recovery,
• 29:03
  Speaker 1: but there's certainly plenty of other shapes. I do think
• 29:07
  Speaker 1: ultimately the trajectory of the recovery comes down to the
• 29:10
  Speaker 1: path of the virus itself and where we are in
• 29:13
  Speaker 1: it and when competence is restored. Uh, my gut says
• 29:16
  Speaker 1: this is slower U shape is looking increasingly likely at
• 29:20
  Speaker 1: this stage. We're speaking with Kevin Thorpe, chief economist and
• 29:23
  Speaker 1: head of Global Research, Akushman and Wakefield, and I do
• 29:26
  Speaker 1: wonder there have been a number of calls for the
• 29:29
  Speaker 1: Federal Reserve and the federal government to take a stronger
• 29:33
  Speaker 1: role in back stopping real estate valuations, including commercial real estate.
• 29:37
  Speaker 1: What's your view on that, given the fact that a
• 29:40
  Speaker 1: lot of people are saying, you know, focus first on
• 29:43
  Speaker 1: the people who are losing their jobs and supporting state's municipalities. Yeah, so,
• 29:49
  Speaker 1: you know, so first, I think the policy makers, both
• 29:52
  Speaker 1: fiscal monetary, the response to this economic crisis. I mean
• 29:56
  Speaker 1: it's it's it dwarfs anything we've ever seen before, right,
• 30:00
  Speaker 1: I mean its disfer perspective. If you sort of take
• 30:03
  Speaker 1: the two point two trillion dollar Cares Act, the other
• 30:06
  Speaker 1: two bills that came before that, you factor in all
• 30:09
  Speaker 1: of the big bold moves by the Federal Reserve, flash
• 30:11
  Speaker 1: interest rates, restarting QWEE you know, launching new credit facilities
• 30:16
  Speaker 1: of dollar squall lines. I mean, all of that really
• 30:18
  Speaker 1: summed up to a huge over g d P, so
• 30:22
  Speaker 1: they haven't. I'm so sorry to do this. UM let's
• 30:24
  Speaker 1: continue this another time. I'm sorry to say, but we
• 30:27
  Speaker 1: are getting Muriel Bowser. That was Kevin Thorpe of Cushman
• 30:30
  Speaker 1: and Wakefield. Thanks for listening to the Bloomberg P and
• 30:33
  Speaker 1: L podcast. You can subscribe and listen to interviews at
• 30:35
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• 30:39
  Speaker 1: I'm on Twitter at pt Sweeney. I'm Lisa abram Woit's
• 30:42
  Speaker 1: I'm on Twitter at Lisa abram Woit's one before the podcast.
• 30:45
  Speaker 1: You can always catch us worldwide on Bloomberg Radio