Latest / Bloomberg Intelligence / Year-End Bloodbath Coming for Target, Amazon and Walmart, Mushkin Says

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Year-End Bloodbath Coming for Target, Amazon and Walmart, Mushkin Says · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
0:08
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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Speaker 1: bring you the most important, noteworthy, and useful interviews for
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Speaker 1: you and your money, whether you're at the grocery store
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Speaker 1: or the trading floor. Find the Bloomberg p m L
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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well,
0:32
Speaker 1: we've had some mixed results out of retailers, but one
0:35
Speaker 1: really positive one was out of Target earlier today. The
0:38
Speaker 1: shares UH surged more than four percent initially, but have
0:42
Speaker 1: retraced some of those gains and are up a little
0:45
Speaker 1: bit more than three percent now. To give a better
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Speaker 1: sense of what was driving the positive better than expected
0:51
Speaker 1: returns for Target and what this might mean for Walmart,
0:54
Speaker 1: is Scott Mushkin. He's managing director and senior staples retail
0:57
Speaker 1: analyst for Wolf Research in New York City. Scott first
1:02
Speaker 1: with Target, I mean, was there anything negative here or
1:06
Speaker 1: was this just, you know, unrelentingly a positive scene And
1:08
Speaker 1: how did they turn around their outlooks so much? Yeah?
1:12
Speaker 1: I mean I think if you look at the quarter,
1:13
Speaker 1: it was just straight out positive. Um, you know, as
1:17
Speaker 1: we look across our sector staples retail, and we also
1:19
Speaker 1: do some of the hardline names like home depot Um.
1:22
Speaker 1: People are just outperforming right now. The economy strong, we
1:25
Speaker 1: got low, very low unemployment rate, Wage growth has been percolating.
1:29
Speaker 1: The stock market everyone knows has been on fire. Housing
1:31
Speaker 1: markets good and so what we've been saying to people,
1:34
Speaker 1: if you're not doing well, now, when will you do well?
1:37
Speaker 1: But I would, you know, throw a little cold water
1:39
Speaker 1: on that. For Target, I mean, their numbers are still
1:41
Speaker 1: going to be down year over year, uh, their ebit,
1:44
Speaker 1: their earnings will be down. So you know, while it's
1:47
Speaker 1: definitely much better than they thought they were going to
1:49
Speaker 1: do at the start of the year, you know, Target
1:51
Speaker 1: does still face some significant headwinds in this business. And
1:54
Speaker 1: just to put perspective in stock gains today, the shares
1:57
Speaker 1: are still down about year to date. So this has
1:59
Speaker 1: been you know, you say, everybody has been doing well
2:02
Speaker 1: at least in the stock world. Targets certainly hasn't. Other
2:04
Speaker 1: retailers have also. Retailers have also gotten beaten up. Also
2:08
Speaker 1: coach I should mention as well as Dick Sporting Goods
2:10
Speaker 1: this week have gotten just crushed after worse than expected earnings,
2:14
Speaker 1: so it hasn't been a uniformly positive situation. I want
2:19
Speaker 1: to ask specifically about Targets online presence because this has
2:23
Speaker 1: been a huge challenge in its fight with Amazon, and
2:27
Speaker 1: can you give us an update on kind of how
2:29
Speaker 1: much it's adapted to an online format and what the
2:32
Speaker 1: growth has been like there. Yeah, I mean the growth
2:34
Speaker 1: has been really strong. I think they were up in
2:37
Speaker 1: the quarter um and you know they're you know, they're
2:41
Speaker 1: on a collision course. Targeting in Amazon a very significant one.
2:45
Speaker 1: One of the things Targets doing is Target Restock, which
2:48
Speaker 1: is consumable items. If you order it by two pm,
2:51
Speaker 1: you get it the next day, uh, for kind of
2:54
Speaker 1: reordable consumables. It's really right aimed at what Amazon is
2:59
Speaker 1: doing with Amazon Now out on Amazon next Day with
3:01
Speaker 1: their Prime membership and of course subscribe and save. And
3:05
Speaker 1: this is our caution with the space and and I
3:08
Speaker 1: think you said, you know, not everyone's doing well, and
3:09
Speaker 1: that's correct, but sales for a lot of people have
3:12
Speaker 1: gotten a little bit better. But the problem with that
3:15
Speaker 1: is it's costing a lot to generate those sales. And
3:19
Speaker 1: that's going to be the same thing with Target when
3:21
Speaker 1: they when they expand into e commerce. They go all
3:23
Speaker 1: these programs, same day delivery, stores doing delivery. The question
3:28
Speaker 1: is will Target make more money three years from now
3:32
Speaker 1: than it does today? And given the battle and suing
3:35
Speaker 1: with Amazon, battle and suing with Walmart, it's really hard
3:39
Speaker 1: to see that it's just going to cost more to
3:41
Speaker 1: do business. This is this is a really fascinating point.
3:44
Speaker 1: In other words, people say, well, they need to adopt
3:46
Speaker 1: the online reality of today, and yet to do so
3:50
Speaker 1: costs a lot of money. So you know, whether they
3:53
Speaker 1: can increase their sales enough to overcome and then some
3:57
Speaker 1: those costs is a big question. Mark can just get
4:00
Speaker 1: a little bit more granular about what the costs are.
4:03
Speaker 1: I mean, it wouldn't they rely on you know, a
4:05
Speaker 1: FedEx or UPS or US postal service, And I mean
4:09
Speaker 1: where where's the big costs going to come from? Yeah,
4:12
Speaker 1: I mean, I mean you nailed it with what you said,
4:14
Speaker 1: and so I mean the cost is basically, um, you're
4:18
Speaker 1: having to when customers used to drive to your store
4:21
Speaker 1: pick the stuff off them shulves the shelves themselves. Now
4:24
Speaker 1: what you have to do is either set up a
4:26
Speaker 1: whole distribution network to deal with them online or pick
4:30
Speaker 1: the stuff off the shelves yourself and either have them
4:33
Speaker 1: pick it up or send it out to them. I mean,
4:36
Speaker 1: the margin hit can be anywhere from you know, five
4:39
Speaker 1: basis points to you're not making any money. Uh, And
4:43
Speaker 1: this is really the challenge facing all retail. On top
4:48
Speaker 1: of it, everyone has too many stores. The stores are
4:49
Speaker 1: too big. I mean, you can go through the litany
4:51
Speaker 1: of challenges um and demographics is another challenge where we
4:55
Speaker 1: just don't have as many people having kids. So you know,
4:58
Speaker 1: Targets got a lot in front of it, a lot
5:00
Speaker 1: of tight But you got to hand it to the team.
5:03
Speaker 1: They're working really hard to address these things. It's just
5:06
Speaker 1: from an equity investor's perspective, or you're gonna have more
5:09
Speaker 1: money in your pocket in three years or less, it
5:11
Speaker 1: looks like it's going to be less. And that's why
5:13
Speaker 1: we remain pretty negative on the stock. So just looking ahead,
5:16
Speaker 1: So Walmart's going to be reporting earnings tomorrow and it
5:20
Speaker 1: shares her down just to touch less than two tents
5:22
Speaker 1: of a percent, And I just have to wonder whether
5:25
Speaker 1: Walmart's shared dip, if you can even call it, that
5:29
Speaker 1: is a direct response to targets positive earnings because there
5:32
Speaker 1: seems to be a sort of fixed pool that the
5:34
Speaker 1: two are fighting over and when one does better, the
5:37
Speaker 1: other is going to do worse. Is that a proper interpretation?
5:41
Speaker 1: I mean, I think that's a huge concern. Right, Like
5:43
Speaker 1: we've you know, we've seen Amazon report their sales are
5:46
Speaker 1: better than expected, targets sales are better than expected. Walmart
5:50
Speaker 1: I think is doing you know, decently. Well, I'm not
5:52
Speaker 1: sure that their sales have accelerated thus far this year. Um,
5:56
Speaker 1: you know, Walmart is really an interesting company where you know,
5:59
Speaker 1: invest is gravitated towards it so much this year. But
6:03
Speaker 1: if you look at the numbers, some fascinating numbers here
6:06
Speaker 1: EBITDA at Walmart, is actually looks like this year will
6:09
Speaker 1: be the same as it was in two thousand and
6:11
Speaker 1: eleven and net earnings the same as they were in
6:13
Speaker 1: two thousand and eight. Yet the stock is like thirty
6:17
Speaker 1: dollars higher. So what I've been saying to people is
6:20
Speaker 1: that company better ripped the kill not to cover off
6:22
Speaker 1: the ball tomorrow, or you probably have some downside because
6:25
Speaker 1: it's really seen significant equity appreciation and anticipation of a
6:31
Speaker 1: of a turnaround, and you know, we were made really
6:33
Speaker 1: cautious into the back half of the year on the
6:35
Speaker 1: entire space. As Amazon continues to add fulfillment centers, it's
6:39
Speaker 1: just going to be a blood bath as we get
6:41
Speaker 1: to your end, a blood bath within Walmart as well
6:44
Speaker 1: target the Walmart target and where you've even gotten a
6:47
Speaker 1: little bit more nervous around Amazon. We took our rating
6:49
Speaker 1: from out perform down to appear perform. It's just everybody's
6:54
Speaker 1: gearing up. We call it the clash of the Titans
6:56
Speaker 1: between Amazon and Walmart. But if you've been following anything,
6:59
Speaker 1: you know some of these small regional grocers they're adding
7:02
Speaker 1: online capabilities. I mean, this is just going to be
7:05
Speaker 1: a trench war and it's going to be long, and
7:08
Speaker 1: it's gonna be hard. And just to sort of extrapolate out,
7:11
Speaker 1: when you talk about a blood bath, are you talking
7:13
Speaker 1: about steep discounts that will end up eating into the
7:16
Speaker 1: bottom line, expenditures for distribution networks that are going to
7:20
Speaker 1: eat into the bottom line, as well as a losing
7:22
Speaker 1: market share which will also eat into the bottom line.
7:24
Speaker 1: Is that sort of the trifecta you're viewing again, you
7:27
Speaker 1: nailed it, Yeah, I mean that's the trifecta, like that's
7:30
Speaker 1: our big concern as we get to the back half
7:32
Speaker 1: and I actually add one more labor costs rising rapidly
7:37
Speaker 1: UM and so this is an issue for the companies too.
7:39
Speaker 1: So you know the theme, it's just costing more to
7:42
Speaker 1: do business. Returns are coming down, it's harder to generate
7:45
Speaker 1: those sales makes and and you know, everyone knows what
7:50
Speaker 1: happened last year last holiday period. Everyone's gearing up. These
7:54
Speaker 1: businesses can't afford to lose the traffic, to lose the share.
7:58
Speaker 1: And if you listen to the Target conference called they
8:00
Speaker 1: were they had hints of caution around their fourth quarter
8:03
Speaker 1: because they know they've got to keep the traffic. They
8:05
Speaker 1: know they've got to keep the share, and one of
8:08
Speaker 1: the best ways to do that is to get more promotional,
8:10
Speaker 1: get more aggressive, throw more labor at the stores. UM.
8:13
Speaker 1: So we're not looking for a very you know, a
8:16
Speaker 1: very good fourth quarter out of retail um. You know,
8:19
Speaker 1: the one saving grace. Maybe the economy. Economy is definitely
8:22
Speaker 1: picked up. Maybe that will will help, but will it
8:24
Speaker 1: be enough. Scott Mushkin with some rather sobering words about
8:29
Speaker 1: the entire retailer industry. Scott Mushkin is managing director and
8:31
Speaker 1: senior Staples Retail and US at Wolf Research in New York. Well,
8:47
Speaker 1: they might be expressing concerns about aluminium, but they are
8:49
Speaker 1: certainly not expressing concerns about bitcoin. Bitcoin has surged eighty
8:55
Speaker 1: nine percent since mid July, shocking rally that has some
9:00
Speaker 1: scratching their heads and wondering how long this can last.
9:03
Speaker 1: Josh Deppman joins US now he's president of Fintech Investment
9:06
Speaker 1: Group UH and Josh, I want to get your sense
9:09
Speaker 1: of what exactly has been behind the acceleration in the
9:13
Speaker 1: rally and bitcoin that we've seen over the past few weeks. Well, personally,
9:17
Speaker 1: I believe that bitcoin is an excellent store of value,
9:21
Speaker 1: and people are starting to realize that with the stock
9:24
Speaker 1: market at all time highs, no interest rate in any
9:26
Speaker 1: bearing securities, that bitcoin actually can serve as an impetus
9:31
Speaker 1: to go even higher and maybe even two five thousand
9:34
Speaker 1: by the end of this month, And currently it is
9:37
Speaker 1: at about four thousand, So it's you're expecting it to
9:42
Speaker 1: climb another good chunk by the end of this month.
9:45
Speaker 1: You know, I hear what you're saying, and this is
9:47
Speaker 1: something that a lot of people have said, which is
9:49
Speaker 1: as central banks seek to devalue their currencies are at
9:52
Speaker 1: least buy assets and in parking these stimulus efforts, that
9:57
Speaker 1: why not go into a cryptocurrency that's backed by uh,
10:00
Speaker 1: this sort of blockchain technology in this sense of sort
10:04
Speaker 1: of communal creation of what it means to have a currency.
10:09
Speaker 1: At the same time, nothing really has happened in the
10:11
Speaker 1: past few weeks to sort of, uh indicate that it's
10:14
Speaker 1: more of a good time to go into this than
10:16
Speaker 1: than in the past. Right. Well, I mean, you know,
10:19
Speaker 1: the key is that it is a store of value,
10:22
Speaker 1: that there is a limited supply. And one of the
10:24
Speaker 1: things that's great about bitcoin, uh is that you know,
10:27
Speaker 1: it is a kind of a ubiquitous coin even though
10:30
Speaker 1: that it you know, it does have a limited amount
10:32
Speaker 1: that can be there. People have heard of it, People
10:34
Speaker 1: know of it, and there's more and more adoption in
10:36
Speaker 1: retail and businesses that are willing to take bitcoin. You pay,
10:40
Speaker 1: you pay your employees in bitcoin, right, yeah, we do.
10:43
Speaker 1: They have that option, yes, and the ones that have
10:46
Speaker 1: received their paying bitcoin are much more happy than the
10:48
Speaker 1: ones who have taken the fiat currency lately. Do you
10:52
Speaker 1: do you personally spend bitcoin at retailers? Uh? We do um,
10:57
Speaker 1: you know, in where I live in the land or
11:00
Speaker 1: that there aren't a lot of places that accept bitcoin.
11:04
Speaker 1: But when we're on the road, you know, if if
11:05
Speaker 1: there's an ability to pay for it in bitcoin, we do,
11:09
Speaker 1: so I have to wonder, you know, A big question
11:12
Speaker 1: mark about bitcoin is, yes, there might be a limited
11:16
Speaker 1: store of the cryptocurrency, but nothing's backing it and it's
11:20
Speaker 1: not adopted by any nation. And normally a currency is
11:26
Speaker 1: thought to be something that is backed by the good
11:28
Speaker 1: faith and the economic engine of a country. That's not
11:33
Speaker 1: the case here. Well, no, it isn't. And quite frankly,
11:36
Speaker 1: the cryptocurrency is kind of a misnomer. Uh. These are
11:40
Speaker 1: these are commodities, these are digital assets. There's no ownership,
11:44
Speaker 1: you don't have voting rights. There's a lot of things
11:46
Speaker 1: that you don't have with bitcoin that you would say
11:49
Speaker 1: in a security like you know, shares of Microsoft or
11:51
Speaker 1: what have you. However, because there is a limited avout
11:55
Speaker 1: of value and there is no central government that could
11:58
Speaker 1: come in and uh mess around with changing rates, adding liquidity,
12:02
Speaker 1: taking away liquidity. Uh, there is a certain stability with
12:06
Speaker 1: that model that lends itself for some trust and some
12:10
Speaker 1: beliefs and Uh. I think that's why people are migrating
12:13
Speaker 1: to it, because they see what a disaster the central
12:17
Speaker 1: banks have become. And you know, anything that's regulated by
12:20
Speaker 1: the government has a tendency to uh just become more
12:23
Speaker 1: and more regulated. You know. I take issue with the
12:25
Speaker 1: idea that the central banks have become disasters because some
12:28
Speaker 1: would say that they stepped in and they prevented another,
12:31
Speaker 1: uh financial crisis that was at least another great recession,
12:35
Speaker 1: great depression, as as what we saw in the thirties.
12:38
Speaker 1: So you know, I mean some people could say that
12:40
Speaker 1: they did what they needed to do and we haven't
12:41
Speaker 1: seen rampant inflation and the economy has continued to grind higher,
12:46
Speaker 1: So you know, there is this feeling. Yes, central banks
12:49
Speaker 1: have certainly stepped into the markets and it propped them
12:52
Speaker 1: up in a big way. But I do have to,
12:55
Speaker 1: uh take issue with that. And I also have to
12:57
Speaker 1: question one other thing that you're you're saying, which is
12:58
Speaker 1: ubiquitousness of bitcoin. I have yet to see a retailer
13:04
Speaker 1: that has a sign up that says we accept bitcoin.
13:06
Speaker 1: Where is this cryptocurrency ubiquitous and sort of where is
13:09
Speaker 1: it accepted? That sort of gives you the sense that
13:11
Speaker 1: it's a long lasting I mean, you can buy stuff
13:14
Speaker 1: on on overstock, dot com, Virgin Atlantic, Dell Computers, Starbucks
13:18
Speaker 1: has uh venues where you can pay in bitcoin. Um,
13:22
Speaker 1: there will be more uh And and if if the
13:26
Speaker 1: segment that's happening is coming out, it's going to allow
13:30
Speaker 1: the transaction time to be greatly increased, and then therefore
13:34
Speaker 1: it'll be a lot easier to pay in bitcoin. Uh.
13:37
Speaker 1: And that's something that's coming up here in the next
13:39
Speaker 1: month or so. And if if that happens, which we
13:41
Speaker 1: believe it will, we believe they'll be even more increased
13:44
Speaker 1: acceptance of bitcoin. In other words, if people can transact
13:48
Speaker 1: with bitcoin, not only can they do it more quickly,
13:50
Speaker 1: but also I assume the settlement and the back office
13:53
Speaker 1: costs will also be reduced. Correct, That is correct. So
13:56
Speaker 1: that's a big piece of it as well. Right, absolutely, So,
13:59
Speaker 1: are more of your eployees asking to be paid in
14:01
Speaker 1: bitcoin these days? Yes? They are? What proportion of your
14:04
Speaker 1: employees are paid in bitcoin? Uh? Probably, um, you know,
14:08
Speaker 1: and we we allow them, um, you know, to access
14:11
Speaker 1: coins that that we mind ourselves. Uh. And basically we
14:16
Speaker 1: think that uh, you know, at least for the time
14:19
Speaker 1: being we think that the more more are going to
14:22
Speaker 1: be paid in bitcoin. Josh Detman, thank you so much
14:24
Speaker 1: for joining me. Uh, such an interesting area. I'm looking
14:27
Speaker 1: at the chart right now. It is a kind of
14:29
Speaker 1: mind blowing to see the rally. It looks like a
14:32
Speaker 1: rocket taking off of bitcoin's value. Josh Dettman as president
14:36
Speaker 1: of Fintech Investment Group in Florida. And we will keep
14:41
Speaker 1: talking about bitcoin, but not only bitcoin, but also uh
14:43
Speaker 1: the blockchain technology behind it that is being adopted by
14:46
Speaker 1: more big investment firms. So yesterday we were talking about
15:01
Speaker 1: the retail sales and how the U as a consumer
15:04
Speaker 1: appears to be in really good shape. And then we
15:07
Speaker 1: get this from our own Adam Tempkin, a story about
15:12
Speaker 1: how deep subprime auto loans are experiencing delinquencies at the
15:17
Speaker 1: fastest pace since the crisis. That sounds bad. Adam Tempkin
15:21
Speaker 1: joins us now to explain what's behind this and how
15:23
Speaker 1: concerning this really is. Adam Tompkin is a credit markets
15:26
Speaker 1: reporter here at Bloomberg News. So Adam, let's just get
15:28
Speaker 1: a big picture sense of what the delinquency rate is
15:32
Speaker 1: and just the backdrop for deep subprime auto loans, which
15:36
Speaker 1: to my recollection are at the highest proportion of overall
15:40
Speaker 1: subprime auto loans that they've ever been. That's right, even
15:43
Speaker 1: though subprime as a whole is decreased a little bit,
15:45
Speaker 1: deep subprime, which is a what what equifox calls advantage
15:49
Speaker 1: score which is similar to FI GO of less than
15:51
Speaker 1: five thirty, has actually increased, and the delinquency rate for
15:56
Speaker 1: those least credit worthy borrowers it's as high as was
16:00
Speaker 1: for loans originated in OH seven and O eight um.
16:04
Speaker 1: And those credit scores are about the same, you know,
16:07
Speaker 1: that range bound five thirty or less, But yet the
16:10
Speaker 1: performance of the loans is getting worse for those people.
16:13
Speaker 1: So what does this mean? Does this mean that the
16:15
Speaker 1: originators of these loans were irresponsible or a little bit
16:19
Speaker 1: lax with their lending standards. Does this mean that perhaps
16:22
Speaker 1: the American consumer isn't as in good shape as people
16:25
Speaker 1: had expected, or is this a comment on the underlying
16:29
Speaker 1: value of the car? I mean, what's your takeaway from this? Well,
16:32
Speaker 1: equifox feels that this is really about shifting market share
16:36
Speaker 1: in the auto loan market. So basically, you had three
16:39
Speaker 1: kind of newish players post crisis that got into subprime
16:43
Speaker 1: lending dealer finance companies, mono lines and independent finance companies
16:48
Speaker 1: mino lines. To be clear, our bond in chures right, No, no, no,
16:51
Speaker 1: this is a different type of mono line. These are
16:53
Speaker 1: if that's recollection from the crisis ere These are sort
16:58
Speaker 1: of non bank lenders, but they don't have a parent company.
17:02
Speaker 1: They're just doing their own thing, so that distinguishes them
17:05
Speaker 1: from what they call captive of finance companies. The captive
17:09
Speaker 1: finance are like the Ford or GM when they have
17:12
Speaker 1: and these other the model line, as you say, are
17:14
Speaker 1: independent companies that finance themselves with what we basically securities
17:19
Speaker 1: or yes, all these deep subprime lenders that have entered
17:22
Speaker 1: the market and through competition have loosened underwriting since the crisis.
17:27
Speaker 1: They tend to fund themselves through asset back securities. But
17:31
Speaker 1: mind you, it's still a very small proportion of the
17:34
Speaker 1: overall auto lending market. So what you have is you
17:37
Speaker 1: have on one hand, banks, credit unions and um, you know,
17:42
Speaker 1: finance companies with parent companies doing very concervative underwriting since
17:46
Speaker 1: the crisis, and that's or more of overall auto lending.
17:51
Speaker 1: And then you have mono lines, independent finance companies and
17:54
Speaker 1: dealer finance. They're doing a lot of subprime, and they're
17:57
Speaker 1: getting their going down the credit spect from and they're
18:01
Speaker 1: doing a lot of this subprime and deep subprime lending. So,
18:04
Speaker 1: you know, here's a dilemma that I've been thinking about
18:05
Speaker 1: a lot because we have been hearing about problems within
18:08
Speaker 1: the auto lending sector for a while that perhaps things
18:10
Speaker 1: got out of control. Uh. The amount of auto related
18:14
Speaker 1: dead outstanding in the US has reached an all time high.
18:18
Speaker 1: You have people who are like pulling back and tightening standards,
18:21
Speaker 1: like Wells Fargo. Um. But I'm wondering how much this
18:25
Speaker 1: is idiosyncratic to the auto industry and the auto lending
18:29
Speaker 1: sector versus the overall consumer, because we are also seeing
18:33
Speaker 1: an uptick intolinquencies among credit cards, uh, credit card dead um.
18:39
Speaker 1: And you are seeing, although to a smaller extent, you're
18:41
Speaker 1: seeing a little bit of a weakening within higher rated borrowers,
18:45
Speaker 1: more credit worthy borrowers as well with their auto loans.
18:49
Speaker 1: So you know, when you talk to analysts, are they
18:51
Speaker 1: concerned about a broader base weakening of the consumer? Well,
18:56
Speaker 1: I spoke to you Equifox's chief economist Amy cottson she
18:59
Speaker 1: didn't think so she thinks that this is idiosyncratic to
19:03
Speaker 1: the auto market and shifting. Um, you know, basically the
19:07
Speaker 1: auto ending market has shifted towards these newer entrants that
19:11
Speaker 1: are willing to take on the risk. These like the monolnes,
19:15
Speaker 1: the deal you know, can you give us some names
19:16
Speaker 1: of them the companies, Yeah, like Westlake, Exeter, Scopos. And
19:20
Speaker 1: by the way, these are all asset backed securities issuers,
19:23
Speaker 1: and you know those deals, those bonds are protected. But
19:26
Speaker 1: when you think about the actual borrower, you know, it's
19:28
Speaker 1: not a great situation. Uh. The way that this happens
19:32
Speaker 1: is when cars are repossessed. Um, you know, the lenders
19:35
Speaker 1: try to get money back when people are not paying
19:37
Speaker 1: their their loans. However, use car prices are going down,
19:42
Speaker 1: so interest rates are going up. So I have to wonder,
19:46
Speaker 1: you know, who's feeling this pain right because somebody's not
19:49
Speaker 1: getting their money paid back. If you're seeing more delinquencies
19:51
Speaker 1: and more losses. Are people who hold the bonds that
19:54
Speaker 1: are backed by these auto loans? Are they starting to
19:57
Speaker 1: see losses? Are the actual companies, the monol lines, as
20:00
Speaker 1: you say, are the independent independent financing units, Are they
20:05
Speaker 1: feeling pressure or threatening bankruptcy or is this just all
20:09
Speaker 1: kind of going out in the wash because the yields
20:11
Speaker 1: are so high anyway on these things. Well as far
20:13
Speaker 1: as the asset backed bonds, which again a lot of
20:16
Speaker 1: this deep subprime stuff goes into these asset backed bonds,
20:19
Speaker 1: those happen to be very well protected with you know,
20:23
Speaker 1: credit enhancement and you know other overcollateralization, other protections. So
20:27
Speaker 1: bond investors have not really been feeling it, despite the
20:31
Speaker 1: fact that delinquencies have been rising. But you know, you
20:34
Speaker 1: have your poorer borrowers, first of all, on the hook
20:38
Speaker 1: for loans that that can't pay back, and often the
20:40
Speaker 1: car has already been been repossessed. And I will say,
20:43
Speaker 1: and this is an undertold story, but some of these
20:45
Speaker 1: borrowers of these uh consumers are paying rates of what
20:49
Speaker 1: like or more on these loans, which is crazy, very
20:55
Speaker 1: very high, and they're underwater because their car no longer
20:58
Speaker 1: is worthwhile. So probably they're going to be uh, probably
21:01
Speaker 1: suffering the most in all of this. Adam Tompkin, thank
21:04
Speaker 1: you so much for joining us. Really uh, really informative.
21:07
Speaker 1: Adam Tompkin is a structured finance reporter for Bloomberg. We're
21:10
Speaker 1: talking about deep subprime auto loans. This is a small
21:13
Speaker 1: portion of the overall auto lending sector, about forty billion dollars,
21:16
Speaker 1: but still very important as sort of a gauge of
21:19
Speaker 1: the temperature in consumer credit worthiness. When we're looking on
21:35
Speaker 1: our computers or at work, a lot of people don't
21:38
Speaker 1: think about all of the back office support that goes
21:41
Speaker 1: into storing, maintaining the data, enabling conferences that are virtual
21:46
Speaker 1: with other people. But it is actually a massive business.
21:50
Speaker 1: And here to tell us more about that is Stephen Smith,
21:52
Speaker 1: chief executive officer and president of Equinix. We're also joined
21:56
Speaker 1: by Josh Yatskoitz. He's a media and cable analyst for
21:59
Speaker 1: Bloomberg in intelligence and Stephen, I wanted to start with you.
22:02
Speaker 1: So Equinis was formed, which seems rather prescient frankly, because
22:06
Speaker 1: it seems like, uh, it has only become more necessary
22:10
Speaker 1: to store data and get somebody to maintain it all
22:13
Speaker 1: for you, because it is a very difficult Can you
22:15
Speaker 1: give us a sense of how big this market is
22:18
Speaker 1: and how big you see it growing too? Well, it's
22:20
Speaker 1: a great question. Um. The company is eighteen years old,
22:23
Speaker 1: as you point out, and and it is a four
22:27
Speaker 1: billion dollar revenue business been public for for a couple
22:30
Speaker 1: of decades now, and the basic premise of the business
22:34
Speaker 1: is we design, build and run big, massive data centers
22:37
Speaker 1: on behalf of thousands of big customers, bid two of them, right, No,
22:42
Speaker 1: we have a hundred two yes data centers, but we
22:44
Speaker 1: have almost ten thousand customers and these are big global,
22:46
Speaker 1: two thousand fortune businesses and small and medium businesses, all sizes.
22:50
Speaker 1: But generally speaking, companies either do their own technology or
22:54
Speaker 1: they today more increasingly in the last four or five years,
22:57
Speaker 1: are going directly to the cloud, or third option for
23:00
Speaker 1: them is to come to data centers like equin x,
23:04
Speaker 1: where if they don't want to be in the data
23:05
Speaker 1: center business themselves, portions of their I T can go
23:08
Speaker 1: to co location where we give them private access to
23:11
Speaker 1: the cloud providers, the networks, etcetera. So the company was
23:14
Speaker 1: built on the premise of ninety eight, when the Internet
23:17
Speaker 1: was scaling. The big network, the big telcos came to
23:19
Speaker 1: the market and said we can't hand off traffic very
23:22
Speaker 1: elegantly in the US. A start in the US and
23:24
Speaker 1: Equinox was chosen as the company to facilitate networks handing
23:29
Speaker 1: off traffic to scale the Internet that's how the company started,
23:32
Speaker 1: and then since then we've just scaled it to help
23:35
Speaker 1: scale all of this traffic, mobile, cloud data, all this
23:39
Speaker 1: stuff today that we talk about requires massive amounts of
23:42
Speaker 1: servers and storage, arraysing networking gear, and we glue it
23:45
Speaker 1: all together inside these centers. Josh, can you give us
23:48
Speaker 1: a sense of what the competitive landscape is, because I'm curious.
23:51
Speaker 1: I just want to bring you in to sort of
23:53
Speaker 1: give a picture of how much this area has grown
23:56
Speaker 1: as far as companies they're trying to break in. Yeah,
24:00
Speaker 1: UM Equinox is the biggest by far in the space.
24:03
Speaker 1: There's other players on both It's called de retail space,
24:06
Speaker 1: which specializes in the interconnections, and the whole space wholesale space,
24:10
Speaker 1: which is one of these large UM large data centers
24:13
Speaker 1: for large deployments. You have competitors on both sides. Uh,
24:17
Speaker 1: the retail space is a little more fragmented. Equinox dominates
24:21
Speaker 1: all over the world UM as as Steve can allude to,
24:25
Speaker 1: but you have a lot of small players coming in.
24:28
Speaker 1: There's just so much demand out there from cloud providers,
24:31
Speaker 1: from enterprises from all over the space UM for interconnections
24:34
Speaker 1: and just wholesale space in general that there is room
24:37
Speaker 1: for everybody to grow, and everybody does seem to be
24:40
Speaker 1: growing really well both. An interesting aspect that Josh knows
24:43
Speaker 1: as well is that um even the big cloud providers
24:46
Speaker 1: that are dominating the technology conversations today, the Microsoft, the AWSS,
24:50
Speaker 1: the Google's and then and then Facebook and Apple, who
24:53
Speaker 1: aren't really cloud providers but big hyper scaling companies, they
24:56
Speaker 1: build these massive data centers in the middle of nowhere,
25:00
Speaker 1: big server farms, you know, in the middle of Tennessee, Oklahoma, Finland,
25:03
Speaker 1: where there's cheaper power, cheaper labor, low taxes. And then
25:07
Speaker 1: when they when they when they distribute their network all
25:09
Speaker 1: over the world, they use companies like Equinics, So they
25:12
Speaker 1: put their capital in their big servant they build the
25:14
Speaker 1: huge server farms, and then when they go to Frankfort,
25:17
Speaker 1: into London, into Singapore and Shanghai and Dubai, they use
25:20
Speaker 1: the data center capacity with companies like Equinics. We're just
25:24
Speaker 1: the biggest in the world globally, and there's thousands of
25:27
Speaker 1: these data center companies around the world that facilitate not
25:30
Speaker 1: only cloud but enterprise data centers, etcetera. Can I'm feeling
25:35
Speaker 1: a little behind the times as you talk, but I'm
25:39
Speaker 1: trying to imagine what that means when they use equinics
25:42
Speaker 1: to connect the rest of the world. Is it uh fibers,
25:46
Speaker 1: Is it through satellites? Is it through I mean, how
25:49
Speaker 1: how does it gets to you? It's both. So all
25:51
Speaker 1: of our data centers are connected with each other in
25:53
Speaker 1: each of the metropolitan areas and so and then we're
25:56
Speaker 1: connected on top of the networks between metros, so between
25:59
Speaker 1: Chicago and you ORC or anywhere in the world that
26:02
Speaker 1: carriers connect the world, but in a metropolitan area they
26:05
Speaker 1: do that inside of Econoxis data center. So we we
26:08
Speaker 1: are that we are the central place. And this is
26:10
Speaker 1: what started the company. It was six or seven of
26:13
Speaker 1: the biggest telecos came into New York, d C, Chicago, Dallas,
26:17
Speaker 1: Silicon Valley in l A, two places on the East coast,
26:20
Speaker 1: two places on the West coast, and two places in
26:21
Speaker 1: the middle of the country to facilitate scaling the Internet.
26:25
Speaker 1: Can I ask, because we hear so much about telecommunication
26:28
Speaker 1: companies and the need to upgrade their networks to five
26:32
Speaker 1: G is there a sort of parallel problem that that
26:35
Speaker 1: that you're facing as far as sort of upgrading the
26:39
Speaker 1: overall technology underpinning this interconnectivity. It's part and parcel to it.
26:44
Speaker 1: Five G is one technology that will make things go
26:47
Speaker 1: faster and and go to the next level. We go
26:51
Speaker 1: to four G T five G, everything gets faster, so
26:53
Speaker 1: the latency is down to milliseconds and sometimes micro seconds.
26:57
Speaker 1: So that's that's one technology that's going to facility. There's
27:00
Speaker 1: also um up to fifty new undersea cables being laid
27:05
Speaker 1: today between continents just to get ready for the data
27:07
Speaker 1: explosion that cloud and mobile and all of this information
27:11
Speaker 1: that we all used to run our businesses, including yours.
27:13
Speaker 1: So so when you see that starting to happen in
27:16
Speaker 1: the billions of dollars being invested to connect continents, connect cities,
27:20
Speaker 1: connect buildings, connect things. This is this whole Internet of
27:24
Speaker 1: things concept. It all gets done in data centers, cloud
27:26
Speaker 1: sits and data centers. Cloud is a is a technology
27:30
Speaker 1: paradigm shift to pay for it by the drink. You
27:33
Speaker 1: used to you used to have to buy all your servers,
27:34
Speaker 1: and today you say, I just want to use this
27:37
Speaker 1: much compute, this much stores, and this most network, and
27:39
Speaker 1: I want to pay a monthly fee. Steven Smith say
27:41
Speaker 1: thank you so much for joining us, Chief executive officer
27:43
Speaker 1: and president of Aquinix, which is based in San Francisco,
27:46
Speaker 1: and our thanks to Josh Yasco, it's telecom, cable and
27:48
Speaker 1: media analyst for Bloomberg Intelligence. Thanks for listening to the
27:53
Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
27:56
Speaker 1: to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform
28:00
Speaker 1: you prefer. I'm pim Fox. I'm on Twitter at pim Fox.
28:04
Speaker 1: I'm on Twitter at Lisa abramowits one before the podcast.
28:08
Speaker 1: You can always catch us worldwide on Blueberg Radio