Latest / Bloomberg Intelligence / Alberto Gallo on How the American Dream Turned into Greed and Inequality

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Alberto Gallo on How the American Dream Turned into Greed and Inequality · 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 A. Bramowitz. Each day
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  Speaker 1: we bring you the most important, noteworthy, and useful interviews
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• 0:17
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• 0:20
  Speaker 1: L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com.
• 0:31
  Speaker 1: There's a story that caught my eye, how the American
• 0:33
  Speaker 1: Dream turned into greed and inequality. It was authored by
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  Speaker 1: Alberto Gallo, portfolio manager and head of macro Strategies at
• 0:40
  Speaker 1: Algebra's Investments Limited in London, and he joins us now. Alberto,
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  Speaker 1: I thought this was a fascinating piece that you authored.
• 0:49
  Speaker 1: The main point was that monetary policies have sort of
• 0:53
  Speaker 1: patched over a lot of sort of policy deficits and
• 0:57
  Speaker 1: have allowed the weakest links to just hack on credit
• 1:01
  Speaker 1: at the expense of actually improving their place in society.
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  Speaker 1: Can you give us a sense of what has caused
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  Speaker 1: us and what has allowed this and what the potential
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  Speaker 1: consequences are. Good morning, Lisa. We have seen as investors
• 1:15
  Speaker 1: in the market every day every month in the last
• 1:17
  Speaker 1: nine years, markets rising, but our struggle is that this wealth,
• 1:21
  Speaker 1: this benefit hasn't reached the real economy. There's a big
• 1:25
  Speaker 1: divide between Wall Street and Main Street. And in the
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  Speaker 1: end it's negative for everyone because we have seen that
• 1:31
  Speaker 1: countries become more and more split as they have and
• 1:35
  Speaker 1: they have not followed different political directions. Um. And also geographically,
• 1:40
  Speaker 1: you have areas which are very rich versus areas that
• 1:42
  Speaker 1: are very poor, like the West and East Coast versus
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  Speaker 1: the Midwest, or in the in the UK, London versus
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  Speaker 1: the rest of the country. So you have a very
• 1:50
  Speaker 1: usset rich but wage poor recovery. You have countries that
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  Speaker 1: look very good in GDP terms, but look very bad
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  Speaker 1: in the distribution of this wealth. The trickle down is
• 2:01
  Speaker 1: is some is an illusion, uh, and it generates political instability, Alberto,
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  Speaker 1: Is this any different than it's always been? No, because
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  Speaker 1: we are at the endpoint of a very long dead supercycle.
• 2:17
  Speaker 1: We started using credit to boost wealth with Nixon, with
• 2:21
  Speaker 1: Freddie May Fanny mac being created and privatized, with the
• 2:25
  Speaker 1: idea that you could replace productivity with a loan. The
• 2:29
  Speaker 1: American dream would be possible. You could go to university,
• 2:33
  Speaker 1: you can get a student loan, you could get a
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  Speaker 1: mortgage just because Uncle Sam would help you to get that.
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  Speaker 1: But then what happened is that all the tuition fees
• 2:43
  Speaker 1: started to go up, all the house prices started to
• 2:45
  Speaker 1: go up, and then you needed even more credit. So
• 2:48
  Speaker 1: they started really with the baby boomer generation, which and
• 2:52
  Speaker 1: with the government subsidy to private debt, which generated a
• 2:58
  Speaker 1: growth in debt to GDP private debt to GDP from
• 3:02
  Speaker 1: four So we used four dollars of debt private debt
• 3:08
  Speaker 1: to generate to to grow GDP GDP group, but private
• 3:12
  Speaker 1: debt outgrew GDP by four times between the sixties and
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  Speaker 1: the two eight crisis. The US did it first, then
• 3:19
  Speaker 1: it was Europe done China in the last ten years.
• 3:22
  Speaker 1: The question is now you're at the end of the game.
• 3:25
  Speaker 1: Because interest rates are records low. You can't lower interest
• 3:29
  Speaker 1: rates even more so central banks have bought twenty three
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  Speaker 1: dollars of assets around the world, but this is effectively
• 3:35
  Speaker 1: a debasement of money. Remember money is credit and credit
• 3:39
  Speaker 1: means faith in the system. When you depreciate money by
• 3:42
  Speaker 1: increasing the value of all the assets that money can buy,
• 3:46
  Speaker 1: you implicitly depreciate faith in the financial system, which is
• 3:50
  Speaker 1: why people today are looking at buying bitcoin and buying
• 3:52
  Speaker 1: gold or buying alternatives because they think that will be
• 3:55
  Speaker 1: even more q E and their money will be less
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  Speaker 1: worth in the future. Uh. These are all shortcuts, um
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  Speaker 1: for what politicians should have done, investing in productivity, investing
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  Speaker 1: in education, giving everyone an opportunity, and we are I'm
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  Speaker 1: sad today to see that politicians are cutting taxes for
• 4:13
  Speaker 1: the rich rather than investing in productivity. Alberto, is this
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  Speaker 1: something you see as just a phenomenon of the last
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  Speaker 1: fifty years, because you know, post a pre World War Two,
• 4:25
  Speaker 1: there were very few opportunities for financial assistance from the
• 4:28
  Speaker 1: government for just about anything. So I don't understand exactly
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  Speaker 1: where this American dream that you're describing comes from, except
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  Speaker 1: if you agree that it is an anomaly as a
• 4:40
  Speaker 1: result of the victory of the United States after the
• 4:42
  Speaker 1: Second World War, Because I mean, if you go back
• 4:44
  Speaker 1: a hundred years, hardly anybody owned their own home, and
• 4:48
  Speaker 1: now homeownership is let's say six However, we got here
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  Speaker 1: and previously you had to put down a down payment
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  Speaker 1: of about fifty So whatever the financial rigamarole, I'm wondering,
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  Speaker 1: is it better now because we've appreciated people's lives and
• 5:03
  Speaker 1: maybe depreciated the value of money at the same time.
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  Speaker 1: I in my view, we need to think about what's
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  Speaker 1: the dream that we want? Is it about home ownership?
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  Speaker 1: Does ome ownership make you happy? And today many young
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  Speaker 1: people can't afford to buy a house um for example. Um,
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  Speaker 1: but maybe we have substituted the idea of a dream,
• 5:26
  Speaker 1: the idea of home ownership, UM with with happiness. While
• 5:31
  Speaker 1: happiness is really linked to social mobility, to the chances
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  Speaker 1: you have in life to end up in a better
• 5:37
  Speaker 1: position than your parents. And data today shows that social
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  Speaker 1: mobility is actually lower in the US than it is
• 5:43
  Speaker 1: in Scandinavia for example, or in some other European countries
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  Speaker 1: that have a much less dynamic economy. And more importantly, um,
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  Speaker 1: even if you think that you may make it to
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  Speaker 1: get to the one percent regardless of where you're born, Um,
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  Speaker 1: do you want to be in a society where, in
• 6:00
  Speaker 1: particular the bottom cannot afford uh food? You know? Or
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  Speaker 1: in the UK one third of children living poverty. Do
• 6:08
  Speaker 1: you want to be the successful person in a society
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  Speaker 1: which is deeply divided and where nurses are on food banks?
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  Speaker 1: So this this is I think the question we need
• 6:18
  Speaker 1: to ask all there too, just real quick, do you
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  Speaker 1: think they were close to the breaking point at this
• 6:23
  Speaker 1: at this at this juncture. I think the question we
• 6:28
  Speaker 1: are increasing economists are asking themselves is about, you know,
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  Speaker 1: some of the assumptions that we use in the last
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  Speaker 1: twenty thirty years, and politicians, on the other hand, are
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  Speaker 1: capitalizing on this inequality and this anger. Paradoxically, the irony
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  Speaker 1: is that in the UK and the U S, which
• 6:45
  Speaker 1: are the most flexible economic systems, we have seen more
• 6:50
  Speaker 1: political protest vote, more anti establishment votes with you know,
• 6:54
  Speaker 1: the Trump administration and Brexit. But these um political moves,
• 7:00
  Speaker 1: the movements sometimes are associated with policies that are are
• 7:04
  Speaker 1: long term. We have been waiting for general electrics, grand
• 7:19
  Speaker 1: vision for how to proceed going forward after a pretty
• 7:24
  Speaker 1: horrible year. And here to explain to us, just to
• 7:27
  Speaker 1: give us a review of what this plan looks like,
• 7:30
  Speaker 1: is Brook Sutherland, an m and a columnist for Bloomberg
• 7:33
  Speaker 1: Goad Fly. Brooke, thank you so much for joining us.
• 7:35
  Speaker 1: I know today has been a crazy day for you.
• 7:37
  Speaker 1: The stock market is responding to ges plan, with the
• 7:40
  Speaker 1: shares down more than five cent. You had written long
• 7:44
  Speaker 1: ago GE needs to cut its dividend and it will.
• 7:48
  Speaker 1: Is this plan still not enough? It's not. And I
• 7:51
  Speaker 1: think you know, when we initially saw the dividend cut
• 7:54
  Speaker 1: this morning, I was thinking, Okay, well this is good.
• 7:56
  Speaker 1: They're being dramatic about it. It It was a fifty cut.
• 7:59
  Speaker 1: That was what people were facting and what they sort
• 8:01
  Speaker 1: of needed to do. And then they came out with
• 8:03
  Speaker 1: their slide deck with their numbers. And when you sort
• 8:07
  Speaker 1: of drill down into what those numbers are, I think
• 8:10
  Speaker 1: you have to wonder if they did go far enough
• 8:12
  Speaker 1: or if maybe they should have cut the divid in more.
• 8:14
  Speaker 1: And you know, I think that's raising questions for people.
• 8:17
  Speaker 1: I think the other thing is that Flannery promised this
• 8:20
  Speaker 1: comprehensive review and we didn't. Yeah. Sorry, um. And if
• 8:28
  Speaker 1: you know, he I believe him when he says he
• 8:30
  Speaker 1: really drilled down through these businesses and looked at you know,
• 8:33
  Speaker 1: units within businesses and everything. But what we got is
• 8:37
  Speaker 1: kind of I mean, like, you know, they're talking about
• 8:40
  Speaker 1: getting rid of the industrial solutions business, which is great
• 8:43
  Speaker 1: because they've already sold that, so then you know it's
• 8:46
  Speaker 1: not new. And they're talking about lighting and transportation and
• 8:50
  Speaker 1: these are all sort of ancillary businesses that people were
• 8:53
  Speaker 1: already expecting them to divest. There's no real new surprising,
• 8:58
  Speaker 1: you know, grab your attention at AGY here, and I
• 9:00
  Speaker 1: think you know what that means is that we're just
• 9:03
  Speaker 1: basically looking at a few years of a really tough
• 9:06
  Speaker 1: slog at GE. They're committed to staying in markets like power,
• 9:10
  Speaker 1: and power is not going to get better for at
• 9:12
  Speaker 1: least a few years, even by g s own admission,
• 9:15
  Speaker 1: and you know, some analysts worry it might not ever
• 9:18
  Speaker 1: get better. It might just sort of trend down to
• 9:20
  Speaker 1: this new normal of lower profitability. And I think you know,
• 9:24
  Speaker 1: if you were looking for radical change, this this is
• 9:27
  Speaker 1: not it. What about the sell off of the majority
• 9:30
  Speaker 1: stake in Baker Hughes. That's new ish, But gees prior
• 9:35
  Speaker 1: management had communicated that a spinoff of that or some
• 9:38
  Speaker 1: sort of investor was possible when they announced this deal,
• 9:42
  Speaker 1: and that's something that investors have been speculating about basically
• 9:45
  Speaker 1: ever since they decided that they were going to buy
• 9:47
  Speaker 1: the Baker Hughes business and emerge it in this combined entity.
• 9:51
  Speaker 1: So this is the first time ge has publicly said, yes,
• 9:54
  Speaker 1: we're looking at that, but they've sort of indicated it's possible,
• 9:57
  Speaker 1: and people have been expecting that to come, so, you know,
• 10:00
  Speaker 1: I think that is a good step, but that's also
• 10:03
  Speaker 1: not the kind of thing that they're going to be
• 10:05
  Speaker 1: able to do tomorrow. They own, you know, nearly six
• 10:08
  Speaker 1: of this business. If you sold that all right now,
• 10:10
  Speaker 1: you're not going to get a great price for it.
• 10:12
  Speaker 1: Um They're going to have to do it in stages.
• 10:14
  Speaker 1: They probably have to wait a while for some of
• 10:15
  Speaker 1: these commodity markets to recover. I'm wondering about whether they're
• 10:20
  Speaker 1: gonna have to cut the divid in more. I think
• 10:23
  Speaker 1: that that is sort of the question, and I you know,
• 10:25
  Speaker 1: I don't think we would expect anything, you know, in
• 10:27
  Speaker 1: the coming months or anything like that. I think a
• 10:29
  Speaker 1: lot of it's going to depend on how team plays out.
• 10:32
  Speaker 1: But when you look at those numbers, I think it
• 10:35
  Speaker 1: does make you nervous. And even after they cut it,
• 10:37
  Speaker 1: they're still going to have one of the highest dividend
• 10:39
  Speaker 1: payout ratios among high grade industrials. Talking about high grade,
• 10:44
  Speaker 1: I know that g E is on watch for downgrade,
• 10:47
  Speaker 1: and you know that I'm obsessed with bonds, so I
• 10:48
  Speaker 1: was looking at their von price action and in fact,
• 10:52
  Speaker 1: the market is treating them as though they have already
• 10:54
  Speaker 1: been downgraded to the lowest rung of investment grade. I
• 10:58
  Speaker 1: have to think that's also a headwind because that raises
• 11:01
  Speaker 1: their borrowing costs going forward. No, absolutely, and you know
• 11:05
  Speaker 1: they're borrowing about six billion to front pay their pension
• 11:09
  Speaker 1: um and you know, but you can't just keep going
• 11:12
  Speaker 1: to the vond market to keep your business going so
• 11:16
  Speaker 1: well fair enough, but um, yeah, you know. I I
• 11:20
  Speaker 1: just think that there was so much hype for this event,
• 11:22
  Speaker 1: and part of that is g s own fault. I mean,
• 11:24
  Speaker 1: the way that they set this up. This November date
• 11:26
  Speaker 1: has been on the calendar since September, and then we
• 11:29
  Speaker 1: had that horrible earnings report and they kept promising to wait,
• 11:32
  Speaker 1: wait with us until we get to November. We're gonna
• 11:34
  Speaker 1: tell you this grand plan. And it's basically a reiteration
• 11:37
  Speaker 1: with maybe a little bit more details here and there
• 11:40
  Speaker 1: of what they said on that third quarter earnings call.
• 11:42
  Speaker 1: And so you know, they sort of set themselves up
• 11:45
  Speaker 1: for this where they really sort of promised something grand
• 11:48
  Speaker 1: and this is not This is not it. I mean,
• 11:51
  Speaker 1: this is maybe the best that they can do, and
• 11:53
  Speaker 1: maybe this is the what they think is right, But
• 11:56
  Speaker 1: this is not the kind of thing that's going to
• 11:57
  Speaker 1: be a magic fix for g stock. Is there a
• 12:01
  Speaker 1: is there a thought you have about the compensation plan
• 12:05
  Speaker 1: that has been announced because they seem to at least
• 12:08
  Speaker 1: be putting their own money where their mouth is in
• 12:10
  Speaker 1: terms of compensation. Is going to be in stock? No
• 12:14
  Speaker 1: more of these long term performance awards, well, some of
• 12:17
  Speaker 1: it's going to be in stock, more of it than
• 12:19
  Speaker 1: it was before. I think, you know, that's certainly going
• 12:21
  Speaker 1: to be a good step. UM. A lot of investors
• 12:24
  Speaker 1: were looking at these big payouts that that former executives
• 12:26
  Speaker 1: got in cash at times when the company was struggling,
• 12:30
  Speaker 1: when you know, what's stock price was not delivering for investors. UM.
• 12:34
  Speaker 1: So I think that certainly was a watch item. I
• 12:36
  Speaker 1: think this is a good step. I do think you
• 12:38
  Speaker 1: have to wonder if down the road there's going to
• 12:40
  Speaker 1: be any sort of clawbacks of what was paid to
• 12:43
  Speaker 1: former executives UM and if that should be including perhaps
• 12:48
  Speaker 1: I mean, you know, I don't think anything has been
• 12:51
  Speaker 1: proposed yet, but I know this is something that investors
• 12:53
  Speaker 1: I've talked to are wondering about and whether there's any
• 12:56
  Speaker 1: grounds there. UM or you know, the head of the
• 12:58
  Speaker 1: power business, Steve Bowles. He ran that business for a
• 13:01
  Speaker 1: very long time, and John Flannery is basically saying it
• 13:05
  Speaker 1: was his fault. It was poor execution. You know, power
• 13:08
  Speaker 1: is a troubled market, but we were worse off than
• 13:11
  Speaker 1: other people in the power market because of the way
• 13:13
  Speaker 1: we handled that business. Well, investors seem to agree with you.
• 13:16
  Speaker 1: The shares of Gear down more than five percent right now.
• 13:19
  Speaker 1: Thanks very much for being with us. Brook Sutherland is
• 13:21
  Speaker 1: m and A. Thomas Bloomberg Gadfly. All things mergers and
• 13:25
  Speaker 1: acquisitions much appreciated. Not shopping on Ali Baba Group holding site,
• 13:43
  Speaker 1: well you were one of the few, not one of
• 13:45
  Speaker 1: the many. The site generated more than twenty five billion
• 13:49
  Speaker 1: dollars in sales in China's Singles Day, the perhaps largest
• 13:54
  Speaker 1: retail shopping day in the world. Here to tell us
• 13:56
  Speaker 1: more about it is Shura over Day. Our technology columnist
• 14:00
  Speaker 1: are Bloomberg gad Fly and you can follow Shira on
• 14:03
  Speaker 1: Twitter at Shira over Day. Of course, shar thanks for
• 14:06
  Speaker 1: coming into the studio. What is why is this so important?
• 14:11
  Speaker 1: So Ali Baba essentially created this fake shopping holiday which
• 14:15
  Speaker 1: they hold on November eleven every year, and it is
• 14:18
  Speaker 1: basically sort of a celebration of shopping and frankly, it's
• 14:22
  Speaker 1: a marketing event for Ali Blab, but it's a way
• 14:25
  Speaker 1: to draw attention to themselves from all across the globe
• 14:28
  Speaker 1: from these enormous sums of sales that they do every year. Yeah, well,
• 14:32
  Speaker 1: I mean they're not alone, right, because Amazon also has
• 14:34
  Speaker 1: Cyber Monday. I mean, why not create an artificial holiday
• 14:37
  Speaker 1: to to have people spend money on your site. The
• 14:40
  Speaker 1: fact though, that people spent twenty five point three billion
• 14:44
  Speaker 1: dollars in sales is remarkable now, I mean, can you
• 14:46
  Speaker 1: put this in a perspective and is this just sort
• 14:48
  Speaker 1: of a blow away as far as what people were expecting.
• 14:51
  Speaker 1: It is a staggering number. And we should remember that
• 14:54
  Speaker 1: China is the largest um market in the in the world,
• 14:59
  Speaker 1: both for or electronic commerce and for a number of
• 15:03
  Speaker 1: people on the internet, so the numbers in China are
• 15:05
  Speaker 1: always going to be big. But billion is roughly equivalent
• 15:09
  Speaker 1: to the total quarterly sales on eBay, so and that
• 15:13
  Speaker 1: was done in a single day, So it's a lot.
• 15:15
  Speaker 1: But it's also important to remember that Ali Baba, unlike Amazon,
• 15:19
  Speaker 1: to which it's frequently compared doesn't make money directly from
• 15:24
  Speaker 1: merchandise sales, or doesn't make the majority of its money
• 15:27
  Speaker 1: from merchandise sales. It makes money from the merchants who
• 15:30
  Speaker 1: advertise to make those sales on ali Baba. So the
• 15:35
  Speaker 1: actual total daily sales, even on a marketing day, are
• 15:40
  Speaker 1: not really that material to Ali Baba. Do they make
• 15:44
  Speaker 1: money in terms of margin on this kind of stuff?
• 15:47
  Speaker 1: I mean because that you can have a artificial shopping day,
• 15:50
  Speaker 1: cut the prices, you get great sales, and then you
• 15:53
  Speaker 1: go back to the other three something days of the
• 15:56
  Speaker 1: year and you realize, although you gotta make up for
• 15:58
  Speaker 1: that one bad day we had. Well, I think the
• 16:00
  Speaker 1: better question is do the merchants who sell their stuff
• 16:04
  Speaker 1: through ali Baba make money? And I don't know, and
• 16:06
  Speaker 1: I think it probably varies a lot by merchant um. Again,
• 16:09
  Speaker 1: because ali Baba is not selling products directly, it's more
• 16:12
  Speaker 1: of a middleman. For companies that are selling directly to consumers,
• 16:16
  Speaker 1: their sales tend to be pretty profitable because they're they're
• 16:19
  Speaker 1: essentially making money from advertising, which is a high margin
• 16:21
  Speaker 1: business for most digital media companies are digital advertising companies.
• 16:25
  Speaker 1: So Shara, you know me really well, and I imagine
• 16:27
  Speaker 1: you were expecting me to ask about bonds because Ali
• 16:30
  Speaker 1: Baba is selling some and the US asking me about
• 16:34
  Speaker 1: flow flow your mind. Um, but you know Ali Baba
• 16:37
  Speaker 1: selling seven billion dollars in US dollar denominated bonds pricing
• 16:42
  Speaker 1: at some point this week. This is the first sale
• 16:45
  Speaker 1: of the company in the U S Why they just
• 16:48
  Speaker 1: sold all this like material? They? I mean they why
• 16:51
  Speaker 1: do they need money? I mean, I think the answer
• 16:53
  Speaker 1: to any tech companies selling debt these days is because
• 16:56
  Speaker 1: they can. Um that we've seen the the last few years. Um.
• 17:01
  Speaker 1: Now seven the top seven companies in the public companies
• 17:05
  Speaker 1: in the world by stock market value or all tech companies, um.
• 17:09
  Speaker 1: And you know investors see that and are willing to
• 17:12
  Speaker 1: loan money to these companies because of their enormous size, profitability,
• 17:16
  Speaker 1: and market power. Right. But you know, if I could
• 17:18
  Speaker 1: borrow money at a four percent rate or four and
• 17:21
  Speaker 1: a half percent rate, unless I'm going to use it
• 17:23
  Speaker 1: for something, it's a drag, right, I mean, is it
• 17:26
  Speaker 1: going to be for refinancing debt? Is it that they're
• 17:29
  Speaker 1: going to build out operations in the US. Is there
• 17:32
  Speaker 1: a sense of what it's going to be going toward? Right,
• 17:34
  Speaker 1: whether it's true that Ali Baba does have debt that
• 17:37
  Speaker 1: they're trying to refinance, so certainly that's part of it,
• 17:39
  Speaker 1: and they weren't very explicit about what they will do
• 17:41
  Speaker 1: with the money. But it's also true that Ali Baba
• 17:43
  Speaker 1: has been an acquisitive company. They invest a lot, both
• 17:47
  Speaker 1: in startups and in other companies around the world, not
• 17:50
  Speaker 1: so much in the United States, but um certainly in
• 17:53
  Speaker 1: their home country and in places like the Middle East.
• 17:56
  Speaker 1: And this is a company that has global ambitions. Again,
• 17:59
  Speaker 1: maybe not US ambitions, but um global US ambitions. You know.
• 18:04
  Speaker 1: One of the things I noted about this particular Singles
• 18:08
  Speaker 1: Day is that Ali Baba has rolled out a kind
• 18:11
  Speaker 1: of artificial intelligence fashion aid as well as an artificial
• 18:16
  Speaker 1: reality game. So in a variety of restaurants, and I
• 18:20
  Speaker 1: believe in some select malls, you can go online, you
• 18:25
  Speaker 1: play an artificial reality game, you earn coupons that are
• 18:29
  Speaker 1: then valid for shopping on Ali Baba's site. I'm wondering
• 18:34
  Speaker 1: is that something of a strategy that could be adopted
• 18:37
  Speaker 1: in the United States. I mean, we don't see anything
• 18:40
  Speaker 1: like that, this merging of online shopping, but with online
• 18:44
  Speaker 1: game playing in the real world. So I think two things.
• 18:47
  Speaker 1: One is that artificial intelligence and virtual reality, these are
• 18:51
  Speaker 1: sort of buzzwords that every company is going to dabble
• 18:54
  Speaker 1: in UM and TBD whether that will be an effective
• 18:57
  Speaker 1: sales strategy. But the second point is that I think
• 19:02
  Speaker 1: ali Baba to the extent that we have not really
• 19:04
  Speaker 1: seen here in the US. They have been very savvy
• 19:08
  Speaker 1: about uniting online and physical commerce, and again in a
• 19:13
  Speaker 1: way that even a company like a smart company like
• 19:15
  Speaker 1: Amazon has not really done, including in groceries by the way,
• 19:18
  Speaker 1: where Ali Baba is trying to sort of do that
• 19:21
  Speaker 1: merging that Amazon is also trying to do a physical
• 19:24
  Speaker 1: grocery shopping and digital grocery shopping. Of course, ali Baba
• 19:27
  Speaker 1: also has the benefit of not having to deal with
• 19:29
  Speaker 1: different security and privacy rules, and they can use all
• 19:31
  Speaker 1: of their data to monopolize their client customer. The Chinese
• 19:36
  Speaker 1: technology giants have certain advantages that US tech giants don't have. True,
• 19:40
  Speaker 1: that's the diplomatic way of putting it. Shira Day, thank
• 19:43
  Speaker 1: you so much for joining us. As always, Shira Ovidate,
• 19:45
  Speaker 1: technology columnist for Bloomberg gad Flyer. Stuff is great. Read
• 19:49
  Speaker 1: it Bloomberg dot com, slash goad fly shares of Mattel
• 20:05
  Speaker 1: soaring up more than the stock of Hasbro, up about
• 20:09
  Speaker 1: six and a half percent. Will these two toymakers come together, Well,
• 20:13
  Speaker 1: let's bring in Sarah Halzac, our retail columnist our Bloomberg
• 20:16
  Speaker 1: gad Fly, and she joins us from our Bloomberg studios
• 20:19
  Speaker 1: in Washington, d C. Sarah, what can you tell us
• 20:23
  Speaker 1: about this potential merger? We're gonna see hot wheels driving
• 20:27
  Speaker 1: around the monopoly board soon. Yeah, I think there's a
• 20:30
  Speaker 1: good chance of it. And here's why. The toy industry
• 20:32
  Speaker 1: is really in a place of big change right now,
• 20:35
  Speaker 1: and I think Hasbro and Mattel could confront it better together.
• 20:38
  Speaker 1: So one thing is that these companies are having to
• 20:40
  Speaker 1: develop new core competencies. As we all know, play is
• 20:43
  Speaker 1: getting more digital. They can't just make molded plastic blocks anymore. Um.
• 20:48
  Speaker 1: They have to learn how to make YouTube videos, apps,
• 20:51
  Speaker 1: and even get onto the big screen, as Hasbro has
• 20:54
  Speaker 1: done with My Little Pony movie. So they have to
• 20:56
  Speaker 1: learn how to do new things and they can probably
• 20:58
  Speaker 1: do that better together. Well, I'm just wondering, Sarah, why
• 21:02
  Speaker 1: this didn't happen earlier, because the retail industry and even
• 21:06
  Speaker 1: the toy industry has been under pressure for a while. Yeah,
• 21:09
  Speaker 1: it's a good question, Um, but I think one thing
• 21:11
  Speaker 1: we can consider is how the toy industry in particular
• 21:14
  Speaker 1: has been looking, and in fact, were blockbuster years for
• 21:19
  Speaker 1: the industry. I think was its best year in over
• 21:22
  Speaker 1: a decade. And you had a number of different things
• 21:24
  Speaker 1: fueling that. It's a really strong year for movies. For example,
• 21:27
  Speaker 1: that was when Star Wars first came back after about
• 21:30
  Speaker 1: ten years of no new films. You had properties like shopkins,
• 21:33
  Speaker 1: You had all sorts of things that were sort of
• 21:35
  Speaker 1: a rising tide lifting all boats in the toy industry,
• 21:38
  Speaker 1: sort of making things look good and making tough decisions
• 21:41
  Speaker 1: like this look less urgent. Is this going. Is this
• 21:45
  Speaker 1: potential combination going to affect companies that the license their
• 21:50
  Speaker 1: products and their brands to the toy makers in order
• 21:53
  Speaker 1: to make their products, whether it is a Disney or
• 21:56
  Speaker 1: a movie maker. Yeah, I think that's still kind of
• 22:00
  Speaker 1: clarifying itself, to be honest, because, um, it is true
• 22:04
  Speaker 1: that they'll have some competing licenses. One will have a
• 22:06
  Speaker 1: license for d C comics, one will have a license
• 22:09
  Speaker 1: for Marvel comics, and sort of what challenges that presents
• 22:13
  Speaker 1: or what weakal issues that presents that they were to
• 22:15
  Speaker 1: get together, I think is still clarifying at this point.
• 22:18
  Speaker 1: Do you have a sense of whether the Toys r
• 22:20
  Speaker 1: US bankruptcy kind of pushed this into high gear. I
• 22:25
  Speaker 1: think it's fair to say that it probably did in
• 22:28
  Speaker 1: the sense that, you know, Mittel really took a bath
• 22:30
  Speaker 1: after its latest earnings report, um, when sales just plummeted,
• 22:34
  Speaker 1: and they attributed about half of that decline in North America.
• 22:37
  Speaker 1: Eleven percent of that eleven line was because of the
• 22:41
  Speaker 1: Toys r US bankruptcy, and uh, you know, Mitchel just
• 22:44
  Speaker 1: lost so much market value after that that I think
• 22:47
  Speaker 1: it suddenly became a much more attractive takeover target. What
• 22:50
  Speaker 1: are some of the potential obstacles from an antitrust perspective
• 22:53
  Speaker 1: other than those license deals? Yeah, simply just that, Um,
• 22:57
  Speaker 1: these companies are so huge, right Um, them and Lego
• 23:01
  Speaker 1: are clearly the titans of the toy industry. Uh. So
• 23:04
  Speaker 1: that's said, though, the toy industry is more fragmented than
• 23:07
  Speaker 1: we sometimes think, and I think even if you look
• 23:09
  Speaker 1: at what's going to be hot this holiday season, you
• 23:11
  Speaker 1: can see that so hatch moles are projected to be
• 23:13
  Speaker 1: a huge seller. Well, those are made by spin Master.
• 23:15
  Speaker 1: They're not made by Hasbro or Mattel. Fingerlings are flying
• 23:19
  Speaker 1: off shelves and around eBay for much higher prices. Those
• 23:22
  Speaker 1: are made by a small company called Wowie. So shopkins
• 23:25
  Speaker 1: are made by Moose Toys, a small company based in Australia.
• 23:27
  Speaker 1: So there definitely will be some hurdles there since it
• 23:30
  Speaker 1: has Brown Mattel are so large. But the market is
• 23:33
  Speaker 1: a bit more broken up than you might expect. I'm
• 23:35
  Speaker 1: feeling this pit of doom in my stomach because I
• 23:38
  Speaker 1: haven't heard of some of those things that I know
• 23:40
  Speaker 1: my children will be asking for them. So I'm concerned.
• 23:43
  Speaker 1: I'm looking at hate you don't you don't know hatchem
• 23:47
  Speaker 1: I like. I like giving them a brown, brown paper
• 23:50
  Speaker 1: bag and telling them to make a puppet. But just
• 23:53
  Speaker 1: just lastly, you know, I'm just wondering. You know, yes,
• 23:56
  Speaker 1: a combination makes sense given the pressures, but will this
• 23:58
  Speaker 1: materially change the dynamic at all? With the competent competition
• 24:02
  Speaker 1: from Amazon and other sources. It might give them more
• 24:08
  Speaker 1: power frankly in dealing with Amazon to you know, dictate
• 24:11
  Speaker 1: pricing and that kind of thing. So it could be
• 24:13
  Speaker 1: helpful in that way, and then I think the other
• 24:15
  Speaker 1: thing to think about is just what this does for
• 24:17
  Speaker 1: them in emerging markets. What we know is that the growth,
• 24:21
  Speaker 1: the majority of growth in the toy industry over the
• 24:22
  Speaker 1: next five years is absolutely going to come not from
• 24:25
  Speaker 1: North America but from emerging markets, and the power that
• 24:28
  Speaker 1: these companies combined would have in dealing with Ali Baba,
• 24:31
  Speaker 1: for example, might be helpful to them in their growth
• 24:34
  Speaker 1: mission as well. Sarah Hawzac, thank you so much for
• 24:36
  Speaker 1: joining us. Sarah Howzac is a retail columnist with Bloomberg Godfly,
• 24:40
  Speaker 1: and she joins us from our studio in Washington, d C.
• 24:44
  Speaker 1: Just to give you a sense of how the shares
• 24:46
  Speaker 1: are responding to this potential combination. Mattel shares up more
• 24:49
  Speaker 1: than twenty percent, Hasbro shares up more than six and
• 24:52
  Speaker 1: a half percent, So certainly it's being cheered on the street.
• 24:56
  Speaker 1: It's still unclear to me whether they could compete with
• 24:58
  Speaker 1: an Amazon or even some local kinds of alliances with
• 25:02
  Speaker 1: some of these upstart uh you know, toymakers that have
• 25:05
  Speaker 1: less overhead and just saying wow, we fingerlings and hatch themles.
• 25:09
  Speaker 1: You're gonna hear a lot about Thanks for listening. To
• 25:14
  Speaker 1: the Bloomberg P and L podcast. You can subscribe and
• 25:17
  Speaker 1: listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast
• 25:21
  Speaker 1: platform you prefer. I'm pim Fox. I'm on Twitter at
• 25:24
  Speaker 1: pim Fox. I'm on Twitter at Lisa Abramo. It's one
• 25:28
  Speaker 1: before the podcast. You can always catch us worldwide on
• 25:31
  Speaker 1: Bloomberg Radio