Latest / Bloomberg Intelligence / Slack CEO, CFO On Why They Went With A Direct Listing

Transcript

Slack CEO, CFO On Why They Went With A Direct Listing · Bloomberg Intelligence

0:02
Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul Swinge. You,
0:05
Speaker 1: along with my co host Lisa Brahma wits each day
0:07
Speaker 1: we bring you the most noteworthy and useful interviews for
0:10
Speaker 1: you and your money. Whether at the grocery store or
0:12
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
0:15
Speaker 1: podcast or wherever you listen to podcasts, as well as
0:17
Speaker 1: at Bloomberg dot com. Let's get a little bit more
0:23
Speaker 1: insight into the company Slack, and we do that we
0:26
Speaker 1: bring in Man Deep. Seeing. Man Deep is senior tech
0:28
Speaker 1: industry annalys for Bloomberg Intelligence. So we've talked a lot
0:32
Speaker 1: Man Deep about the actual process of a direct listing,
0:35
Speaker 1: but I wonder if you can just give us a
0:37
Speaker 1: sense of what this company is really all about and
0:39
Speaker 1: why investors are, you know, kind of I think pretty
0:42
Speaker 1: interested in this in this new offering here. Sure. So,
0:45
Speaker 1: Slack is a company that was born on the cloud
0:47
Speaker 1: and it's writing this trend of mobility and shift to cloud.
0:51
Speaker 1: When you think about their technology stack, you're really re
0:55
Speaker 1: platforming from on premise environments to a cloud based environment.
0:59
Speaker 1: And Black is a single product company. What it does
1:03
Speaker 1: is real time messaging platform zoom IF, which went public
1:07
Speaker 1: before Slack, it does you know, real time video communications.
1:11
Speaker 1: So I feel like there is a lot of fragmentation
1:13
Speaker 1: on the cloud now and what you're seeing is single
1:16
Speaker 1: product companies doing very well because cloud, remember is a
1:20
Speaker 1: recurring subscription model, so you have tons of visibilities. Once
1:24
Speaker 1: you have a customer, it's very sticky, and I think
1:27
Speaker 1: that's why these companies are getting a lot of premium
1:30
Speaker 1: because there is growth, There is good growth, there is
1:33
Speaker 1: predictable growth. But at the end of the day, I
1:35
Speaker 1: think they're going to run against some Microsoft or a Google,
1:38
Speaker 1: and that's where you're you're gonna say, Okay, how how
1:41
Speaker 1: much RAM does this company have? And I feel like
1:44
Speaker 1: they haven't hit that point yet, but it will be
1:46
Speaker 1: very soon. I should note that Bloomberg Beta, the venture
1:49
Speaker 1: capital arm of Bloomberg LP, is an investor in Slack,
1:52
Speaker 1: So it kind of brings up one of the questions,
1:53
Speaker 1: you know it it seems like a business that very
1:56
Speaker 1: relatively early stages that is slack of their growth profile.
1:59
Speaker 1: But we've seen in the past or somebod these you know,
2:01
Speaker 1: cool technologies really hit that Microsoft Software or or Google
2:07
Speaker 1: or an amaza. I can just come in and buy
2:08
Speaker 1: them up. And do you think that's a reasonable scenario
2:11
Speaker 1: here for a company like Slack. Sure, So that's a
2:13
Speaker 1: great point. We've seen that beginning to happen now with
2:17
Speaker 1: Salesforce buying Tableau. What it tells you is the cloud.
2:22
Speaker 1: The large cloud companies like Salesforce, like Microsoft, even you
2:26
Speaker 1: know you can put Service Now in the same bucket,
2:29
Speaker 1: are looking for acquisitions because as a company, you don't
2:33
Speaker 1: want to deal with fifty different vendors. If I have
2:36
Speaker 1: a point product from Slack, point product from Atlastian, point
2:39
Speaker 1: product from drop Box, that's not going to help me,
2:41
Speaker 1: you know, manage my enterprise systems any easier on the cloud. Yes,
2:45
Speaker 1: cloud is a better model with you know, subscriptions on demand.
2:49
Speaker 1: But at the end of the day, you want to
2:51
Speaker 1: see vendor consolidation. And I think with Slack, their revenue
2:56
Speaker 1: is very growth is very strong, it's recurring. But at
3:00
Speaker 1: the end of the day, how many customers can they
3:02
Speaker 1: add for that single product, And that's a question that
3:04
Speaker 1: investors want to know. Well about a month or so,
3:07
Speaker 1: it seemed like we were talking to you a lot
3:09
Speaker 1: about uber Um and Lift and one of the problems
3:12
Speaker 1: was I from an investors perspective is they weren't profitable
3:16
Speaker 1: and the path of profitability was very unclear. Is Slack profitable, No,
3:20
Speaker 1: it's not. In fact, they spend a ton of money
3:23
Speaker 1: on customer acquisition costs that the sales and marketing expenses
3:28
Speaker 1: are really high. They have operating margins of negative negative
3:32
Speaker 1: free casual margins. The good thing with Slack compared to
3:35
Speaker 1: the right sharing guys you alluded to, is that they
3:38
Speaker 1: have higher gross margins. Slack has typical you know, plus
3:43
Speaker 1: gross margins. That's typical for any software company. And so
3:47
Speaker 1: the only level they need to pull this to lower
3:49
Speaker 1: their sales and marketing expenses and that way they can
3:52
Speaker 1: be operating margin positive. The risk is if they do that,
3:56
Speaker 1: then you know they're not going to acquire customers at
3:58
Speaker 1: the same pace and that's the key to driving revenue growth. Interesting,
4:01
Speaker 1: is this a global stories? Is a u S domestic?
4:04
Speaker 1: So they have exposure in Europe. For most of the
4:07
Speaker 1: software companies, especially the cloud ones, they are America and
4:10
Speaker 1: Europe centric. They have very little exposure to China, and
4:14
Speaker 1: so in this case they are thirty percent of their
4:16
Speaker 1: revenue comes from Europe. Interesting, so it's we'll have to
4:20
Speaker 1: take a look, Mandy, if you're gonna stay with us.
4:22
Speaker 1: So we're gonna see how this stock opens that hasn't
4:24
Speaker 1: open yet in the marketplace, um, but expected sometime later
4:28
Speaker 1: this afternoon. UM. So we'll have to see other place
4:31
Speaker 1: coming up. Of course, we have Emily Chang of Bloomberg Television.
4:33
Speaker 1: She's sitting down with Slack CEO Stewart Butterfield and the
4:37
Speaker 1: CFO Alan Shim at the New York Stock Exchange to
4:40
Speaker 1: talk about this new offering, to talk about the future
4:44
Speaker 1: of the company. So that'll be coming up in just moments.
4:47
Speaker 1: But but clearly and highly anticipated transaction. Not only is
4:51
Speaker 1: it a you know, a well known technology company, high growth,
4:54
Speaker 1: lots of investor interest, but it's also direct listing way
4:58
Speaker 1: of issuing shares to the public and is not an
5:00
Speaker 1: I p O. It is a direct listing where your
5:02
Speaker 1: secondary shareholders are offering shares in the public marketplace. Uh.
5:07
Speaker 1: And buyers are being lined up and they're trying to
5:09
Speaker 1: figure out the right price which they can open this stock.
5:13
Speaker 1: So we will see that coming right now. Let's go
5:15
Speaker 1: to Emily Chang of Bloomberg Television. Welcome to our Bloomberg
5:18
Speaker 1: TV and radio audiences. After bumper crop of I p
5:22
Speaker 1: O s either languishing or wildly exceeding expectations, Slack is
5:26
Speaker 1: taking a route to the trading fuller, it hopes will
5:29
Speaker 1: provide a much more well boring outcome a direct listing.
5:33
Speaker 1: As we wait for the stock to start trading on
5:34
Speaker 1: the New York Stock Exchange, I am joined from the
5:36
Speaker 1: trading floor by the company's co founder and CEO Stewart Butterfield,
5:40
Speaker 1: and CFO Alan Shim. Gentlemen, thank you for joining us.
5:43
Speaker 1: Congratulation big milestone. We are waiting for first trade. The
5:47
Speaker 1: stock indicated to open thirty to thirty four dollars a share,
5:49
Speaker 1: which is higher than your reference price of twenty six
5:51
Speaker 1: dollars a share. Stewart, how confident are you in this
5:55
Speaker 1: moment as you wait there for this stock to start
5:57
Speaker 1: trading about the process that the wreck listing was the
6:01
Speaker 1: way to go. Um. We'll see, But I think for
6:06
Speaker 1: at this point it has been working exactly the way
6:09
Speaker 1: we're supposed to work. Um. And ultimately we'll open, we'll
6:13
Speaker 1: have a high and a low today, we'll close, and
6:15
Speaker 1: then the same thing is gonna happen tomorrow and the
6:17
Speaker 1: next day and the next day, and we are very
6:19
Speaker 1: much focused on the long term. Now, you're still paying
6:22
Speaker 1: large fees to bankers. You still raised a lot of
6:24
Speaker 1: money on the private market. So what problem are you
6:27
Speaker 1: really solving Stewart by doing a direct listing versus the
6:31
Speaker 1: traditional I P O. Well, the first one is that
6:36
Speaker 1: no need to raise primary capital. We came into this
6:38
Speaker 1: process with over million dollars on the balance sheet, so
6:41
Speaker 1: the delusion to existing shareholders would have been tough. I
6:44
Speaker 1: think we did get a little bit more freedom and
6:46
Speaker 1: how we tell the story. So in addition to a
6:49
Speaker 1: road show, but instead of only having a road show
6:52
Speaker 1: in private rooms with the investors, we were able to
6:54
Speaker 1: do an investor day, live stream it and make the
6:57
Speaker 1: video available to everyone. Um, and that I think is
7:00
Speaker 1: a pertition a better position. Now Alan Slack is still
7:04
Speaker 1: unprofitable and the markets have rewarded profits even if they're
7:07
Speaker 1: slim profits. How far out is profitability? Well, our primary
7:11
Speaker 1: focus right now is to invest in growth, and as
7:14
Speaker 1: we continue to build on what we think is a
7:16
Speaker 1: new category, that's going to be our focus for a
7:18
Speaker 1: long time. But we've also said to investors that our
7:21
Speaker 1: near term priority is to drive towards cash will break even.
7:24
Speaker 1: We have high confidence in the strong economics of our
7:27
Speaker 1: business that we can still invest very aggressively while driving
7:30
Speaker 1: towards that near term profitability market. So, then, Stewart, how
7:35
Speaker 1: much of a priority would you say that profitability actually is.
7:39
Speaker 1: I think, uh, I don't want to get you technical
7:41
Speaker 1: about it. In sas there's a lot of deferred revenues,
7:44
Speaker 1: so accounting profitability isn't that much of a priority. As
7:47
Speaker 1: Alan was saying, bringing in more cash than we put
7:49
Speaker 1: out on an ongoing basis is a priority because it
7:52
Speaker 1: allows us to control our own destiny. The ideal for
7:55
Speaker 1: us though, is that we continually find new ways and
7:57
Speaker 1: new opportunities to invest to further grow the business, and
8:00
Speaker 1: we don't need a lot of free cash flow, but
8:03
Speaker 1: just a little bit. Now, Allen, revenue growth is slowing.
8:07
Speaker 1: What are some new sources of revenue you're expecting to tap. Well,
8:11
Speaker 1: we're very pleased with the revenue growth. I think what
8:12
Speaker 1: you're seeing is also we're making great track when customers
8:16
Speaker 1: and we've gotten customers today. Our enterprise customers are also
8:20
Speaker 1: growing even faster, so we have six customers over hun
8:23
Speaker 1: Kane revenue and I think what you're seeing is we're
8:25
Speaker 1: scaling so at the base of revenue that we're right now.
8:27
Speaker 1: Some of the revenue growth this mathematically will come down,
8:30
Speaker 1: but we're very optimizing about the opportunity. We believe it's
8:33
Speaker 1: a huge new category to be built and invested behind.
8:35
Speaker 1: So we're focused on that now. Stewart, We've charted your
8:39
Speaker 1: progress from the very beginning. I went back into our archives.
8:42
Speaker 1: The first interview I did with you was inn when
8:44
Speaker 1: you were CEO of Tiny Speck and you were making
8:47
Speaker 1: a game called Glitch, which sort of became slack in
8:52
Speaker 1: Jared Leto crashed our interview. I will never forget that. Um,
8:56
Speaker 1: your employees, your users really love the sort of quirkiness
9:02
Speaker 1: of Slack, which is an ethos very much inspired by you.
9:05
Speaker 1: That said, you are becoming a public company. You're going
9:10
Speaker 1: to be doing earnings calls every quarter. How do you
9:12
Speaker 1: manage that transition with public investors holding your feet to
9:16
Speaker 1: the fire. I think both Al and I have been
9:19
Speaker 1: committed and this is not a recent thing, but over
9:21
Speaker 1: the course of many years on building the kind of
9:23
Speaker 1: internal controls and systems that would allow us to operate
9:25
Speaker 1: as a public company. UM. So you know the financial
9:29
Speaker 1: business operations side. That again a long time ago, and
9:32
Speaker 1: we've been working with the whole company that kind of
9:35
Speaker 1: transition in the limited number of ways that we do.
9:38
Speaker 1: I mean, the we believe we can keep the same culture.
9:41
Speaker 1: We can believe we can keep the same approach to
9:43
Speaker 1: serving customers. If you think about our mission to make
9:46
Speaker 1: people's working life simpler, more pleasant, and more productive, there's
9:49
Speaker 1: a nice humility to it because we do want to
9:51
Speaker 1: be of service. So there's also a huge ambition, and
9:54
Speaker 1: I think the challenge for us or you know, like
9:57
Speaker 1: kind of the what we're going to have to pull
9:59
Speaker 1: off is bringing investors along on that ride and help
10:03
Speaker 1: them understand what the long term vision is and what
10:05
Speaker 1: we can truly do to support companies all over the world.
10:10
Speaker 1: Now you're entering the volatile market. We're in the midst
10:12
Speaker 1: of a trade war with China. You could imagine in
10:16
Speaker 1: an economic downturn that businesses are going to cut budgets.
10:20
Speaker 1: They might not cut email, they might not cut Microsoft Office,
10:23
Speaker 1: they might cut the nice to haves, and they might
10:25
Speaker 1: think that Slack falls into that category. Stewart, how big
10:29
Speaker 1: a risk is that? I don't see any real risk
10:32
Speaker 1: in that we have exceptional retention, so industry leading on
10:35
Speaker 1: both the enterprise side and the SMB side. Um Our
10:38
Speaker 1: customers tell us black is the kind of thing that
10:40
Speaker 1: they didn't know they needed, but once they have it,
10:42
Speaker 1: can't live without it. And if you can't live without Sudden,
10:45
Speaker 1: it's not going to be one of the items that
10:47
Speaker 1: are cut on a discretionary basis. So Alan would you say,
10:51
Speaker 1: you know, how much do these market fluctuations? How much
10:54
Speaker 1: are you following what's happening in the global economy. Well,
10:58
Speaker 1: we we watched it like anybody, all us, but it
11:00
Speaker 1: doesn't necessarily affect the way we are on our business.
11:02
Speaker 1: We're building a new category. We have so many things
11:04
Speaker 1: to focus on, supporting our customers and building this ambition
11:07
Speaker 1: of a new way of working. So we've control we
11:10
Speaker 1: can control, and the markets see what they need to
11:11
Speaker 1: do now. Stewart analysts say that chat apps are a
11:16
Speaker 1: dime of dozen. You've got huge competitors like Microsoft, like Facebook,
11:20
Speaker 1: with deep pockets and billions of users over the longer term,
11:24
Speaker 1: how do you differentiate yourself? How do you compete when
11:28
Speaker 1: even you say in your own risk factors, you haven't
11:30
Speaker 1: figured out the optimal price because it depends often on
11:33
Speaker 1: what your competitors are doing. At Slack, we say we
11:37
Speaker 1: are a competitor aware, but customer assessed, and I know
11:40
Speaker 1: it's hard for me to imagine anything that any competitor
11:43
Speaker 1: would do that would cause us to change our plans
11:46
Speaker 1: um when those plans are all oriented around creating value
11:49
Speaker 1: for our customers. So one of the things you want
11:52
Speaker 1: to do is put ourselves in the position sets that
11:54
Speaker 1: Slack the company becomes more valuable as the world uses
11:56
Speaker 1: more software because Slack the product becomes more valuable for
11:59
Speaker 1: each of our customers as they use more software because
12:02
Speaker 1: of the platform, because of the integrations. Uh, you know,
12:05
Speaker 1: there's a whole world out there of other software. The
12:09
Speaker 1: number of categories continues to put there for it, the
12:11
Speaker 1: number of dollars that companies investment software every year continues
12:15
Speaker 1: to go up. So in that kind of market, and
12:17
Speaker 1: in a world where we have ten million daily active
12:19
Speaker 1: users out of the million plus that we believe would
12:21
Speaker 1: benefits from Slock, it's just wide open all right. Shares
12:25
Speaker 1: now indicated to open thirty two thirty four dollars a share,
12:29
Speaker 1: So so we're getting a little bit higher. This means
12:31
Speaker 1: that you know, investors, employees can sell their shares immediately. Alan,
12:36
Speaker 1: should we be worried about a brain drain? Should we
12:38
Speaker 1: be worried about a talent exodus once employees can sell
12:42
Speaker 1: with no lock up. I think employees like investors, they're
12:47
Speaker 1: appreciating how big of a category and opportunity this is.
12:50
Speaker 1: We estimate this addressable market to be twenty billion dollars
12:53
Speaker 1: and we're just getting started here at one where a
12:55
Speaker 1: category and a product and a hub that values adoption
13:00
Speaker 1: and use er engagement, you know, customer experience as well
13:03
Speaker 1: as the thoughtless sort of alluded to which we think
13:05
Speaker 1: is going to transform the way people work in the future.
13:07
Speaker 1: Here now, Stewart, last quick question for you. You've been
13:11
Speaker 1: very focused on building a diverse team. Slack punches above
13:15
Speaker 1: its way on women and minorities that I know even
13:17
Speaker 1: you admit that that you still have work to do. Unfortunately,
13:21
Speaker 1: other CEOs still don't think diversity is a priority. How
13:24
Speaker 1: has having a diverse team, having more voices in the
13:26
Speaker 1: room helped you get to this moment, helped you improve
13:29
Speaker 1: the bottom line? Well, I think that there's a bit
13:33
Speaker 1: of an increasing return dynamic. So the better job we
13:36
Speaker 1: do the easier it is to take the next step.
13:39
Speaker 1: And so UM, there's a lot of early employees I
13:41
Speaker 1: think who made really important contributions to the Slack culture
13:45
Speaker 1: opened it up UM and brought in people from their network,
13:48
Speaker 1: and that has allowed us to kind of continue, which
13:51
Speaker 1: reduces some of the resistance because it can be very
13:53
Speaker 1: difficult if company gets too big. Is that's something that
13:55
Speaker 1: we're we're proud of, but you know, you said, we
13:57
Speaker 1: have more work to do. It's uh, that doesn't end.
14:01
Speaker 1: We're part of the larger culture, in the larger society UM,
14:04
Speaker 1: and we do what we can. Uh. My hope is
14:07
Speaker 1: that there are you know, a group of people who
14:09
Speaker 1: graduate from SLOCK and go on to start other companies, UM,
14:12
Speaker 1: to have careers at other companies and kind of spread
14:15
Speaker 1: that way of working on all right, Stewart Butterfield, CEO
14:19
Speaker 1: and co founder Slack Ellen Shim the CFO, we're waiting
14:21
Speaker 1: for shares to start trading. Thank you both so much
14:23
Speaker 1: for joining us. Back to you, Emily Chang, thank you
14:26
Speaker 1: so much. That was Emily Chang of Bloomberg Television interviewing
14:29
Speaker 1: Slack CEO Stewart Butterfield and CFO Allen Shim who were
14:33
Speaker 1: on the New York Stock Exchange floors. The stock opens
14:36
Speaker 1: begins to openfor trading. At some point later this this morning,
14:40
Speaker 1: we still have man Deep seeing with us Man Deep
14:42
Speaker 1: as the senior technology annals for Bloomberg Intelligence, So Manteep.
14:45
Speaker 1: One of the things I thought was interesting was the
14:47
Speaker 1: discussion around competition. Um. The question, I guess is there
14:51
Speaker 1: are some big competitors in the marketplace. How do you
14:53
Speaker 1: think Slack is positioned in that space? Sure? So, I
14:58
Speaker 1: think when I look at, you know, the comparative landscape,
15:01
Speaker 1: obviously Microsoft is the biggest one for Slack, and Microsoft
15:05
Speaker 1: is still a hybrid company. It's you know, it's got
15:07
Speaker 1: a huge legacy on premise customer base and it's got
15:11
Speaker 1: a lot of new cloud offerings. I think what they're
15:14
Speaker 1: trying to do, what Microsoft specifically is trying to do,
15:17
Speaker 1: is to build their team's product which competes with Slack,
15:20
Speaker 1: and Slack will have a tough time displacing a Microsoft
15:24
Speaker 1: when it comes to you know, large enterprises. So I
15:27
Speaker 1: think Stewart alluded to it that they're gonna keep spending on,
15:30
Speaker 1: you know, acquiring new customers. That seems to be the
15:33
Speaker 1: path to sustain revenue growth. Here, I would have wanted to,
15:37
Speaker 1: you know, hear more around product expansion and how they
15:39
Speaker 1: want to move into different areas of software versus just
15:42
Speaker 1: focusing on chats, because there are a lot of chat
15:46
Speaker 1: companies out there and it's hard to you know, sustain
15:49
Speaker 1: your revenue growth just when you're a single product company. Yeah.
15:52
Speaker 1: The other thing I heard there which kind of concerned
15:55
Speaker 1: me a little bit, is a discussion about profitability. This is,
15:58
Speaker 1: you know, this the standard line from a lot of
16:00
Speaker 1: these technology companies that they are going to continue to
16:02
Speaker 1: invest in growth. And I think what we saw again
16:05
Speaker 1: from Uber and Lift is investors are all for the
16:09
Speaker 1: top line, but they least have to have some path
16:12
Speaker 1: to profitability, a vision of how a company can get
16:14
Speaker 1: to profitability, and arguably Uber and Left have not made
16:18
Speaker 1: that clear to investors. Do you think investors are going
16:20
Speaker 1: to give this company? I pass on this don't worry
16:23
Speaker 1: about the profits right now story. I think as long
16:26
Speaker 1: as they maintained the top line growth of over fifty
16:30
Speaker 1: that's the key here, because the overall cloud market is
16:33
Speaker 1: still growing over and we're talking about, you know, a
16:36
Speaker 1: hundred and fifty billion plus market growing at this is
16:39
Speaker 1: a company with four hundred million dollars in revenue, it
16:42
Speaker 1: has to you know, grow at least fifty. As long
16:45
Speaker 1: as they maintain that top line growth, it should be okay.
16:49
Speaker 1: But I think where they're gonna struggle is we've got
16:51
Speaker 1: good comps for Slack. You have a company like a
16:53
Speaker 1: Classian that is operating margin positive. You have a company
16:57
Speaker 1: like DocuSign that is operating margin positive. Box and drop
17:01
Speaker 1: Box are trading at much lower multiples than Slack is.
17:05
Speaker 1: So I think there will be a real challenge for
17:07
Speaker 1: Slack to make sure investors are able to you know,
17:10
Speaker 1: write in that growth story without them having a clear
17:13
Speaker 1: path through profitability. Men Deep Seek, thank you so much.
17:16
Speaker 1: A man Deep, senior tech analyst for Bluemberg Intelligence, joining
17:19
Speaker 1: me here in the Bloomberg Interactor Brooker Studios. Trade back
17:38
Speaker 1: on the front, Bernard, and I guess despite some deverished
17:41
Speaker 1: comments by President Trump yesterday about trade tensions, remain high
17:46
Speaker 1: concerns about what the impact will be on corporate America.
17:48
Speaker 1: Now we're actually starting to see some of the leading
17:51
Speaker 1: corporations in America kind of voicing their concerns to the
17:54
Speaker 1: appropriate folks in Washington. So you get a sense of
17:57
Speaker 1: what's going on there. We welcome Sarah How's Actually's a
17:59
Speaker 1: retail colms for Bloomberg Opinion, usually based in d C,
18:03
Speaker 1: but joining us today in our Bloomberg Interactive Broker Studio. Sarah,
18:06
Speaker 1: thanks so much for being with us. So we think
18:08
Speaker 1: about some of these big companies, big brands, how are
18:11
Speaker 1: they trying to get their story about to the Washington
18:15
Speaker 1: regulators about what could really impact their business if these
18:18
Speaker 1: tariffs do in fact go through. So so far, they're
18:21
Speaker 1: using a pretty traditional playbook. They're using their trade groups
18:25
Speaker 1: in Washington, like the National Retail Federation. They're writing sternly
18:28
Speaker 1: worded letters to the President that are signed by coalitions
18:31
Speaker 1: of big name retailers UM and this week, what we're
18:34
Speaker 1: seeing is that they are testifying at hearings for the
18:37
Speaker 1: Office of the U. S. Trade Representative, trying to make
18:39
Speaker 1: their case in that format. And I'm sort of wondering
18:42
Speaker 1: if it's time for them to go off script here
18:44
Speaker 1: and try something different, if it's time for these really
18:47
Speaker 1: high profile consumer brands to get out there in a
18:50
Speaker 1: more individual way and make their case directly to consumers
18:53
Speaker 1: that these tariffs are not a good policy. Idea because
18:55
Speaker 1: what we've not seen I don't believe is the you
18:58
Speaker 1: know what we used to see in years past on
19:00
Speaker 1: time maybe would be a you know, full page ed
19:01
Speaker 1: in the New York Times or Walsh Journal, or television
19:05
Speaker 1: ads or you know, a social media campaign. We haven't
19:08
Speaker 1: really seen that yet, have we. That's exactly right, and
19:10
Speaker 1: I think that we should imagine the power of Nike.
19:13
Speaker 1: We all know it's marketing prowess. Imagine if they put
19:16
Speaker 1: together a TV commercial sort of outlaying how this affects
19:19
Speaker 1: them and their consumers. Imagine if you walked into a
19:22
Speaker 1: retailer like Old Navy and they had a sign ups thing.
19:24
Speaker 1: This ten dollar T shirt will be fifteen dollars in
19:26
Speaker 1: November if this tariff policy is enacted. I think that
19:29
Speaker 1: there's a fear out there that President Trump's brand is
19:31
Speaker 1: so powerful that nobody wants to sort of go toe
19:35
Speaker 1: to toe with him. But at the end of the day,
19:37
Speaker 1: these retailers ought to remember their brands are really powerful too.
19:40
Speaker 1: They serve millions of customers every day who have a
19:42
Speaker 1: real loyalty to them, and that they should play on
19:45
Speaker 1: that and try to get out there, get on the
19:47
Speaker 1: Today Show, make their case directly to consumers. Is there
19:50
Speaker 1: a sense that GF one or two big brands like
19:53
Speaker 1: a Nike or something like that does it first, then
19:55
Speaker 1: others will follow. I think that could certainly help. And
19:59
Speaker 1: I just think that retailers have to remember that. I
20:03
Speaker 1: think that we've just sort of seen Trump has a
20:05
Speaker 1: willingness to put them in the center of all sorts
20:09
Speaker 1: of issues that don't even relate to trade at this point.
20:12
Speaker 1: We saw that most clearly with his threats on Mexico
20:15
Speaker 1: right there. That's been averted temporarily, but that he was
20:18
Speaker 1: going to put tariffs on all goods coming in from
20:20
Speaker 1: Mexico to get his way on immigration. And so I
20:22
Speaker 1: think whatever risk they see out there in speaking up
20:25
Speaker 1: on this issue, the risk to being put in the
20:28
Speaker 1: center of another one of these entanglements, I think for
20:30
Speaker 1: them is far worse. Right. And what have you have
20:33
Speaker 1: we seen anybody kind of maybe just do a little
20:35
Speaker 1: bit more. Have we seen anybody do anything on this
20:37
Speaker 1: front um or do you think maybe they're just waiting
20:39
Speaker 1: to see what happens down the road, maybe the G
20:41
Speaker 1: twenty or something like that. Now, I think we've seen,
20:44
Speaker 1: you know, comments here and there on earnings calls like
20:47
Speaker 1: Walmart just kept repeating something along the lines of uh,
20:50
Speaker 1: there's no question that increased taxes result increased prices. But
20:54
Speaker 1: they weren't saying any specific, anything specific. And I think
20:58
Speaker 1: that's where it would really make a difference, Right if
21:00
Speaker 1: consumers could hear on this particular item that I put
21:02
Speaker 1: in my pantry every week, or on this particular item
21:05
Speaker 1: I know I'm going to need to buy for my
21:06
Speaker 1: kids back to school shopping, I'm going to see higher prices.
21:09
Speaker 1: I think that could go a long way towards getting
21:11
Speaker 1: people riled up. Um, And we're just not seeing action there.
21:14
Speaker 1: I think the other thing to remember is that I
21:16
Speaker 1: have covered so many of these collisions of retail and
21:19
Speaker 1: politics over the years, going back to Chipotle saying we
21:22
Speaker 1: don't want people to bring guns into our stores, going
21:25
Speaker 1: back to Walmart's UH saying urging its governor in Arkansas
21:29
Speaker 1: to Vito or religious freedom bill, um. And none of
21:32
Speaker 1: this has long term impact on any of these retailers.
21:35
Speaker 1: I think we just live in a moment where politics
21:37
Speaker 1: and business are colliding more and they should speak up
21:40
Speaker 1: on the stuff that matters to them. This is fascinating.
21:42
Speaker 1: We'll have to see how that plays out, because clearly
21:45
Speaker 1: the impact on retailers and big consumer companies could in
21:48
Speaker 1: fact be substantial. Some of these tariffs do go through
21:51
Speaker 1: and likely, very likely could impact their businesses. Sarah Hawsak,
21:55
Speaker 1: thanks so much for joining us in studio. We appreciate it.
21:57
Speaker 1: Sarah's a retail calumnist for Bloomberg at Opinion. Well, equity
22:14
Speaker 1: markets are certainly applauding the Fed's statement yesterday of likely
22:17
Speaker 1: easing later this year. To get a sense of where
22:19
Speaker 1: we go from here, we welcome Barry nap Berry is
22:22
Speaker 1: a managing partner for Iron Sides macro Economics, based in Westland,
22:26
Speaker 1: New Jersey, but now Vail, Colorado. Lucky Barry, Barry, thanks
22:29
Speaker 1: so much for joining us. Just wonder if you can
22:31
Speaker 1: give us kind of your takeaways from what we heard
22:34
Speaker 1: from Chairman Pal yesterday. Sure. Um, well, they seem absolutely
22:41
Speaker 1: committed to Uh, we're trying to resolve at least the
22:46
Speaker 1: low inflation that's so persistent in the economy. Um. I
22:50
Speaker 1: think it's an exercise and utility. Quite frankly, we've done
22:54
Speaker 1: a lot of work on the correlation of the components
22:56
Speaker 1: of GPI to convince ourselves that you me, what's causing
23:01
Speaker 1: that the low inflation is um innovation adoption in the
23:05
Speaker 1: service sector, and global excess capacity and goods. Even an
23:09
Speaker 1: energy um shale has fundamentally changed the elasticity of supply
23:14
Speaker 1: and likely dampen volatility and energy prices over time. So
23:18
Speaker 1: all these things are out of the purview of the FETE,
23:20
Speaker 1: but none. Nonetheless, they seem absolutely convinced that, uh, you know,
23:25
Speaker 1: they've got to try and ease policy to to boost
23:28
Speaker 1: inflation backwards two percent. Now I'm trying to avoid falling
23:33
Speaker 1: into the trap of sounding like a bit of a
23:35
Speaker 1: shrill and saying, well, this is going to cause um,
23:39
Speaker 1: you know, impair creative destruction and cause asset bubbles and all.
23:43
Speaker 1: Both those things are certainly true in the long run,
23:45
Speaker 1: but in the near term, I don't think there's a
23:48
Speaker 1: heck of a lot of risk to them easing from
23:50
Speaker 1: this point, and so I'm a I'm a bit indifferent
23:53
Speaker 1: to the whole thing. Obviously, investors in the near term
23:56
Speaker 1: cheered it though we're well off or high um. But
24:00
Speaker 1: I think on balance, to really understand what's going on
24:04
Speaker 1: with the FED and what happened last year, I think
24:07
Speaker 1: you need to step back from conventional rate policy and
24:09
Speaker 1: think about just that. The demand for bonds from the
24:13
Speaker 1: three major developed world central banks. So the e c B,
24:17
Speaker 1: b o J and FED bought two trillion dollars worth
24:20
Speaker 1: the bonds in ten they bought zero. And that really
24:25
Speaker 1: accelerated around the September October time frame, when e C
24:29
Speaker 1: D cut their purchases in half then reached their maximum
24:32
Speaker 1: caps for balance sheet runoff. The B o J had
24:35
Speaker 1: altered their guield curve control program a bit, and there
24:38
Speaker 1: was a provision in the tax bill that ended that
24:41
Speaker 1: allowed companies to contribute to their pension plan at the
24:44
Speaker 1: old rate. So really what you had was a liquidity shocked,
24:48
Speaker 1: going from two trillion of demands to zero in demand,
24:52
Speaker 1: and that's what caused what we've been calling the q T,
24:55
Speaker 1: you know, stock market crash in the fourth quarter. It
24:58
Speaker 1: wasn't that rates got too tight. There was no part
25:01
Speaker 1: of the economy really that exhibited um signs that that
25:06
Speaker 1: policy was quite even the housing market. We thought the
25:09
Speaker 1: slowdown last year was attributable to the state and local
25:12
Speaker 1: tax production elimination, not higher rates. So much so I'm balancing,
25:17
Speaker 1: I'm sort of been different to FED policy here. I
25:20
Speaker 1: think what's more important is the improvement in domestic demand
25:24
Speaker 1: and the pick back up and consumption from that QUT
25:27
Speaker 1: crash that's been so evident in retail sales in particularly
25:31
Speaker 1: last week's numbers. All Right, So if the FED is
25:34
Speaker 1: what it is here, it's on the sidelines at least
25:36
Speaker 1: for the very near term and then likely to ease
25:39
Speaker 1: a little bit later in the year. The other big
25:42
Speaker 1: driver of the market's performance really, you know, over the
25:45
Speaker 1: last six to nine months, has been global trade tensions
25:48
Speaker 1: and then appears that they might be coming to a
25:50
Speaker 1: head here with China. How do you think that plays
25:53
Speaker 1: out and how should investors kind of be positioned for
25:57
Speaker 1: How do you think trade discussions with China my playout? Um? Well,
26:02
Speaker 1: I thought that last week's numbers from China were really
26:07
Speaker 1: very telling inasmuch as um industrial production was weaker than expected,
26:11
Speaker 1: fix ass and investment was weaker than expected. The import
26:14
Speaker 1: component of the trade data was much weaker than expected,
26:18
Speaker 1: and whatever strength there was was in their traditional heavy
26:21
Speaker 1: industry state owned enterprise sectors so steel cement those sectors,
26:27
Speaker 1: and consumer sectors like auto production was decidedly weak. Technology
26:31
Speaker 1: was very weak, So I we expect that this really
26:35
Speaker 1: strengthened the hands of her formers and led to President
26:39
Speaker 1: she being willing to come back to the table and
26:42
Speaker 1: restart negotiations. So we've placed a fairly high probability that
26:46
Speaker 1: we get a trade to tant h next week and
26:48
Speaker 1: that pushes UM any further tariffs down the road at
26:52
Speaker 1: least still much later this fall. So I think on
26:56
Speaker 1: balance that's the key driver of the recovery and business
27:00
Speaker 1: confidence in the US. That's been evident in capital spending
27:03
Speaker 1: plans and the National Federation of Small Business confidence measures,
27:08
Speaker 1: as well as a pickup and labor market turnover. So
27:10
Speaker 1: that to us is the most likely scenario now if
27:14
Speaker 1: the deal falls apart or if there is no trade
27:17
Speaker 1: to time, because the stock markets, the fries UM, we're
27:21
Speaker 1: clearly more vulnerable than we than we had been, perhaps
27:25
Speaker 1: even going into you know, the May trade tweets. Still
27:29
Speaker 1: I think that's a low probability, but you know that
27:34
Speaker 1: you know that the downside associated with that is even
27:36
Speaker 1: greater now that we're back up at the high. Now
27:38
Speaker 1: that we're back up at the high, Barry Nap, thanks
27:40
Speaker 1: so much for joining us. Barry's managing partner at Iron
27:43
Speaker 1: Science of macro Economics joining us on the phone today
27:45
Speaker 1: from Lovely Vail, Colorado. We appreciate his comments. Thanks for
27:49
Speaker 1: listening to the Bloomberg P and L podcast. You can
27:52
Speaker 1: subscribe and listen to interviews at Apple Podcasts or whatever
27:54
Speaker 1: podcast platform you prefer. On Paul Sweeney, I'm on Twitter
27:58
Speaker 1: at pt Sweeney, Brahmway Time on Twitter at Lisa Abramo.
28:01
Speaker 1: It's one before the podcast. You can always catch us
28:04
Speaker 1: worldwide on Bloomberg Radio.