Latest / Bloomberg Intelligence / U.K. Election Raises Power of the Remainers, Blanchflower Says

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U.K. Election Raises Power of the Remainers, Blanchflower 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
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Right now,
• 0:32
  Speaker 1: I want to bring in Danny Blanchflower, professor of economics
• 0:35
  Speaker 1: at Dartmouth College, has a lot of experience watching UK
• 0:39
  Speaker 1: politics and the potential effects of these new political developments
• 0:45
  Speaker 1: on the economy. And Danny, we've already heard from some
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  Speaker 1: people that the more turmoil there is here in the
• 0:49
  Speaker 1: more uncertainty around Brexit, the slower growth will be for
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  Speaker 1: the United Kingdom. Do you agree does this outcome of
• 0:56
  Speaker 1: the election lower growth prospects for I'm not sure that
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  Speaker 1: it does. I think what it does is it lowers
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  Speaker 1: the prospect of a very hard Brexit in the sense
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  Speaker 1: that it weakens Theresa May's bargaining position at a time
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  Speaker 1: when the UK economy is growing really slowly, and in
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  Speaker 1: fact it's actually the slowest growing G seven country and
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  Speaker 1: the slowest growing country in the EU twenty eight. And
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  Speaker 1: I think what it does compared to say yesterday, is
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  Speaker 1: it raises the power of what they call the remainders,
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  Speaker 1: because May is is trying to form a government which
• 1:32
  Speaker 1: looks like you probably is with an agreement with the
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  Speaker 1: Ulster Unionists, but that's a very fragile coalition. Um and
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  Speaker 1: Anna Subri in the example, the next Tory minister, Tory
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  Speaker 1: MP has said May has to consider her position. We're
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  Speaker 1: not going to go along with a hard Brexit. So
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  Speaker 1: I think in some sense the markets think, you know,
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  Speaker 1: steady as you go. I think it takes away the
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  Speaker 1: prospect of something idiotic happening. Hence the markets are probably
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  Speaker 1: right to think, um, steady she goes. Well, Danny, do
• 2:02
  Speaker 1: you think these are the same people that were able
• 2:04
  Speaker 1: to predict that Britain would vote to remain in the
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  Speaker 1: European Union? Yeah, I know. I mean I think I
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  Speaker 1: think the polling was equally and the last three elections
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  Speaker 1: we've had in the UK, the polling wasn't really right,
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  Speaker 1: although you Gov seemed to have called it pretty right.
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  Speaker 1: I think the thing this time, I'm not sure it's
• 2:23
  Speaker 1: exactly the answer to your question, Pim, but Um. The
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  Speaker 1: really interesting thing this time was the exit polls had
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  Speaker 1: it exactly right. I mean, the reality is that the
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  Speaker 1: polling moved dramatically. This was a very terrible campaign led
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  Speaker 1: by May. She started out with the twenty two point
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  Speaker 1: leading on May the seventh. What do you think, What
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  Speaker 1: do you think is the reason or reasons for the
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  Speaker 1: precipitous decline of Theresa May's fortunes in the campaign. Yeah,
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  Speaker 1: it's it's interesting. I think one of the big things
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  Speaker 1: is the economy. So the economy has slowed and for
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  Speaker 1: the first time in the last three real wages started
• 3:02
  Speaker 1: to fall again. So economic factors. I think that the
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  Speaker 1: um that the fact that she called an election after
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  Speaker 1: seven times saying that she wouldn't, and she campaigned horribly. Um.
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  Speaker 1: Corbin actually was conducting campaigns everywhere and was having thousands
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  Speaker 1: of people showing up and Thereason maybasically wouldn't speak to
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  Speaker 1: anybody and so she wasn't really speaking to the people
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  Speaker 1: and that became obvious. And then I think the final
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  Speaker 1: straw was actually the the bombings in Manchester and London,
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  Speaker 1: and it was clear that when she was the Home Secretary,
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  Speaker 1: she actually fired twenty thousand policemen and the police have
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  Speaker 1: made it clear that in some ways she was responsible,
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  Speaker 1: not saying she was, but people have argued that that happened.
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  Speaker 1: So in a sense, you called this election, you say
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  Speaker 1: it's an election about me, strong and stable, um, and
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  Speaker 1: it was quite clear she was none of those things,
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  Speaker 1: and in the end she ended up as being weak
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  Speaker 1: and unstable Danny, and just moving away from the Brexit.
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  Speaker 1: In particular, you were saying that the UK is the
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  Speaker 1: slowest growing economy among the G seven nations, and it
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  Speaker 1: was kind of heading that direction before Brexit, right, I mean,
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  Speaker 1: it wasn't entirely an outcome, no, of course. I mean,
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  Speaker 1: obviously the story has been that the exchange rate fell dramatically. Um,
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  Speaker 1: it picked up a bit. But what we're seeing is
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  Speaker 1: two things that happened. The British public unexpectedly borrowed like
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  Speaker 1: mad and continued to this save so that was a
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  Speaker 1: really big that was a really big problem. And the
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  Speaker 1: other problem has been that as a result of the
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  Speaker 1: fall in the exchange rate, inflation starts to tick up.
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  Speaker 1: So wage growth remaining about two now inflations at three
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  Speaker 1: probably going to rise more so that so that that
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  Speaker 1: is something that's really happened post Brexit, the Bank of
• 4:53
  Speaker 1: being enacted after business confidence collapse. But my suspicion is
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  Speaker 1: that you know, we're going to use some more slowing God,
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  Speaker 1: so you were right to worsom slowing. The economy picked up,
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  Speaker 1: but in the last three months we've seen i mean,
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  Speaker 1: point to percent annually. Point to growth in Q one
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  Speaker 1: was a disaster. All right, Well, we're gonna leave it there,
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  Speaker 1: but I want to thank you very much, Danny blanche
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  Speaker 1: for our professor of economics Dartmouth College. Well, the head
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  Speaker 1: of the United Kingdom is struggling to salvage her political life,
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  Speaker 1: and yet markets are just hugging along, just fine. Nobody
• 5:41
  Speaker 1: seems to be too worried. Who is trading bonds and stock?
• 5:44
  Speaker 1: Stug Cioca, CEO and partner of Var Capital. I want
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  Speaker 1: to bring you in, Uh. Doug is based in Leewood, Kansas,
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  Speaker 1: And Doug, can you just give me some perspective. What
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  Speaker 1: will it take to shake this market out of its
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  Speaker 1: seemingly unshakable complacency. Yeah, thank you, Lee. So that is
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  Speaker 1: the question I mean today, certainly the market is absorbing,
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  Speaker 1: not deflecting, this news, and even immediately after the first
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  Speaker 1: exit poll last night um that the true safety risk
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  Speaker 1: off trades like gold didn't rally pounding. Your occurrencies weaken
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  Speaker 1: a touch, but nothing substantive, nothing near the Brexit loads
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  Speaker 1: of a year ago. And if anything, maybe the prospect
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  Speaker 1: of a softer Brexit is less destabilizing and the general
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  Speaker 1: heightened level of ambiguity keeps central banks engaged. And we've
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  Speaker 1: got a b o E meeting next week, we have
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  Speaker 1: the EC meeting ECB meeting last week, we have the
• 6:38
  Speaker 1: set of course that is going to come out with
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  Speaker 1: the press conference after the rate decision on the fourteen.
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  Speaker 1: So I think you're right. It's got a lot of
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  Speaker 1: investors wondering what has to happen for the market to
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  Speaker 1: experience more than a fleeting adverse impact from some of
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  Speaker 1: this heightened global tension or one of these geo political events.
• 6:56
  Speaker 1: Great question, can we I'm wanna ask what what makes
• 6:59
  Speaker 1: stocks go up and down? Well? Demand certainly to me,
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  Speaker 1: I mean four things right to him. Historically, you have
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  Speaker 1: to have earnings growth, You've got to have some diven
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  Speaker 1: in and income component to the stock ownership proposition, perhaps
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  Speaker 1: some inflation, and then sentiments right whether or not there
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  Speaker 1: will be a multiple expansion or contraction. And I think
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  Speaker 1: a portfolio manager has to ascertain the influence these outside
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  Speaker 1: events on investor attitudes. And that's the basis of assessing
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  Speaker 1: that sentiment and its input in the calculation of expected returns. Sorry, glad,
• 7:31
  Speaker 1: I beg your pardon to continue them right. The better
• 7:34
  Speaker 1: the underlying sentiment, the more the optimism, the bigger the
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  Speaker 1: benefits of doubt, the more likely multiple expanded, the prices
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  Speaker 1: go up. And you know, the equal and opposite impact
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  Speaker 1: exists if there is weaker sentiment, and that Trump trades
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  Speaker 1: the best example, and he had a positive outlook on
• 7:47
  Speaker 1: the prospects of a pro business presidency. But now right
• 7:50
  Speaker 1: instead of debating functional fiscal policy, we're dissecting things like
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  Speaker 1: conversations in the intelligence community whether President Trump is or
• 7:57
  Speaker 1: isn't going to invoke executive privilege. Stocks or may attaining
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  Speaker 1: a bid despite at best neutrality and sentiment. And mostly
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  Speaker 1: that's on the heels of what was a really strong
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  Speaker 1: earnings quarter in Q one and some considerable financial engineering.
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  Speaker 1: But for the broad markets push forward for stock to
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  Speaker 1: go higher, we need more than the apathy that least
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  Speaker 1: have mentioned to emanate from some of these geopolitical events
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  Speaker 1: justicause if I if you are able to produce nine
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  Speaker 1: and a quarter percent returns on an annual basis for
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  Speaker 1: your customers, you'd be a hero. Correct, correct? Okay, so
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  Speaker 1: that SMP five is up nine and a quarter percent
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  Speaker 1: this year, why wouldn't people just take the money off
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  Speaker 1: the table and wait? Yeah, I think that is absolutely
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  Speaker 1: a strong consideration. Other than right, you're still talking about
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  Speaker 1: a look back period where you not only returns to
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  Speaker 1: returns have to be even better than that to catch
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  Speaker 1: up with what historically markets have been able to produce.
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  Speaker 1: But I think that fear of missing out is very strong.
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  Speaker 1: These animal spirits that have pulled forward maybe someone x
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  Speaker 1: the latter part of this year's gains are still represented.
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  Speaker 1: You do get even and I hate to call its fleeting.
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  Speaker 1: It just was a little bit off the radar. Things
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  Speaker 1: like this God Frank deluction that took place yesterday. You
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  Speaker 1: get the idea of how much better things could possibly be.
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  Speaker 1: So that is keeping people engage as opposed to just
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  Speaker 1: taking profits and sitting the rest of the year out. Doug,
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  Speaker 1: I have to wonder, you know, are we really observing
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  Speaker 1: complacency or are we really just simply witnessing the effects
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  Speaker 1: of one point two trillion dollars of asset purchases by
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  Speaker 1: the Bank of Japan and the European Central Bank. I mean, yes,
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  Speaker 1: the FED has stopped its asset purchases, are stopped expanding
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  Speaker 1: its balance sheet, I should say, but they are being
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  Speaker 1: offset quite dramatically by other central banks. Yeah. I think
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  Speaker 1: there's there's a strong under current, Lisa. I think that
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  Speaker 1: it's it's buoying prices, but at the same time, prices
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  Speaker 1: within the absence of of of corroboration, of that um
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  Speaker 1: of that sponsorship make at these levels the profect of
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  Speaker 1: of a of a swift destabilizing higher. So you can say, yeah,
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  Speaker 1: we like the process. This money is coming in. It's
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  Speaker 1: coming off the sidelines. There's been a lot of idle cash,
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  Speaker 1: not just internationally but domestically on the sidelines. If it
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  Speaker 1: doesn't get that reinforcement as it enters the market, this
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  Speaker 1: is one of our big issues with a big path
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  Speaker 1: of trade that's been on for the last eighteen months,
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  Speaker 1: then that's going to be the first money that leaves.
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  Speaker 1: So that might be the first step, but it's not
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  Speaker 1: enough of a consistent um march toward allowing these prices
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  Speaker 1: to continue in that fashion. Well, so then my question
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  Speaker 1: is we do have some small hints that the Bank
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  Speaker 1: of Japan the e c B are straying to prepare
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  Speaker 1: how they're going to unwind some of this stimulus. What
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  Speaker 1: do they have to do or what could they do
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  Speaker 1: that would potentially derail this certain complacency that we've been
• 10:45
  Speaker 1: talking about. Yeah, I mean, they're they're floating all of
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  Speaker 1: these trial balloons, and what they have to do is
• 10:51
  Speaker 1: is going to be described as very delicately as they
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  Speaker 1: moved down that path, we actually are now given drag
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  Speaker 1: these Outlook, you could make the case that we are
• 11:01
  Speaker 1: on a globalized, globally synchronized monetary policy tightening, but it's
• 11:06
  Speaker 1: implementation is going to be so delicate and not unlike
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  Speaker 1: the FED saying hey, at some point we're gonna have
• 11:12
  Speaker 1: to begin to work down the bounty. Yeah, we're not
• 11:14
  Speaker 1: going to reinvest some of the maturing proceeds of these bonds.
• 11:17
  Speaker 1: These are trial balloons that are being floated, not unlike
• 11:21
  Speaker 1: polling that has taken place politically to understand the reactivity
• 11:25
  Speaker 1: function of the market based on that job owningtion worked out. Yeah, exactly, exactly,
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  Speaker 1: So you know, the market, it will always move in
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  Speaker 1: advance of the FED if they I'm sorry about just
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  Speaker 1: the Fed of any essential banks, if it feels like
• 11:41
  Speaker 1: their intentions are sincere. But when you look at our
• 11:44
  Speaker 1: us bondo market is a great example. The fetes raised
• 11:47
  Speaker 1: rates three times in this In this this, this regime
• 11:51
  Speaker 1: shifts right, so to speak, from being um being very
• 11:54
  Speaker 1: accommodative to flat to now tightening, and the bond markets rallies.
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  Speaker 1: My market is even rallied since the FED is about
• 12:00
  Speaker 1: working down the balance sheet. So we've seen this massive
• 12:02
  Speaker 1: curve flat name because even though the short is coming up,
• 12:05
  Speaker 1: there's not a lot of inflation in the market, which
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  Speaker 1: puts FED in a very difficult position. But the bond
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  Speaker 1: market will not necessarily have its moves dictated by the FED.
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  Speaker 1: They may corroborate and enhance a direction that the market
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  Speaker 1: is already predetermined or established as the proper path. How's
• 12:20
  Speaker 1: this for inflation in the equity market? Doug that TESLA
• 12:23
  Speaker 1: is now valued greater than BMW. Yeah, I mean, come on, yeah,
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  Speaker 1: I mean this is the market that we live in,
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  Speaker 1: and no one is I mean, it's like the emperor
• 12:35
  Speaker 1: has no clothes. You can keep making money in it,
• 12:37
  Speaker 1: I guess. But that's a hope and a dream. It's
• 12:40
  Speaker 1: not based on anything factual. It's not I mean, and
• 12:44
  Speaker 1: certainly in TESTA was a specific example, is very aspirational
• 12:47
  Speaker 1: in nature. Certainly the way they are commandeering attention and
• 12:51
  Speaker 1: the way that their innovation is exploded, their multiple and
• 12:55
  Speaker 1: people's interest in aligning with them, the fact that they
• 12:58
  Speaker 1: name their new car that you to take on this
• 13:01
  Speaker 1: pre eminence that the BMW three had at that point
• 13:03
  Speaker 1: in time. Just to support your example, Yes, without making
• 13:07
  Speaker 1: a comparison to the two companies on a on evaluation basis,
• 13:10
  Speaker 1: I do think the aspirational nature of the market that
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  Speaker 1: has been so pronounced in the growth areas is something
• 13:17
  Speaker 1: that could end up having a come up in that um. Again,
• 13:20
  Speaker 1: if you're looking at just the general landscape, having some
• 13:23
  Speaker 1: balance and portfolio and not being too heavily one side.
• 13:26
  Speaker 1: We've got to leave it here. I want to thank
• 13:27
  Speaker 1: you very much, Doug Sioca. He is the chief executive
• 13:30
  Speaker 1: officer and the partner at Cavar Capital Partners based in Leewood, Kansas. Well,
• 13:47
  Speaker 1: let's turn our attention now to Apple and it's new iPhone.
• 13:51
  Speaker 1: We have John Butler. He is a senior telecom analyst
• 13:53
  Speaker 1: for Bloomberg Intelligence. He covers the services and equipment business
• 13:57
  Speaker 1: and he can be followed on Twitter at on Underscore
• 14:01
  Speaker 1: Butler five. Alright, John, Underscore Butler. What's this about Apple's
• 14:06
  Speaker 1: new iPhone? And it's not gonna be able to take
• 14:08
  Speaker 1: advantage of all those new high speed links that mobile
• 14:11
  Speaker 1: carriers are offering. Well, it all goes into down to
• 14:14
  Speaker 1: the core, if you will, of what's inside the iPhone.
• 14:18
  Speaker 1: So Qualcom is one of the main chip suppliers to
• 14:23
  Speaker 1: the smartphone industry, and they make what's called the modem.
• 14:26
  Speaker 1: It's that chip that talks to the network and receives
• 14:30
  Speaker 1: information data back from the network and onto ultimately onto
• 14:35
  Speaker 1: the screen of your phone. And Apple uh dual sources.
• 14:40
  Speaker 1: They get chips from Qualcom and from Intel. Qualcom is
• 14:45
  Speaker 1: way ahead of Intel in terms of the download speeds
• 14:48
  Speaker 1: that can support on the phone up to a gigabit
• 14:52
  Speaker 1: per second or a billion ones and zeros per second
• 14:56
  Speaker 1: of information over the phone, and Intel's running at about
• 14:59
  Speaker 1: half the at right. And so what Apple typically does
• 15:04
  Speaker 1: is they'll build the phones, they'll throttle down that Qualcom
• 15:10
  Speaker 1: chip to be on par with the Intel chip, so
• 15:13
  Speaker 1: it levels the playing field. All iPhone users are equal
• 15:17
  Speaker 1: under that equation. And so the concern is that maybe
• 15:21
  Speaker 1: this could spill over and impact sales of the iPhone eight.
• 15:25
  Speaker 1: I say, no way, I just don't see it because
• 15:28
  Speaker 1: in our day to day lives, Lacy, you look like
• 15:31
  Speaker 1: you want to Well, yeah, I'm just I'm confuous because
• 15:34
  Speaker 1: I think a lot of people are using their phones
• 15:36
  Speaker 1: more and more. I see it everywhere I go for
• 15:38
  Speaker 1: streaming movies or TV shows or YouTube videos and all
• 15:43
  Speaker 1: of these other applications that are better when you have
• 15:46
  Speaker 1: higher speed networks. Absolutely true, But I'll offer this. You
• 15:51
  Speaker 1: can measure the download speeds on your phone with an
• 15:54
  Speaker 1: app from the FCC, and the highest rate that I
• 15:57
  Speaker 1: get in New York City is fifty five megabits per second.
• 16:02
  Speaker 1: So on that gigabit speed we're talking about. So I
• 16:06
  Speaker 1: think I think the news is getting ahead of itself here.
• 16:10
  Speaker 1: I don't think people will care or frankly, even notice
• 16:13
  Speaker 1: the difference. And the other thing I'd say is once
• 16:17
  Speaker 1: networks get fully loaded, they get crowded with people, those
• 16:20
  Speaker 1: theoretical download speeds go right out the window. You don't
• 16:25
  Speaker 1: really get that gigabit per second rate that you might
• 16:29
  Speaker 1: get in the lab with the single user on the network.
• 16:32
  Speaker 1: So practically speaking, speeds are moving up into the right,
• 16:36
  Speaker 1: but they're not moving at the rate that the marketers
• 16:39
  Speaker 1: want you to believe, John, what, what should we take
• 16:42
  Speaker 1: away from the fact that Qualcom has a better, faster
• 16:45
  Speaker 1: chip than Intel? And why is Apple even bothering to
• 16:48
  Speaker 1: use the Intel chips? Why don't they just get more
• 16:50
  Speaker 1: Qualcom chips? I know they're in litigation, but why don't
• 16:53
  Speaker 1: they just get the real better chip? Well, Number one,
• 16:56
  Speaker 1: they are in litigation and they're very unhappy partners right now,
• 16:59
  Speaker 1: so that's it's a bit of a risk. But Apple
• 17:02
  Speaker 1: is known to always dual source, which is a very
• 17:06
  Speaker 1: smart thing um, because anything can happen with chip makers.
• 17:10
  Speaker 1: We've seen earthquakes in Japan really derail a lot of vendors,
• 17:14
  Speaker 1: not just Apple. Well, why not get Intel to make
• 17:16
  Speaker 1: a faster chip. Well, Intel's trying to make a faster
• 17:20
  Speaker 1: chip and they're actually running behind, which is what fueled
• 17:23
  Speaker 1: this news story that came out on Bloomberg about um
• 17:28
  Speaker 1: Intel basically being late to the game with a gigabit
• 17:31
  Speaker 1: per second chip. My argument, I go back to the
• 17:35
  Speaker 1: fact that when you're talking speeds that high gigabit per second,
• 17:40
  Speaker 1: if you cut it in half, I don't think people
• 17:42
  Speaker 1: are gonna notice or care. I just don't. So what's
• 17:46
  Speaker 1: Apple's new iPhone going to offer them that's going to
• 17:49
  Speaker 1: be so terrific that it will offset the inevitably snarky
• 17:53
  Speaker 1: counter ads that you're going to get from Samsung saying well,
• 17:55
  Speaker 1: we're fast and we've got secure. Actually Apple got better
• 17:58
  Speaker 1: security probably, but say like where we've got the up,
• 18:01
  Speaker 1: you know, up and coming speed, you can count on
• 18:04
  Speaker 1: the ads for sure. But the one thing I'll say
• 18:08
  Speaker 1: is Apple typically lags all its competitors on hardware specs.
• 18:13
  Speaker 1: That's not where they play. They play in the ecosystem,
• 18:16
  Speaker 1: and it's very sticky. It's very hard for someone who's
• 18:20
  Speaker 1: an Apple user to move to Android number one. But
• 18:23
  Speaker 1: there's real appeal there. You know. They continue, for example,
• 18:27
  Speaker 1: to evolve Apple Pay so now they have peer to
• 18:30
  Speaker 1: peer payments similar to Venmo that's coming with iOS leven.
• 18:34
  Speaker 1: Apple Music is increasingly moving beyond music into video um
• 18:39
  Speaker 1: and just the ecosystem in general is very broad and
• 18:44
  Speaker 1: very strong, and and that's where I think that's Apple's Wheelhouse.
• 18:49
  Speaker 1: Really that's where they they far exceed their competitors. John,
• 18:54
  Speaker 1: I want to get your thoughts on what's going on
• 18:56
  Speaker 1: at Verizon Communications. Uh, the stock is down about thirteen
• 19:00
  Speaker 1: percent so far this year. It trades about forty six
• 19:02
  Speaker 1: dollars and cents. This is a stock that last year
• 19:07
  Speaker 1: same time was fifty four bucks. So now you're fifty
• 19:10
  Speaker 1: four bucks. You down the forty six, you're still getting
• 19:12
  Speaker 1: your five percent dividend. What is the strategy at Verizon
• 19:15
  Speaker 1: and why are they're laying off people? Yeah, well, the
• 19:19
  Speaker 1: layoffs are related to the Yahoo emerging Yahoo in a
• 19:22
  Speaker 1: o L. There's a lot of redundant jobs. They're in
• 19:25
  Speaker 1: engineering and marketing and so forth, So that was expected.
• 19:30
  Speaker 1: I think broadly, taking a step back from that merger
• 19:33
  Speaker 1: and looking at where Verizons headed, they don't have as
• 19:37
  Speaker 1: well defined as strategy as a T and T for example,
• 19:41
  Speaker 1: which is making some really bold moves into content. Uh,
• 19:45
  Speaker 1: they have a really bright future there in my view.
• 19:49
  Speaker 1: I mean, there's a lot of risk they need to execute,
• 19:51
  Speaker 1: but I think they made the right moves. Verizons just
• 19:55
  Speaker 1: seems to be foundering a little bit. They're trying to
• 19:58
  Speaker 1: find the right next step they've committed hard on five G,
• 20:03
  Speaker 1: which is I think a good move, but the margins
• 20:07
  Speaker 1: lying content that's my bad. So thank you so much
• 20:10
  Speaker 1: for joining us. John Butler, always wonderful speaking with you.
• 20:13
  Speaker 1: John Butler senior Telecom Services and Equipment analyst for Bloomberg Intelligence,
• 20:17
  Speaker 1: and he joins us here in our Bloomberg eleven three
• 20:19
  Speaker 1: oh studio talking about how the speed just might not
• 20:22
  Speaker 1: matter since you actually can't get it practically, certainly not
• 20:25
  Speaker 1: in any crowded place. Well, I think of the at
• 20:40
  Speaker 1: one point almost bounce in the shares of this company
• 20:43
  Speaker 1: in the past three days after it came out that
• 20:46
  Speaker 1: it's looking to potentially go private, whether from the Nordstrom
• 20:49
  Speaker 1: family or some private equity firms that are supposedly quote
• 20:53
  Speaker 1: kicking the tires on Nordstrom right now. Jenn Gnelli is
• 20:56
  Speaker 1: a high yield analyst focusing on the retail and gaming
• 20:59
  Speaker 1: industries at City Group, and UH has some good perspective
• 21:02
  Speaker 1: just generally about the retail industry and what could make
• 21:06
  Speaker 1: Nordstrom attractive or not and what kind of debt could
• 21:09
  Speaker 1: end up getting piled on. Jenna, I want to start
• 21:12
  Speaker 1: with the value here. How much of Nordstrom is a
• 21:16
  Speaker 1: retail story and how much is a real estate story.
• 21:19
  Speaker 1: Hi guys, well thanks for having me on today. I
• 21:21
  Speaker 1: appreciate it. UM. I think you you know, you jumped
• 21:25
  Speaker 1: into write of what the heart of the big differentiating
• 21:27
  Speaker 1: points is here. You know, most retailers that we look
• 21:29
  Speaker 1: at in our universe, whether it's high yield or even
• 21:31
  Speaker 1: in high grade, they don't own a lot of their
• 21:34
  Speaker 1: real estate. But for those that do, it's been a
• 21:36
  Speaker 1: huge resource resource in terms of enhancing liquidity, whether for
• 21:40
  Speaker 1: massive sales, engaging in sale. These facts, um are in
• 21:43
  Speaker 1: some cases securing lower costs of capital. So we've seen that,
• 21:46
  Speaker 1: you know in our coverage universe J C. Penny Toys,
• 21:48
  Speaker 1: r us uh, Neiman, Marcus, Bontan Stores, um. But broadly,
• 21:52
  Speaker 1: I mean these are a few and far between. So
• 21:54
  Speaker 1: in the case of Nordstrom, UM, you know, we we
• 21:57
  Speaker 1: don't cover, but we actually applied the same METHODOLO that
• 22:00
  Speaker 1: we use in our NEEME and markets real estate valuation.
• 22:03
  Speaker 1: You know, we came up with an estimate that it
• 22:05
  Speaker 1: could be worth around you know, six billion dollars six
• 22:07
  Speaker 1: billion dollars UM. I'm sure there are a lot of
• 22:10
  Speaker 1: different estimates out there, but just to give context, that's
• 22:12
  Speaker 1: almost the size of their market cap. So six million
• 22:15
  Speaker 1: dollars in other words, is the value of the real
• 22:17
  Speaker 1: estate You're saying right exactly of the combination of the
• 22:20
  Speaker 1: owned and ground least real estate that they have. And
• 22:22
  Speaker 1: you know, assuming certain cap rates, UM lease values per
• 22:25
  Speaker 1: square foot, etceter. Are making some assumptions, but um, applying
• 22:29
  Speaker 1: again the same methodology that we've seen in other high
• 22:31
  Speaker 1: yield retailers, UM, it comes out to a really large
• 22:34
  Speaker 1: number of relative to the size of their market cap.
• 22:36
  Speaker 1: So um. You know, when you're thinking about multiples in
• 22:39
  Speaker 1: the space potential purchase prices for those that do own
• 22:43
  Speaker 1: their own real estate, it has to be factored in
• 22:45
  Speaker 1: relative to just thinking about traditional multiples and what those
• 22:48
  Speaker 1: might you know, be. We've seen that those that own
• 22:51
  Speaker 1: do command to hire multiple So with with that real
• 22:54
  Speaker 1: estate value, help Nordstrom go private without having to incur
• 23:00
  Speaker 1: the kind of debt loads that we've seen way down
• 23:02
  Speaker 1: the Jim Borees of the world and the other LBO
• 23:05
  Speaker 1: targets that have been going out a business or going bankrupt,
• 23:09
  Speaker 1: I should say I as a result, yeah, I mean, look,
• 23:13
  Speaker 1: that's a good question. I think what we've seen more
• 23:15
  Speaker 1: likely is just the ability to use that real estate.
• 23:19
  Speaker 1: Maybe you know, you could again engage in asset sales
• 23:21
  Speaker 1: all these backs to shore up liquidity ahead of time
• 23:24
  Speaker 1: so you don't have to take on as much leverage
• 23:27
  Speaker 1: UM in that you know, financing transaction. Another way that
• 23:30
  Speaker 1: it's used is it really to secure a lower cost
• 23:32
  Speaker 1: of capital. So you could do uh, you know, a
• 23:35
  Speaker 1: prop code type facility, or you could do just a
• 23:37
  Speaker 1: real estate term loan where you get um, you know
• 23:39
  Speaker 1: j C. Penny is a great example. They use their
• 23:41
  Speaker 1: real estate uh to you know, get pretty attractive rates
• 23:45
  Speaker 1: relative to what it could have been UM on on
• 23:48
  Speaker 1: their term loan UM because of the value of the
• 23:51
  Speaker 1: real estate that they owned. So I think it would
• 23:53
  Speaker 1: be you know more in the form of that I
• 23:55
  Speaker 1: get securing lower cost of financing, but certainly allow them
• 23:59
  Speaker 1: um would you know real estate allows them to UM
• 24:02
  Speaker 1: manage that leverage a little bit more than those that don't.
• 24:05
  Speaker 1: And I think you know, you compared it to a
• 24:06
  Speaker 1: Jim Burie or some of the other stress retailers. Um
• 24:09
  Speaker 1: they didn't necessarily start out with that type of high leverage,
• 24:12
  Speaker 1: but not owning some of their real estate had certainly
• 24:15
  Speaker 1: um you know it's a limited flexibility, but it's certainly
• 24:18
  Speaker 1: it enhances the quility for those that do. Jenna wonder
• 24:22
  Speaker 1: if you could just make a little bit simpler it
• 24:23
  Speaker 1: can how much debt could could Nordstrom take on given
• 24:27
  Speaker 1: their current financial situation about fifteen billion in sales, they
• 24:31
  Speaker 1: did net about five hundred and forty million, They got
• 24:33
  Speaker 1: free cash flow of over seven hundred and seventy million,
• 24:37
  Speaker 1: only two point seven on the balance sheet two point
• 24:39
  Speaker 1: seven billion, right, and a market cap of seven and
• 24:41
  Speaker 1: a half billion, right exactly. So I mean, look, how
• 24:44
  Speaker 1: much leverage can you put on a retailer today? Um,
• 24:48
  Speaker 1: there's a lot of hesitation in the market to finance
• 24:51
  Speaker 1: these transaction. There's more skepticism around new retail deals coming
• 24:55
  Speaker 1: to market that I will say. And even for retail
• 24:57
  Speaker 1: deals that we've seen come recently within a lot a
• 25:00
  Speaker 1: month or so, you can still put um five to
• 25:03
  Speaker 1: six times leverage on a retailer that's in the right
• 25:06
  Speaker 1: category and has the right story, and you know, they're
• 25:09
  Speaker 1: put the potential to de lever from wherever they're they're
• 25:12
  Speaker 1: starting point is. So you know, what would that apply
• 25:15
  Speaker 1: to your point? I mean, Nordstrom has about two point
• 25:17
  Speaker 1: seven billion dollars of growth debt right now. If they
• 25:20
  Speaker 1: were to lever up to that five to six times
• 25:23
  Speaker 1: leverage contexts, that would assume, you know, roughly about seven
• 25:26
  Speaker 1: billion total net debt um on the existing capital structure.
• 25:31
  Speaker 1: So it's manageable. I mean, I think when you look
• 25:33
  Speaker 1: at where yields are in the high yield space for
• 25:36
  Speaker 1: a single B type reeler with that type of leverage
• 25:39
  Speaker 1: in the five times you're looking at six to seven percent,
• 25:42
  Speaker 1: it depends also what you're willing to pay. Well, we
• 25:45
  Speaker 1: got to leave it there, but very interesting giving us
• 25:47
  Speaker 1: these details is Chenna Ginnelli, the high yield analyst for
• 25:50
  Speaker 1: City Bank. We're talking about norths from the shares up
• 25:52
  Speaker 1: about three and a quarter percent right now. Thanks for
• 25:58
  Speaker 1: listening to the Bloomberg P and L pod asked. You
• 26:00
  Speaker 1: can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 26:04
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• 26:08
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• 26:11
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• 26:14
  Speaker 1: worldwide on BLUEBIRG Radio