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FinTech Is Game Changer For Small Business Relief: Former SBA Head · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul swing 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
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  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
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  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:18
  Speaker 1: that Bloomberg dot com. At least, it was reported just
• 0:21
  Speaker 1: recently that that three billion dollar program to help small
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  Speaker 1: businesses reeling from the COVID nineteen outbreak that could actually
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  Speaker 1: be exhausted by Thursday, a top White House advisor said,
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  Speaker 1: but negotiations in Congress to replenish it remains stalled. They
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  Speaker 1: get to lay us on what this means for small businesses.
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  Speaker 1: We welcome our next guest, Karen Mills. She's a senior
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  Speaker 1: fellow at the Harvard Business School, formerly a small business
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  Speaker 1: administrator for President Obama from two thousand nine to two
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  Speaker 1: thousand thirteen. Karen is so good to speak with you
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  Speaker 1: talk to us about the state of the small business
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  Speaker 1: owner out there, How tough is it and how quickly
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  Speaker 1: can AID get to that small business owner? Nice to
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  Speaker 1: talk to you. Well, you know, this is the worst
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  Speaker 1: crisis for small businesses that I've ever seen. And as
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  Speaker 1: you mentioned, I was in the seat two thousand nine
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  Speaker 1: and we thought that was pretty bad. Um. You know,
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  Speaker 1: we lost two million small businesses the first quarter. Well,
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  Speaker 1: when we look at our unemployment numbers, we're seeing six
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  Speaker 1: million last week. Most of those are small businesses, UH
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  Speaker 1: and their employees. As you know, this has a critical
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  Speaker 1: impact on the economy because half the people who work
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  Speaker 1: in this country own or work for a small business.
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  Speaker 1: It's actually forty seven percent of the jobs. And these
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  Speaker 1: small businesses are now three or four weeks into a
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  Speaker 1: crisis and they only have on average three or four
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  Speaker 1: weeks worth of cash, so they have had to lay
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  Speaker 1: off people. And the question is how are they going
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  Speaker 1: to get the money from the p p P program
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  Speaker 1: and the other government relief in time for them to
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  Speaker 1: make a decision to keep operating, Because we know if
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  Speaker 1: we lose them, it's a very long and slow recovery.
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  Speaker 1: It's six months at least to get a new business
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  Speaker 1: to start up if an old one failed. So the
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  Speaker 1: next two weeks are critical. So these loans, let's talk
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  Speaker 1: a little bit about them and the logistics of it.
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  Speaker 1: We have heard that more than half of the three
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  Speaker 1: hundred and fifty billion dollars so so far allocated to
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  Speaker 1: the SBA program has been distributed. That program is expected
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  Speaker 1: to run out of cash in the next couple of days.
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  Speaker 1: What are the parameters around these loans? Do companies have
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  Speaker 1: to make sure to keep their employees on staff, they
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  Speaker 1: have to repay them? What do we know? So it's
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  Speaker 1: an actually amazing number. Two hundred and sixty three billion
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  Speaker 1: as of yesterday, which is seventy of the three hundred
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  Speaker 1: nine billion has been approved. Now only a very small
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  Speaker 1: percent of that apparently has been funded. So we'll come
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  Speaker 1: back to that issue, because until you have the money,
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  Speaker 1: doesn't really do you any good. But one thing that
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  Speaker 1: is amazing in my tenure, the first year we were
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  Speaker 1: in office, we did all kinds of UH increases in
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  Speaker 1: the guarantees and we had a record year of thirty billion,
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  Speaker 1: a record year. Now in one month we're trying to
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  Speaker 1: get out ten times that much. So it's it's unbelievable
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  Speaker 1: that banks have have been um actually able to get
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  Speaker 1: this done. Now, why aren't we getting money into the
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  Speaker 1: hands of small business owners from the s B a.
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  Speaker 1: The banks actually have to fund this money into the
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  Speaker 1: accounts of the small businesses, and they haven't yet been
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  Speaker 1: doing that, in part because the Fed and Treasury have
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  Speaker 1: said they will buy all these loans from the bank's
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  Speaker 1: balance sheet. There are a hundred percent guaranteed by the government,
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  Speaker 1: and that program has not gotten up and running. And
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  Speaker 1: the second thing that hasn't quite gotten up yet is
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  Speaker 1: that a bunch of the new fin techs like Square
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  Speaker 1: and PayPal and quick books are only just getting their
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  Speaker 1: approvals and they are really critical for the smallest small businesses.
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  Speaker 1: You know, they still proprietorships that have been included here.
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  Speaker 1: And folks who are looking for a forty dollar loan,
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  Speaker 1: at ten thousand dollar loan, a six thousand dollar loan, well,
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  Speaker 1: the banks don't do those small loans. So I am
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  Speaker 1: hopeful that this week will be a turnaround for them.
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  Speaker 1: Here's the problem. We're going to run out of money tomorrow,
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  Speaker 1: so Congress has to get this pipe refilled so the
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  Speaker 1: rest of the small businesses can get their money. So, Karen,
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  Speaker 1: give us a sense of kind of what's really the
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  Speaker 1: issue here for this next round of small business loans
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  Speaker 1: that we've heard. It's two and fifty billion. Maybe the
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  Speaker 1: Democrats would like to move it up to five billion,
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  Speaker 1: include hospital funding and thinking things like that. How do
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  Speaker 1: you think this is really going to play out? Well,
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  Speaker 1: I'm talking to a lot of the Senators this afternoon.
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  Speaker 1: I've been in touched with the House Offices, and you know,
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  Speaker 1: they're having a fight over um, you know, a whole
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  Speaker 1: set of things. But what I'm saying is the matter
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  Speaker 1: is absolutely urgent. We've finally gotten the fire hose attached
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  Speaker 1: to all the pipes. We have to get this in
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  Speaker 1: the hands of small business owners. And you asked me
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  Speaker 1: earlier how do they get it and what's it used for?
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  Speaker 1: And the answer is the bill is actually pretty smartly
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  Speaker 1: crafted to encourage small business owners to keep their people
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  Speaker 1: on the payroll and instead of being alone. The p
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  Speaker 1: p P program actually is a grant. It's a refundable
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  Speaker 1: loan that, um, you don't owe if you use the
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  Speaker 1: money to pay for eight weeks of payroll or other
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  Speaker 1: permitted expenses. And the other permitted expenses are paying your rent,
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  Speaker 1: which you know is going to come up May first,
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  Speaker 1: so that's important, and mortgages and interest on your other loans.
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  Speaker 1: So it's actually a good bill because it understands people
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  Speaker 1: need money and they don't need a loan, they need
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  Speaker 1: a grant, and that it's important that they keep their
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  Speaker 1: folks on the payroll so that they can get healthcare
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  Speaker 1: and that they can be there when hopefully businesses get
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  Speaker 1: to reopen their doors whenever it's safe to do so.
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  Speaker 1: Karen wouldn't just after Ray Dalio spoke. My mindset is
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  Speaker 1: how will this world look after this scenario? And one
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  Speaker 1: thing that you pointed to was that fintech lenders, into it, Square,
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  Speaker 1: et cetera, have been instrumental in this whole effort to
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  Speaker 1: extend credit to small businesses. How will they emerge from
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  Speaker 1: this whole event in terms of providing finances going forward? Well,
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  Speaker 1: Quick Books told me that they have spent the last
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  Speaker 1: two or three weeks while they were waiting for their
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  Speaker 1: SBA approval to you know, taking the turbo tax engine
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  Speaker 1: and making a user friendly front end. I mean, these
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  Speaker 1: poor small business owners are trying to figure out how
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  Speaker 1: did they sell out the paperwork and even if it's easy,
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  Speaker 1: they have to bring different documentation and banks didn't know
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  Speaker 1: what documentation they needed for a while. Now this new
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  Speaker 1: app is, you know, automated and it asked you a
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  Speaker 1: bunch of questions. And if you use quick books that
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  Speaker 1: uploads your documents, PayPal has a similar user friendly opening
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  Speaker 1: for these small business owners. So I think this could
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  Speaker 1: be a game changer for the smaller small businesses who
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  Speaker 1: have been having trouble getting into their banks and you know,
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  Speaker 1: getting in the line, because the bigger small businesses are
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  Speaker 1: more prepared and they're they're getting to the front of
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  Speaker 1: the line. And if you see if you have a
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  Speaker 1: small business and suddenly a new fintech becomes a trusted
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  Speaker 1: provider with a good consumer experience, you could see the
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  Speaker 1: fin techs doing a lot of good but also ending
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  Speaker 1: up with a lot of goodwill because all business customers
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  Speaker 1: are going to remember who was there for them in
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  Speaker 1: this crisis. Karen Mills, thank you so much for being
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  Speaker 1: with us. Karen Mills, Senior Fellow at the Harvard Business School,
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  Speaker 1: former Small Business Administrator for President Obama from two thousand
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  Speaker 1: and nine two thou thirteen, overseeing the efforts during that
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  Speaker 1: financial crisis, with some valuable insights into this one. David
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  Speaker 1: cast joining us now chief Investment Officer of Matrix Asset Advisors,
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  Speaker 1: joining by phone from New York David. When we look
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  Speaker 1: at the bank loan loss provisions totaling twenty four billion
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  Speaker 1: dollars so far from Bank of America, Wells Fargo, JP, Morgan,
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  Speaker 1: as well as City Group, do you feel like the
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  Speaker 1: market is inadequately pricing in the carnage that we're expecting
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  Speaker 1: in this earning season. Uh, we actually don't. We think
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  Speaker 1: that the banks are the bank prices are far more
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  Speaker 1: sensitive to the current trends than most other companies will be.
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  Speaker 1: And the reason behind that is when you're looking at
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  Speaker 1: industrial companies or corporate general corporations, the real concern is
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  Speaker 1: not how they did this quarter, but are they going
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  Speaker 1: to be able to survive it? And where are they
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  Speaker 1: going to be in six months. When you're looking at
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  Speaker 1: the banks, there's a concern that they're leveraged, and if
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  Speaker 1: the loans are this bad now and they get worse later,
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  Speaker 1: are they going to be able to pay the dividends?
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  Speaker 1: Are they going to be able to survive? Is it
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  Speaker 1: going to be two thousand and eight, two thousand nine?
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  Speaker 1: So number one, we'd make that distinction. We don't expect
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  Speaker 1: other stocks and other industries and sectors to react like
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  Speaker 1: the banks that's first number two. We actually think when
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  Speaker 1: the dust settles, the banks are going to start to
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  Speaker 1: do much better. We've been on all of these calls
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  Speaker 1: and and basically what the banks did is they were
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  Speaker 1: in a pretty draconian way, uh said, these loans. You know,
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  Speaker 1: there's going to be an enormous uptick in negative loans
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  Speaker 1: or non paying loans. They took a big hit now
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  Speaker 1: And because the banks don't want to over promise and
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  Speaker 1: under deliver, they and said and if things get worse,
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  Speaker 1: these numbers are going to get a lot worse. So
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  Speaker 1: everyone is looking at the bank numbers and assuming the worst.
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  Speaker 1: We think that they've taken a significant reserve. One thing
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  Speaker 1: that they did say is that they will get through this.
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  Speaker 1: At their balance sheets are in very good shape. They're
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  Speaker 1: over reserved. You know. One of the things people are
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  Speaker 1: trying to get a sense of is is this big
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  Speaker 1: move up off the bottom. Is it a head fake?
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  Speaker 1: Is it real? Are we're gonna retest lows because there's
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  Speaker 1: gonna be a lot of dire data coming out over
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  Speaker 1: the next several months. Well, we think that the last
• 10:31
  Speaker 1: three weeks is a great lesson in teaching people that
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  Speaker 1: you simply can't time the market on a short term basis,
• 10:37
  Speaker 1: and you really shouldn't spend a whole heck of a
• 10:39
  Speaker 1: lot of time trying to call a bottom, because the
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  Speaker 1: people that were trying to call a bottom all of
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  Speaker 1: a sudden missed the first. So we think the key
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  Speaker 1: for investors is take a nine to twelve month time horizon,
• 10:50
  Speaker 1: look at what's going to be happening. By the end
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  Speaker 1: of this year. The market is going to be looking
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  Speaker 1: at two thousand and twenty one earnings, and on that basis,
• 10:58
  Speaker 1: we think stocks are pretty cheap and a that's your mindset,
• 11:01
  Speaker 1: and you're able to do that. You're able to buy
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  Speaker 1: some pretty decent companies at very attractive prices that are
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  Speaker 1: going to get through this period, and we think that's
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  Speaker 1: the most important question. We expect a lot of volatility.
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  Speaker 1: We would be buying in days like today, We would
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  Speaker 1: not be chasing the rallies of the last few weeks.
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  Speaker 1: But today the newsflow feels horrible. Two days ago, you know,
• 11:20
  Speaker 1: one day ago the news flow felt great. Don't get
• 11:23
  Speaker 1: caught up in the daily news flow because it'll make
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  Speaker 1: you crazy. But if you can buy a good business
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  Speaker 1: that's paying a four percent yield that is going to
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  Speaker 1: live to fight another day, is going to get through
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  Speaker 1: this with pretty good economics. You do that, uh, and
• 11:37
  Speaker 1: and try not to focus as much on the day
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  Speaker 1: to day volatility. When you say it's a good time
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  Speaker 1: to buy certain companies that you think that can withstand this.
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  Speaker 1: Other people seem to think big tech is the place
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  Speaker 1: to go. We've seen those shares rally with the exceptions,
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  Speaker 1: say of Alphabet due to the advertising revenue, which is
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  Speaker 1: like behind which companies are you really focusing on here?
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  Speaker 1: So we're looking at companies like V or Comcast, or
• 12:01
  Speaker 1: CVS or A T and T. All are paying very
• 12:05
  Speaker 1: very healthy dividends. They absolutely will get through this. CVS
• 12:09
  Speaker 1: is business has been pretty good. Abby has reaffirmed the dividend.
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  Speaker 1: They'll be growing the dividend. Their earnings are very good. Uh.
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  Speaker 1: A T and T is paying over a six and
• 12:18
  Speaker 1: a half percent yield while you wait, we think they're
• 12:21
  Speaker 1: gonna get through this in pretty good form. All of
• 12:22
  Speaker 1: those are pretty good businesses. We also if again we
• 12:26
  Speaker 1: wouldn't put too much in, but we also think that
• 12:29
  Speaker 1: banks are going to come through this in very good form.
• 12:31
  Speaker 1: And if you don't mind the additional volatility. Uh, that
• 12:34
  Speaker 1: you can buy companies like a Wells Fargo or p
• 12:37
  Speaker 1: n C. P n C announced earnings today. Uh, it
• 12:40
  Speaker 1: was it was actually a pretty good call. They really
• 12:43
  Speaker 1: have their arms around this. They said that one thing
• 12:45
  Speaker 1: that's going to come out of this when all said
• 12:47
  Speaker 1: and done, is the quality of their loan portfolio, and
• 12:50
  Speaker 1: it's paying over almost a five percent dividend. Uh. So
• 12:53
  Speaker 1: those are the type of companies you can buy a
• 12:55
  Speaker 1: year from now. We think you're gonna be pretty happy
• 12:57
  Speaker 1: and feel that you're pretty smart. How concerned are you
• 13:01
  Speaker 1: about balance sheets? A couple of companies you mentioned, most
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  Speaker 1: notably A T and T and Comcast carrying a tremendous
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  Speaker 1: amount of debt. Now they've got good cash flows, but
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  Speaker 1: if this thing gets really ugly and for longer, how
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  Speaker 1: concerned are you about credit and balance sheets? We're very
• 13:17
  Speaker 1: concerned about balance sheets. If you're in a leveraged business
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  Speaker 1: or business is going to be impacted by the coronavirus.
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  Speaker 1: So what would that include? That would include the automobile companies,
• 13:26
  Speaker 1: hotel chains, restaurants, the cruise lines, airlines. Those companies, if
• 13:32
  Speaker 1: they've got too much debt, are going to have no revenues.
• 13:34
  Speaker 1: In terms of Comcast, their revenues are going to be
• 13:37
  Speaker 1: absolutely solid. They're going to come through this. They've got
• 13:40
  Speaker 1: great cash flow. People are not going to be cutting
• 13:43
  Speaker 1: off their services. Same with a T and T. We
• 13:46
  Speaker 1: think that, um, you know people right now, we're all
• 13:49
  Speaker 1: working from home, so they either need their wireless or
• 13:51
  Speaker 1: they need Internet connections. Uh So A T T will
• 13:54
  Speaker 1: get through this. Uh So in both of those cases,
• 13:57
  Speaker 1: you know, we're very, very comfortable that the companies have
• 14:00
  Speaker 1: the cash flow to get through this. But your point
• 14:02
  Speaker 1: is exactly right. We would avoid companies and industries that
• 14:05
  Speaker 1: are going to see a cut in revenues and have
• 14:09
  Speaker 1: debt because they can get caught and really hurt. David,
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  Speaker 1: I'm struggling with the historical reference point to this moment,
• 14:16
  Speaker 1: and people talk about the numbers and how you can't
• 14:19
  Speaker 1: really look at the numbers. Right now. We're getting, you know,
• 14:22
  Speaker 1: horrible retail sales. The Empire Manufacturing Survey dreadful record lows,
• 14:26
  Speaker 1: record plunges, record job losses, record this, record that, and
• 14:30
  Speaker 1: and how do you sort of create a compass forward.
• 14:33
  Speaker 1: It's faith, it's faith that we're going to recover. On
• 14:36
  Speaker 1: the other side is there anything that you're clinging to
• 14:39
  Speaker 1: that's beyond faith that things will revert to normal in
• 14:43
  Speaker 1: terms of data. That underscore your point, which is things
• 14:46
  Speaker 1: will essentially eventually go back to the way that they were,
• 14:50
  Speaker 1: and you can count on these previous ideas of stable
• 14:53
  Speaker 1: balance sheets and companies that seem to have a viable
• 14:56
  Speaker 1: business model. That's that's exactly the point. So basically, the
• 15:01
  Speaker 1: vast majority of the time, the market looks out at
• 15:03
  Speaker 1: earnings twelve to fifteen months out, So if you do that,
• 15:07
  Speaker 1: you're really talking about two thousand and twenty one earnings,
• 15:09
  Speaker 1: and that's how financial markets work. So the part of
• 15:12
  Speaker 1: faith that our analysis relies on is that right now
• 15:16
  Speaker 1: the pharmaceutical companies are spending tens of billions of dollars
• 15:20
  Speaker 1: to find a solution to the coronavirus. So we think
• 15:23
  Speaker 1: at some point, whether it's three months from now or
• 15:26
  Speaker 1: six months from now or nine months from now, we're
• 15:28
  Speaker 1: going to be in a more normal environment. There will
• 15:31
  Speaker 1: be either a treatment for the coronavirus. Uh hopefully Johnson
• 15:35
  Speaker 1: and Johnson that said that they're going to have a
• 15:37
  Speaker 1: vaccine by next um February or March is successful in
• 15:41
  Speaker 1: that endeavor. And if something like that happens, all of
• 15:44
  Speaker 1: a sudden, people will start to behave more normally. They'll
• 15:47
  Speaker 1: be less scared about getting something and dying, which is
• 15:49
  Speaker 1: a perfectly rational fear right now. And then the economy
• 15:53
  Speaker 1: starts to open up. And at that point the market
• 15:56
  Speaker 1: looks beyond current earnings and current horrific economic ends, and
• 16:00
  Speaker 1: the surviving companies are going to be valued on two
• 16:03
  Speaker 1: thousand and twenty one earnings, and on that basis you're
• 16:06
  Speaker 1: able to get a lot of really good businesses at
• 16:08
  Speaker 1: twelve times earnings. And the other part of the equation
• 16:11
  Speaker 1: is when the fear factors at and when the world
• 16:14
  Speaker 1: returns to normal, interest rates are essentially at zero, the
• 16:17
  Speaker 1: federal government will have spent trillions of dollars, whether it's
• 16:21
  Speaker 1: two trillion or five trillion dollars, all that money will
• 16:24
  Speaker 1: be at their interest rates will be at zero, bonds
• 16:27
  Speaker 1: are not offering any reasonable alternative. Stocks will become pretty attractive. Uh.
• 16:32
  Speaker 1: And that again leads to looking at IT earnings, looking
• 16:35
  Speaker 1: at its companies, and valuations based on the last one
• 16:39
  Speaker 1: years evaluations. David Kat's President and chief investment officer Matrix
• 16:44
  Speaker 1: Asset Advisors, David Thanks so much for staying on the
• 16:48
  Speaker 1: line with us. Well, the horrendous economic data just keeps
• 16:55
  Speaker 1: rolling in this morning. In addition to the Empire manufacturing
• 16:58
  Speaker 1: data that fell u gird at Pace, we also saw
• 17:01
  Speaker 1: a record decline in retail sales and joining us to
• 17:05
  Speaker 1: really put this in their perspective at a time when
• 17:07
  Speaker 1: people don't know what numbers to cling to a Smasha,
• 17:11
  Speaker 1: director of consumer and Retail Trends at Credit Intel joining
• 17:15
  Speaker 1: us on the phone from Long Island, Seema, so glad
• 17:17
  Speaker 1: to have you on the phone here. I'm wondering what
• 17:21
  Speaker 1: are you looking at in terms of the retail numbers
• 17:23
  Speaker 1: to give you some gauge of how bad this is
• 17:26
  Speaker 1: going to get. I think the biggest and those obvious
• 17:29
  Speaker 1: trend that came out of the numbers, it just sort
• 17:31
  Speaker 1: of highlights the shift away from discretionary spending and two essentials.
• 17:35
  Speaker 1: You saw grocery stores at a really strong number and
• 17:38
  Speaker 1: ends up. But if you look at what happened to clothing,
• 17:42
  Speaker 1: furniture department stores, I think that just at that risk
• 17:47
  Speaker 1: will continue to grow the longer we're in this shelter
• 17:50
  Speaker 1: in place situation. Then it begs the question what happens
• 17:53
  Speaker 1: when we come out, how will these discretionary retailers be
• 17:56
  Speaker 1: able to perform, Like what do they need to do
• 17:58
  Speaker 1: and what does that mean for them? I think that's
• 18:01
  Speaker 1: the biggest takeaway I'm seeing right now. Yeah, it's interesting
• 18:04
  Speaker 1: to seem I think the you know, one of the
• 18:06
  Speaker 1: questions that we we've been one of the areas of
• 18:08
  Speaker 1: discussion most we've had today and over the last several days,
• 18:11
  Speaker 1: is how do we think the consumer will change, if
• 18:14
  Speaker 1: at all. On the other side of this is is
• 18:16
  Speaker 1: there any data that you've seen that suggesting that there
• 18:18
  Speaker 1: will be a fundamental change, or if any of the
• 18:21
  Speaker 1: retailers you've spoken to, if they suggested that they expect
• 18:24
  Speaker 1: a fundamental change, or will the consumer on the other
• 18:26
  Speaker 1: side of this just kind of go back to kind
• 18:29
  Speaker 1: of normal. I think it's more likely you'll see a
• 18:33
  Speaker 1: change in the consumer because now we're going to be
• 18:35
  Speaker 1: going on almost two months pretty soon of sheltering in place,
• 18:39
  Speaker 1: changing your behavior, having six feet between you and anybody
• 18:43
  Speaker 1: else when you go to the grocery store. So I
• 18:45
  Speaker 1: feel like some of those habits will be hard to change,
• 18:48
  Speaker 1: and it might require retailers to change how they are
• 18:51
  Speaker 1: running their stores. How restaurants. We know that in Hong
• 18:54
  Speaker 1: Kong they've set up table six ft away from each
• 18:56
  Speaker 1: other and they're sanitizer everywhere. So I think people be
• 19:00
  Speaker 1: behavior will change, certainly, But I think the bigger question
• 19:03
  Speaker 1: is how when their finances will change and what does
• 19:05
  Speaker 1: that mean for discretionary retailers When you know over seventeen
• 19:08
  Speaker 1: million people are filing for unemployment claims, retailers across the
• 19:12
  Speaker 1: board have for a loowed many many, if not all,
• 19:14
  Speaker 1: of their employees. Other companies are also struggling, So how
• 19:18
  Speaker 1: do these people come back right? And I don't think
• 19:20
  Speaker 1: that the stimulus that they're going to get at some
• 19:22
  Speaker 1: point one time check is going to be enough for
• 19:26
  Speaker 1: them to shift their spending back to the way that
• 19:28
  Speaker 1: it was. But is actually what I'm concerned about. Well,
• 19:31
  Speaker 1: when people talk about the retail sector, they've talked about
• 19:34
  Speaker 1: how Amazon has really consolidated share, and we've seen a
• 19:37
  Speaker 1: shift that's just accelerated to online ordering just because nobody
• 19:41
  Speaker 1: is allowed to go out and the stores were all closed.
• 19:43
  Speaker 1: It was interesting in your notes you said that actually
• 19:46
  Speaker 1: there is a potential positive outcome from this, that there
• 19:49
  Speaker 1: will be a re emphasis on brick and mortar. Can
• 19:52
  Speaker 1: you talk a little bit about that. Yeah. Absolutely. I
• 19:55
  Speaker 1: think one of the things that you notice when you
• 19:57
  Speaker 1: come away from this is like when people really need something,
• 20:01
  Speaker 1: they want something, they want to go and get it themselves.
• 20:04
  Speaker 1: And you saw with Amazon having these huge supply chain issues,
• 20:07
  Speaker 1: despite having one of the best supply chains out there,
• 20:10
  Speaker 1: they just could not bring in the essential product on time.
• 20:14
  Speaker 1: They're not even taking new grocery deliveries. You cannot get
• 20:16
  Speaker 1: a spot to get Amazon fresh delivery. Even regular goods
• 20:20
  Speaker 1: were taking a long time up until recently, and they
• 20:22
  Speaker 1: halted essential you know, non essential sales, and I think
• 20:26
  Speaker 1: that's a huge risk, and it it was a benefit
• 20:29
  Speaker 1: to people like Target and Walmart who are selling some
• 20:31
  Speaker 1: of those merchandise, but that you could go and get
• 20:33
  Speaker 1: it right away, and I think for them it was
• 20:36
  Speaker 1: even better economically because it's cheaper for a client or
• 20:40
  Speaker 1: customer to go pick up a product from the store
• 20:43
  Speaker 1: than having the retailer ship that product to them. And
• 20:46
  Speaker 1: I think that type of that was really highlighted, I
• 20:50
  Speaker 1: think in this crisis, and it shows why you need
• 20:53
  Speaker 1: to have an omni channel strategy, not an online strategy,
• 20:56
  Speaker 1: and not a brick and mortar only strategy seem a
• 21:00
  Speaker 1: bit about the balance sheets some of the retailers you
• 21:03
  Speaker 1: look at. I mean, you know a lot of retailers
• 21:05
  Speaker 1: they operate on you know, very tight margins. I'm not
• 21:08
  Speaker 1: sure how much cash they carry. How are you thinking
• 21:10
  Speaker 1: about that? Yeah, so credit until we put out a
• 21:14
  Speaker 1: couple of reports recently which we keep updating, and one
• 21:17
  Speaker 1: of those the retailers at risk. And you know why
• 21:20
  Speaker 1: are they at risk? Well, first of all, they have
• 21:22
  Speaker 1: most of them with through their guidance. They closed their stores,
• 21:25
  Speaker 1: they furloughed their employees, most if not all of them
• 21:28
  Speaker 1: have drawn down and on their revolvers just to make
• 21:30
  Speaker 1: sure they have a bit of a cap cushion, and
• 21:32
  Speaker 1: suspended uh their operating expensive including in some cases not
• 21:37
  Speaker 1: paying their rent for the month of April. And we'll
• 21:39
  Speaker 1: see how long this goes. But the way we're looking
• 21:42
  Speaker 1: at it is just like, how long can these companies, uh,
• 21:46
  Speaker 1: when we look at the credit r how long can
• 21:48
  Speaker 1: they sustain in this type of environment when you don't
• 21:51
  Speaker 1: have a zero revenue environment based on your balance sheet
• 21:55
  Speaker 1: and how much cash you're able to get, right, And
• 21:57
  Speaker 1: so there are retailers, you know, we're hearing a lot
• 22:00
  Speaker 1: about J C. Penny and we Credit Hill had a
• 22:03
  Speaker 1: cash burn analysis on it that, based on certain assumptions,
• 22:07
  Speaker 1: if they cut their capital spending by uh, they wind
• 22:10
  Speaker 1: down accounts payable and accrude libilities by and a couple
• 22:15
  Speaker 1: of other assumptions, including the fact that they paid rent
• 22:17
  Speaker 1: that in a good scenario they have liquidity for five
• 22:22
  Speaker 1: point one month. Right, So this has certain assumptions, but
• 22:25
  Speaker 1: you have to think about we're doing this many of
• 22:27
  Speaker 1: our retailers to see who is at most at risk,
• 22:30
  Speaker 1: and so retailers like J. C. Penny who were already
• 22:34
  Speaker 1: sort of struggling, and then you also have like the
• 22:36
  Speaker 1: Stage Doors or a g n C or those type
• 22:39
  Speaker 1: of players, how did they come out of this um
• 22:42
  Speaker 1: In many cases, I think it's going to be really
• 22:44
  Speaker 1: hard for them because if even you can't even go
• 22:47
  Speaker 1: to bankruptcy at this point because you can't liquidate your inventory,
• 22:50
  Speaker 1: right so models and pure One even that is on hold.
• 22:54
  Speaker 1: So I think that it just makes it a lot
• 22:56
  Speaker 1: more difficult for these guys. Take this to back though,
• 23:00
  Speaker 1: I mean trying to find a silver lining, just because
• 23:04
  Speaker 1: right now everything looks pretty dismal, and I'm trying to
• 23:07
  Speaker 1: I'm trying to be more optimistic here, but I mean,
• 23:10
  Speaker 1: some of these retail chains have been struggling for a
• 23:13
  Speaker 1: long time. You talk about J. C. Petty, it's been
• 23:16
  Speaker 1: on the chopping block for a long time, with a
• 23:18
  Speaker 1: lot of traders betting against that company. There are a
• 23:20
  Speaker 1: number of other retailers as well that have been sort
• 23:22
  Speaker 1: of the slow burn, and it's been accelerating in the
• 23:24
  Speaker 1: burn over the past few years. We'll just wash out
• 23:27
  Speaker 1: some of the weaker players and allow some of the
• 23:30
  Speaker 1: stronger retailers to actually consolidate share and put up a
• 23:34
  Speaker 1: bitter fight against Amazon and other retailers. I think so.
• 23:39
  Speaker 1: And it's hard to say exactly who will make it
• 23:41
  Speaker 1: out because companies don't want to fail and people protect
• 23:45
  Speaker 1: them to extend. But I think, yeah, you're gonna see, uh,
• 23:48
  Speaker 1: those that have been struggling and sort of being able
• 23:51
  Speaker 1: to muddle along for the last couple of years when
• 23:54
  Speaker 1: the you know, the consumers quote unquote strong and they
• 23:56
  Speaker 1: were still struggling. Yeah, I think you'll see a shakeout
• 23:59
  Speaker 1: and you'll see the longer retailers take that share, and
• 24:03
  Speaker 1: you know, and I think that will also include Amazon, right,
• 24:06
  Speaker 1: I think that gives them more leverage because they continue
• 24:08
  Speaker 1: to take share as well. So even though they have
• 24:11
  Speaker 1: their own share of problems, they have the whole foods,
• 24:14
  Speaker 1: they have the relationship with colds and right aids, so
• 24:16
  Speaker 1: they are building sort of an omnichannel strategy. So I
• 24:19
  Speaker 1: definitely think you'll see that trend. So it's not like
• 24:22
  Speaker 1: all retail go away or everything is going to go online,
• 24:24
  Speaker 1: but you'll definitely see who the winners are, and it
• 24:27
  Speaker 1: will be most difficult for the smaller retailers who maybe
• 24:31
  Speaker 1: didn't have any omni channel strategy to begin with, or
• 24:34
  Speaker 1: you know, just don't have the balance sheet to sort
• 24:37
  Speaker 1: of sustain a zero revenue environment for multiple months. See Michew,
• 24:41
  Speaker 1: thank you so much for joining us, who really appreciate
• 24:43
  Speaker 1: your insight. As always seems. She's a director of Consumer
• 24:46
  Speaker 1: and Retail Trends at Credit Intel. The focus today, in
• 24:53
  Speaker 1: addition to just see incredibly terrible economic data, has been
• 24:57
  Speaker 1: on the banks reporting earnings kicking off the earning season
• 25:01
  Speaker 1: and loan lost provisions have been the key indicator of
• 25:04
  Speaker 1: how steep the recession, maybe at least in the eyes
• 25:08
  Speaker 1: of the major banks. And there's no one better to
• 25:10
  Speaker 1: talk to about this than Alison Williams, Senior analyst for
• 25:13
  Speaker 1: the Global Investment Banks for Bloomberg Intelligence. She joins us. Now, Allison,
• 25:18
  Speaker 1: now that we've had a couple of hours to process
• 25:20
  Speaker 1: the earnings and the twenty four billion dollars of loan
• 25:24
  Speaker 1: loss provisions set aside for souring loans in the in
• 25:27
  Speaker 1: the weeks and months ahead by City Group, JP Morgan
• 25:30
  Speaker 1: at Wells Fargo, UH and and City Group, what's your
• 25:34
  Speaker 1: big takeaway here? So the takeaway, UM, I think my
• 25:38
  Speaker 1: big takeaway from the border is that we've sort of
• 25:40
  Speaker 1: only just begun, and I think, um, you know, that's
• 25:45
  Speaker 1: probably the main concern among investors. So as you said,
• 25:49
  Speaker 1: you know, we've had twenty four billion provisions twenty five
• 25:52
  Speaker 1: if you include UM Goldman UM, that's an increase of
• 25:56
  Speaker 1: about twenty billion compared with a year ago. And you know,
• 26:01
  Speaker 1: when the managements are talking, uh, you know, yesterday's managements
• 26:05
  Speaker 1: were quite negatives. You're sort of hearing some mixed comments.
• 26:08
  Speaker 1: But when we look at some of the expectations that
• 26:10
  Speaker 1: are built in and also just hearing from these managements
• 26:13
  Speaker 1: that we're only at the beginning, it's it's qualitative in
• 26:16
  Speaker 1: a way. It's just a guestiment, so we really, you know,
• 26:19
  Speaker 1: have no idea how bad this can get. Yeah, that's
• 26:23
  Speaker 1: interesting because you can't really go back to the playbook
• 26:25
  Speaker 1: of two thousand eight two thousand nine eight very different situations.
• 26:29
  Speaker 1: So we're the management team saying, listen, we're kind of
• 26:33
  Speaker 1: taking a best guess here. We're probably gonna you may
• 26:36
  Speaker 1: even see us come back in future quarters with even
• 26:39
  Speaker 1: more Is that kind of the message they're trying to send.
• 26:41
  Speaker 1: So JP morgan Um to begin with said very distinctly
• 26:46
  Speaker 1: that we were definitely or we're probably going to have
• 26:49
  Speaker 1: more reserves in two CUE, being that you know today's reserves,
• 26:54
  Speaker 1: yesterday's reserves took into account, you know, their economic forecast
• 27:00
  Speaker 1: um from their firm of unemployment and over ten percent
• 27:07
  Speaker 1: i'm sorry over drop in g d P over ten
• 27:13
  Speaker 1: percent unemployment rate. Those estimates already are worse down g
• 27:19
  Speaker 1: B g d P unemployment expected for two QUE. So
• 27:23
  Speaker 1: already their estimates are stale. And then the second part
• 27:28
  Speaker 1: of it is the government programs. As you said, you
• 27:30
  Speaker 1: know that the OH nine playbook doesn't work, but even
• 27:33
  Speaker 1: at other cycles, we don't really know what the impact
• 27:37
  Speaker 1: is going to be of these government programs of all
• 27:39
  Speaker 1: these deferrals, how much of these deferrals you know we'll
• 27:42
  Speaker 1: end up going back to good and how much UM
• 27:46
  Speaker 1: will end up having to get charged off. And so
• 27:48
  Speaker 1: we really won't know that until we start to move
• 27:52
  Speaker 1: throughout this quarter. So you know, ten ques, we might
• 27:55
  Speaker 1: get some update may conferences if they go virtual, we
• 27:59
  Speaker 1: make at some update, UM, but we really just don't know.
• 28:03
  Speaker 1: So one, JP Morgan and Bank of America leading the
• 28:05
  Speaker 1: declines that we're seeing today in the major US banks.
• 28:09
  Speaker 1: So I think you know, when we saw the numbers
• 28:11
  Speaker 1: come out yesterday, UM, I think some investors just sort
• 28:15
  Speaker 1: of looked at the top line of reserves and with
• 28:17
  Speaker 1: those numbers, perhaps thought JP Morgan is conservative. Look at
• 28:21
  Speaker 1: Wells They're much lower, you know they we take we
• 28:24
  Speaker 1: look at the dollar provisions, but we look at those
• 28:26
  Speaker 1: provisions versus their loan book. JP Morgan with the two
• 28:30
  Speaker 1: and a half percent ratio, you know, Wells Fargo sort
• 28:33
  Speaker 1: of less than half of that. But then we saw
• 28:35
  Speaker 1: a city group come out today UM with granted less
• 28:39
  Speaker 1: dollar provision number, but their ratio UM while exceeding that
• 28:44
  Speaker 1: now of JP Morgan, perhaps making JP Morgan who appeared
• 28:49
  Speaker 1: conservative now seeming less so and um, you know a
• 28:53
  Speaker 1: Bank of America as well. You know, again the question
• 28:57
  Speaker 1: is sort of sort of how bad they are going
• 29:00
  Speaker 1: to get from here? How all you prepared the card
• 29:03
  Speaker 1: business where all the all three of the banks that
• 29:05
  Speaker 1: we just discussed are very big in this wells Fargo
• 29:08
  Speaker 1: is less big. Um. You know, that's where we're seeing
• 29:11
  Speaker 1: the majority of the provisions that that product tends to
• 29:15
  Speaker 1: have the highest class rate. It's unsecured, the thing that
• 29:17
  Speaker 1: people don't pay first. Um. And so I think that's
• 29:21
  Speaker 1: you know, going to be the area of focus in
• 29:22
  Speaker 1: the coming month or so. So Alis and I know
• 29:24
  Speaker 1: you listen to all these conference calls in these big
• 29:27
  Speaker 1: bank ceo s, they really have great visibility in terms
• 29:30
  Speaker 1: of they see lots of the global economy around the
• 29:34
  Speaker 1: world that they suggest how long they anticipate a downturn
• 29:39
  Speaker 1: to last. I think most people kind of dropped the
• 29:41
  Speaker 1: discussion of a V shaped but now more of a
• 29:44
  Speaker 1: you or an L What are they kind of thinking
• 29:46
  Speaker 1: at this point? Well, I think, um, you know, one
• 29:49
  Speaker 1: contrast maybe and again I think a lot of these
• 29:51
  Speaker 1: managements are sort of calling on their research departments. Um.
• 29:55
  Speaker 1: And again this goes to the quality of their reserves.
• 29:57
  Speaker 1: So Bank of America, you know, expecting a big drop
• 30:01
  Speaker 1: into Q like everyone else, but also expecting negative um
• 30:06
  Speaker 1: growth or declines in GDP for several quarters to come
• 30:10
  Speaker 1: versus JP morgan um that is currently factoring in more
• 30:15
  Speaker 1: of a rebound in the back half. That being said,
• 30:18
  Speaker 1: I think all managements do sort of acknowledge um that
• 30:22
  Speaker 1: we don't necessarily know how long this is going to
• 30:25
  Speaker 1: go on, and so the key risk I think they're
• 30:27
  Speaker 1: two investors. Obviously, yes, it's it's the provisions, but it's
• 30:31
  Speaker 1: the dividends where managements are committed. The FED said they
• 30:34
  Speaker 1: don't see any need for cuts at this time, but
• 30:37
  Speaker 1: to the extent that this downturn is unprecedented and we
• 30:40
  Speaker 1: don't know how long it's going to go on. We
• 30:42
  Speaker 1: don't know if there will um become more pressure, if
• 30:46
  Speaker 1: this becomes a prolonged situation. Alison Williams, thanks so much
• 30:50
  Speaker 1: for joining us. Really appreciate it. We know you're busy
• 30:52
  Speaker 1: with all these big bank earnings, but we appreciate it
• 30:54
  Speaker 1: taking the time. Alison Williams, she's a senior annals covering
• 30:57
  Speaker 1: all things financials for Bloomberg Intelligence, giving us her perspective
• 31:01
  Speaker 1: and kind of Lisa frankly sharing that the management teams
• 31:04
  Speaker 1: really don't know. These are the provisions we have as
• 31:06
  Speaker 1: of right now, but there could be more. Yeah, and
• 31:09
  Speaker 1: and typically banks do take a conservative approach. The question
• 31:12
  Speaker 1: is just how do you even know what a conservative
• 31:14
  Speaker 1: of approaches when you have no idea what we're heading into. Yeah,
• 31:17
  Speaker 1: exactly right. And I think they're just trying to simply say, um,
• 31:20
  Speaker 1: this is kind of what we know now. We're relying
• 31:22
  Speaker 1: upon the data we have now. But to the extent
• 31:25
  Speaker 1: this thing goes even longer, it could be even worse.
• 31:29
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 31:32
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts
• 31:34
  Speaker 1: or whatever podcast platform you prefer. M Paul Sweeney, I'm
• 31:37
  Speaker 1: on Twitter at pt Sweeney. I'm Lisa Abram Woyd's I'm
• 31:40
  Speaker 1: on Twitter at Lisa Abram woits one before the podcast,
• 31:43
  Speaker 1: you can always catch us worldwide. I'm Bloomberg Radio