Latest / Bloomberg Intelligence / Two Percent Growth is the New 3 Percent, So Invest Accordingly, Rhame Says

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Two Percent Growth is the New 3 Percent, So Invest Accordingly, Rhame 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. So
• 0:32
  Speaker 1: we got retail sales out this morning and they were great.
• 0:34
  Speaker 1: US retail sales advanced in July by the most this year,
• 0:38
  Speaker 1: which is good, but it's not as good as consumer confidence,
• 0:43
  Speaker 1: which is at a fifteen year high. And this is
• 0:46
  Speaker 1: raising some kind of dissonance and some kind of questions
• 0:49
  Speaker 1: among economists, including for Lara Raym she's a senior economist
• 0:53
  Speaker 1: FS Investments, which oversees about twenty and a half billion
• 0:57
  Speaker 1: dollars and it's based in Philadelphia. Laura, can you give
• 1:00
  Speaker 1: me a sense of why it's concerning that there isn't
• 1:04
  Speaker 1: the same kind of enthusiasm that we're seeing in retail
• 1:08
  Speaker 1: sales as in the consumer confidence readings. Yeah, you know,
• 1:12
  Speaker 1: I think this disconnect is something that we're seeing in
• 1:15
  Speaker 1: lots of areas of the economy and in financial markets,
• 1:18
  Speaker 1: but specific to retail sales. We've had the consumer be
• 1:22
  Speaker 1: the real workhorse of our economy. This entire expansion, you've
• 1:25
  Speaker 1: had growth averaging two percent. Overall consumer consumer spending has
• 1:29
  Speaker 1: been averaging three And here's the problem, right, that cannot
• 1:33
  Speaker 1: continue indefinitely. The savings rate has been chiseled down from
• 1:38
  Speaker 1: over five percent to now only three point eight percent.
• 1:41
  Speaker 1: That's historically relatively low. Wait, so in other words, people
• 1:47
  Speaker 1: Americans are going out and they're digging into their savings
• 1:50
  Speaker 1: that they can go to heat home depot and renovate
• 1:53
  Speaker 1: their bathroom or buy that really nice pan that they've
• 1:57
  Speaker 1: been looking for. That's exactly right. I mean, you have
• 1:59
  Speaker 1: to think about when are you're going to get the
• 2:01
  Speaker 1: money to spend, and it's either going to come from
• 2:03
  Speaker 1: wages and income or it's going to come from your
• 2:06
  Speaker 1: savings and some other things like stock market gains or
• 2:09
  Speaker 1: housing appreciation. But really we look at those two big
• 2:12
  Speaker 1: factors of income and savings, and income has been really lagging.
• 2:17
  Speaker 1: That's one of the things we're not seeing during this
• 2:19
  Speaker 1: recovery very robustly. Usually at this stage in the recovery,
• 2:24
  Speaker 1: we're seeing better wage gains than we're seeing right now.
• 2:26
  Speaker 1: Let's go a little deeper here, because when we talk
• 2:28
  Speaker 1: about retail sales, are we really talking about buying that
• 2:32
  Speaker 1: really nice pan or buying that beautiful shirt that you've
• 2:35
  Speaker 1: been looking at that's cost three d dollars in his
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  Speaker 1: way above your means? Or are we talking about people
• 2:40
  Speaker 1: paying more for rent, paying more for healthcare, paying more
• 2:43
  Speaker 1: for the necessities in their life, and getting squeezed on
• 2:46
  Speaker 1: every end that you know, what you bring up as
• 2:48
  Speaker 1: a huge issue right now that we're seeing across the economy,
• 2:52
  Speaker 1: and that's that what we call discretionary spending, what people
• 2:56
  Speaker 1: can spend on vacations, what they can spend on restaurants,
• 2:59
  Speaker 1: what they can spend on sporting goods is getting crowded
• 3:02
  Speaker 1: out to a greater and greater degree, most importantly by
• 3:06
  Speaker 1: higher spending on healthcare. We've seen that, you know, over
• 3:09
  Speaker 1: the last uh several decades, really increase as a share
• 3:13
  Speaker 1: of consumer spending. So again, you know, when we look
• 3:17
  Speaker 1: just like what what percentage healthcare spending is as a
• 3:21
  Speaker 1: proportion of retail sales, it's so retail sales different respending,
• 3:26
  Speaker 1: but total spending you're looking at almost twenty percent now
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  Speaker 1: when up from eight percent, so you know that's over
• 3:33
  Speaker 1: several decades, but it's a huge difference. And you add
• 3:36
  Speaker 1: in higher cost of education, which over a lifetime is
• 3:40
  Speaker 1: less but still is more expensive now than it was
• 3:44
  Speaker 1: two decades ago. You're really seeing consumers when it comes
• 3:48
  Speaker 1: to you know, those extra purchases, having to dig into
• 3:52
  Speaker 1: their savings more and having to really rely on higher income.
• 3:55
  Speaker 1: And I can't stress enough. With productivity as low as
• 3:59
  Speaker 1: it's been, and we got second quarter productivity numbers not
• 4:02
  Speaker 1: terribly impressive, we're just not going to see those standard
• 4:05
  Speaker 1: of living or real wage gains. Yeah. I was just
• 4:08
  Speaker 1: reading an article actually that Japan's economy is now growing
• 4:11
  Speaker 1: at the fastest pace among the G seven nations, which
• 4:14
  Speaker 1: is an amazing, amazing turn of fate. Right, Um, well,
• 4:18
  Speaker 1: digging into the retail sales, I want to look at
• 4:20
  Speaker 1: where we saw people actually spending, and just to give
• 4:22
  Speaker 1: some perspectives, So consumption counts for the U s ECONTUY.
• 4:26
  Speaker 1: So this is huge, right, So if people dig into
• 4:28
  Speaker 1: their savings, maybe that's actually, you know, not so bad.
• 4:31
  Speaker 1: Maybe economists think, hey, you know, if they do it
• 4:32
  Speaker 1: for long enough, maybe it could spur some growth and
• 4:34
  Speaker 1: be the stimulus, the fiscal stimulus to factors to fiscal stimulus.
• 4:38
  Speaker 1: But where we saw the gains were at department stores,
• 4:41
  Speaker 1: which was really interesting because they've been hammered recently. UM.
• 4:44
  Speaker 1: Also sporting goods retailers, and building supply outlets. UM. What's
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  Speaker 1: your take on this? So, you know, I think I
• 4:51
  Speaker 1: think we have to you know, month to month. All
• 4:53
  Speaker 1: of these categories are really volatile. We did see a
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  Speaker 1: recovery department store sales, but that was after two months
• 4:58
  Speaker 1: of pretty significant decline, so we were kind of due
• 5:01
  Speaker 1: for a bounce. I think one of the issues was
• 5:04
  Speaker 1: we had Amazon Prime Day fall in July and that
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  Speaker 1: did cause a big boost in non store retailers. Can't
• 5:10
  Speaker 1: believe that an entire company can create holiday to buy
• 5:15
  Speaker 1: our stuff and people buy it. Maybe we need Amazon
• 5:18
  Speaker 1: Prime Day for businesses to get them to start spending
• 5:21
  Speaker 1: more robustly. But yeah, So, Lara, as an economist who
• 5:25
  Speaker 1: is advising on how to invest, how do you make
• 5:28
  Speaker 1: sense of all of this? Uh, sort of different pieces
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  Speaker 1: of data that paint kind of a crooked picture. To me.
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  Speaker 1: What we need to get comfortable with is the fact
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  Speaker 1: that we're just probably not going to see growth accelerate
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  Speaker 1: from here, and here's two percent. It feels uh pretty,
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  Speaker 1: it feels stable, it feels boring, it feels sluggish, and
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  Speaker 1: that's because it is. But we are just stuck in
• 5:53
  Speaker 1: this rut. I tell people two percents to new three percent.
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  Speaker 1: In the eighties and nineties, we grow three percent. Now
• 5:59
  Speaker 1: we're going to out two percent and you have to
• 6:01
  Speaker 1: invest accordingly. So does that mean that bonds still look
• 6:04
  Speaker 1: okay to you? And that stocks might be a little
• 6:07
  Speaker 1: expensive but aren't going to be due for a big fall.
• 6:09
  Speaker 1: We're just gonna keep muddling along in this, you know.
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  Speaker 1: I think that um that the financial markets overall looked
• 6:15
  Speaker 1: like they've gotten ahead of economic fundamentals. On the inflation front,
• 6:19
  Speaker 1: I still think that interest rates and inflation are going
• 6:21
  Speaker 1: to be low. I see low interest rates out as
• 6:25
  Speaker 1: far as I can look. I see a cautious fed um.
• 6:28
  Speaker 1: But I think when it comes to other asset prices,
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  Speaker 1: I think there's a lot of euphoria out there, and importantly,
• 6:35
  Speaker 1: no evidence that anybody is discounting any kind of downside
• 6:39
  Speaker 1: surprise economic, financial, market or geopolitical. None of these risks
• 6:45
  Speaker 1: are counted in. So that's where I don't see the
• 6:49
  Speaker 1: optimism that I feel like the markets are pricing in
• 6:52
  Speaker 1: right now. Yeah, we were talking before the show that,
• 6:54
  Speaker 1: you know, concerns about nuclear war brought the market down
• 6:57
  Speaker 1: a little touch and then everybody was like, whatever, not
• 6:59
  Speaker 1: a big deal. Lara Ray, and thank you so much
• 7:01
  Speaker 1: for joining us. Truly a pleasure to speak with you.
• 7:03
  Speaker 1: Lara Ray, Senior economist, FS Investments, which overseas about twenty
• 7:07
  Speaker 1: and a half billion dollars and is based in Philadelphia.
• 7:23
  Speaker 1: One area where it was not little changed was in
• 7:25
  Speaker 1: the retail sales data that we got earlier today. They
• 7:28
  Speaker 1: came in ahead of expectations. They were really great. But
• 7:32
  Speaker 1: I was speaking with Sema Shot ahead of this segment.
• 7:34
  Speaker 1: She was saying, it doesn't seem to jibe exactly with
• 7:37
  Speaker 1: some of the earnings that we've gotten out of some
• 7:40
  Speaker 1: of the big retailers. And she joins us here, Seema Shot,
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  Speaker 1: consumer discretionary analyst for Bloomberg Intelligence. Can you explain a
• 7:46
  Speaker 1: little bit what's going on here? Right? So there's no
• 7:49
  Speaker 1: doubt retail sales for July were very strong. Um. I
• 7:52
  Speaker 1: was pretty particularly surprised about the strength and autos given
• 7:55
  Speaker 1: what we saw earlier. This month when the Big three
• 7:58
  Speaker 1: released their auto sales, they were all down significantly, and
• 8:01
  Speaker 1: then we get the auto parts US and a lot
• 8:05
  Speaker 1: of these categories that appeared very strong. Doesn't match with
• 8:08
  Speaker 1: what the actual companies are saying. So I would step
• 8:12
  Speaker 1: back and think that one month doesn't make a trend
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  Speaker 1: and see how Q three earnings come out, because if
• 8:17
  Speaker 1: there was a lot of incentives, at least on the
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  Speaker 1: autos or promotions on the retail side, it could mean
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  Speaker 1: that margins are impacted, and so that that's part of
• 8:24
  Speaker 1: why sales were so strong in July. Do you have
• 8:27
  Speaker 1: any sense where the strength was. I mean, because we
• 8:29
  Speaker 1: did get the home depot numbers and they were great
• 8:31
  Speaker 1: and Wall Street doesn't care at all because it had
• 8:32
  Speaker 1: already priced it all um, But you know where where
• 8:35
  Speaker 1: the we're the surprises? Where could they be coming from? Right?
• 8:38
  Speaker 1: I definitely think Building Materials has been strong consistently. Home
• 8:41
  Speaker 1: depots an excellent operator, has done very well. They raised
• 8:44
  Speaker 1: their guidance. This is the highest quarterly sales and earnings
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  Speaker 1: that think they've had in the company's history. Performing very well,
• 8:50
  Speaker 1: still having the tail end of home home renovation, housing
• 8:54
  Speaker 1: market improvements. So definitely strength is coming from there. I
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  Speaker 1: mean in other sectors, you're seeing a little bit less bad.
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  Speaker 1: Department stores were less bad that party and people anticipated
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  Speaker 1: I still think, but you know, a lot of the
• 9:09
  Speaker 1: companies I cover continue to be weak, and they're they're
• 9:11
  Speaker 1: weak because of the online effect and I just not
• 9:15
  Speaker 1: having that compelling product. I just don't think people want
• 9:18
  Speaker 1: or maybe have the capacity to spend as much as
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  Speaker 1: they used to, and if they do, they're shifting to online,
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  Speaker 1: particularly Amazon, as people want price transparency and as other
• 9:28
  Speaker 1: retailers use Amazon as a marketplace and Amazon wants to
• 9:32
  Speaker 1: sell everything, including bonds, everything, which has been talking about
• 9:36
  Speaker 1: when you were saying that you have seen some persistent
• 9:38
  Speaker 1: weakness in the companies that you cover, can you give
• 9:40
  Speaker 1: us some specifics and why it's important to watch these
• 9:44
  Speaker 1: companies and specific results out of them to get a
• 9:46
  Speaker 1: better gauge perhaps and what's really going on these broad
• 9:49
  Speaker 1: sort of macro looks at retail sales, right, I mean,
• 9:52
  Speaker 1: part of it is just to step back and see
• 9:54
  Speaker 1: where companies fit in the competitive landscape. So one company
• 9:56
  Speaker 1: I cover is Signat, which had up until my a
• 10:00
  Speaker 1: few quarters ago, been very resilient as a destination for
• 10:03
  Speaker 1: where people would go when they wanted to get engaged
• 10:05
  Speaker 1: and buy a ring. And you've seen their comms and
• 10:08
  Speaker 1: the earnings, you know, consistently been weak. Recently the CEO
• 10:12
  Speaker 1: left right, it was like a turmoil as as But
• 10:15
  Speaker 1: what you're seeing, and that was more competition from the
• 10:17
  Speaker 1: Macy's of the world. The department stores, who are looking
• 10:19
  Speaker 1: for growth some way, and I've just been speaking about this,
• 10:22
  Speaker 1: have really come into sort of the hard lines retail subsector.
• 10:25
  Speaker 1: You're seeing emphasis on beauty, emphasis on home, and emphasis
• 10:28
  Speaker 1: on fine jewelry, and the retailers I cover are seeing
• 10:31
  Speaker 1: that pressure. So this is on top of the fact
• 10:33
  Speaker 1: that you have Amazon and Wayfair in these categories. So
• 10:37
  Speaker 1: apart from Signet, who are the other which are the
• 10:40
  Speaker 1: other companies that are most affected by this shift toward beauty,
• 10:45
  Speaker 1: home improvement, and oh yeah online. I mean really, I
• 10:50
  Speaker 1: can't think of anyone who's not affected. I cover a
• 10:53
  Speaker 1: wide spots of companies and they're all really affected, from
• 10:56
  Speaker 1: GNC to Vitamin Shop, two Staples office depot. And I
• 10:59
  Speaker 1: think you're e and seeing. I know Dick's reported and
• 11:01
  Speaker 1: I don't cover that, But if you think about how
• 11:04
  Speaker 1: coals commented and J. C. Penny commented about how they're
• 11:07
  Speaker 1: deepening their penetration and at leisure and the fact that
• 11:10
  Speaker 1: under Armour went and started distributing through Coals if not
• 11:13
  Speaker 1: maybe surprising that Dix is doing, you know, kind of
• 11:17
  Speaker 1: struggling today as it is, and it reminds me of
• 11:20
  Speaker 1: when I saw the success of bed Bath and Beyond
• 11:22
  Speaker 1: and Best Buy after the bankruptcies of circuit Cities and
• 11:24
  Speaker 1: Linens and things. When there's consolidation, the big guy went.
• 11:27
  Speaker 1: But then after that comes and they have to comp
• 11:29
  Speaker 1: again and figure out a way to grow, it becomes
• 11:31
  Speaker 1: very difficult. So early in the program, we were speaking
• 11:33
  Speaker 1: with Lara Ram of FS Investments and she was looking
• 11:38
  Speaker 1: at the savings rate and this really struck me that
• 11:41
  Speaker 1: the savings rate of US consumers has been declining pretty
• 11:44
  Speaker 1: steadily and it seems to suggest that people are digging
• 11:48
  Speaker 1: into their UH stockpiles of cash to go out and spend.
• 11:52
  Speaker 1: This is what's driving consumer expenditures. Does that concern you?
• 11:57
  Speaker 1: It definitely does, and I think it goes back. You
• 11:59
  Speaker 1: and I have talked about this at Link consumer credit
• 12:01
  Speaker 1: and the fact that they are rising charge off rates
• 12:04
  Speaker 1: and the retail credit cards and also maybe auto loan delinquencies.
• 12:07
  Speaker 1: And I just recently read I think it was in
• 12:09
  Speaker 1: Bloomberg that the subprime auto loans are really underwater, I
• 12:13
  Speaker 1: mean the deep, the deep subprime sometimes particularly terriby. This
• 12:18
  Speaker 1: is concerning. This is sort of the incremental customer that
• 12:20
  Speaker 1: any retailer who uses credit to fuel their sales is
• 12:24
  Speaker 1: maybe you know, maybe that's not their target customer. But
• 12:27
  Speaker 1: as you get to sort of how are you going
• 12:29
  Speaker 1: to drive sales, you get two promotions and figuring out
• 12:32
  Speaker 1: incentives to drive that traffic. So I definitely think it's
• 12:34
  Speaker 1: a concern that people are digging into their savings and
• 12:37
  Speaker 1: or using credit and not being able to pay it back.
• 12:39
  Speaker 1: And we just got Capital one earnings, and even though
• 12:41
  Speaker 1: there were some improvements in the auto loan side and
• 12:43
  Speaker 1: the credit card side, you saw a charge drops increase.
• 12:46
  Speaker 1: You're seeing that interest coverage, uh come to our net
• 12:49
  Speaker 1: coverage for these losses come down and then having to
• 12:52
  Speaker 1: boost reserves. So this speaks to your concern. Just giving
• 12:56
  Speaker 1: a forward spin to this, how are the retail colors
• 13:00
  Speaker 1: that you cover projecting future earnings? In other words, how
• 13:05
  Speaker 1: much are we going to see an ongoing kind of
• 13:07
  Speaker 1: grind upward in retail sales or not. Oh, I mean
• 13:11
  Speaker 1: I think that you might see, you know, you might
• 13:14
  Speaker 1: feel a little bit grind higher in the home improvement side.
• 13:16
  Speaker 1: So the flor In Dacores of the world home depot
• 13:18
  Speaker 1: even maybe lows, but you know, if you step back
• 13:21
  Speaker 1: and think of where they are, they might be mid
• 13:23
  Speaker 1: cycle and the housing tail wind. So then it becomes
• 13:26
  Speaker 1: a matter of, you know, how much further can people
• 13:29
  Speaker 1: renovated the home. I don't think that that's something that's
• 13:32
  Speaker 1: at risk right now, but something that I personally would
• 13:35
  Speaker 1: keep an eye on and look at the building products
• 13:37
  Speaker 1: companies and see how they are reporting. But for the
• 13:40
  Speaker 1: other companies, you know, I think they're really will have
• 13:42
  Speaker 1: to see how back to school goes. There's like that
• 13:44
  Speaker 1: there's that saying, so it goes back to school, so
• 13:46
  Speaker 1: it goes holiday. So I'd be really interested to see
• 13:49
  Speaker 1: how back to school is a cross buying. Are you
• 13:51
  Speaker 1: buying a ton of stuff for your kids to go
• 13:52
  Speaker 1: back to school no necessities? Is that? I'm like a
• 13:57
  Speaker 1: fight later. And I think holidays the test we just
• 14:00
  Speaker 1: failed for the holiday season. Just want to say that
• 14:02
  Speaker 1: on the record, But multiple retailers have already commented that
• 14:06
  Speaker 1: they think Q four will be exceptionally promotional, so it
• 14:08
  Speaker 1: depends on where their inventors told us. Promotional. That's bad thing, absolutely,
• 14:12
  Speaker 1: because unless they've planned for it and they've bought their
• 14:15
  Speaker 1: merchandise in a way that they can make some profit
• 14:18
  Speaker 1: or merchandise margin, it's going to be you know, it's
• 14:21
  Speaker 1: going to be tough for them, and you know you're
• 14:22
  Speaker 1: going to see more pressure from online retail, and you
• 14:25
  Speaker 1: know part of it. You know, what we saw maybe
• 14:27
  Speaker 1: in the online in July could have been from Amazon
• 14:29
  Speaker 1: Prime Day, So that's something else to consider. You know.
• 14:32
  Speaker 1: It's so interesting because I was actually reading this Bank
• 14:34
  Speaker 1: of America Mary Lynch Funds fund survey for August and
• 14:37
  Speaker 1: people we're talking about how they've been dramatically ratcheting back
• 14:41
  Speaker 1: their expectations for earnings going forward. In other words, we
• 14:43
  Speaker 1: might have seen already the peak earnings in this past quarter,
• 14:47
  Speaker 1: which is a little bit alarming considering, right, I mean,
• 14:50
  Speaker 1: for the most part, they haven't been that great. There
• 14:52
  Speaker 1: are always bright spots. It's not like physical stores are
• 14:55
  Speaker 1: going away and no one's shopping ever again. But you
• 14:57
  Speaker 1: have to think about where we came from from. Two
• 15:00
  Speaker 1: thousand to two thousand ten, when we really over built
• 15:03
  Speaker 1: the malls and we built multiple concepts into over a
• 15:07
  Speaker 1: thousand stores each and then you had this online come
• 15:10
  Speaker 1: and then how much can do people actually want? Maybe
• 15:12
  Speaker 1: the mindset and consumer behaviors less attached to stuff, and
• 15:17
  Speaker 1: that would be very Unamerican. Thank you so much for
• 15:21
  Speaker 1: joining us, as always a pleasure to speak with you.
• 15:23
  Speaker 1: Sima shas consumer discretionary analyst for Bloomberg Intelligence, taking a
• 15:28
  Speaker 1: look at some of the dissonance within the retail sales
• 15:31
  Speaker 1: and the earnings reports that we're getting out of retailers
• 15:33
  Speaker 1: that perhaps aren't seeing that enthusiasm. We have heard a
• 15:49
  Speaker 1: lot about the deregulation of Wall Street, or at least
• 15:52
  Speaker 1: the ongoing discussions to do so. And here was an
• 15:55
  Speaker 1: insider's look at just how regulated uh the investment industry
• 15:59
  Speaker 1: and particular is and what remains as sort of a
• 16:03
  Speaker 1: possible target for possibly tightening things up or loosening things up.
• 16:08
  Speaker 1: But with a better view than I have is Norm Champ,
• 16:10
  Speaker 1: partner within the Investment Funds group at Kirkland and ellis
• 16:13
  Speaker 1: also the former director of the Division of Investment Management
• 16:17
  Speaker 1: at the u S Securities and Exchange Commission and an
• 16:19
  Speaker 1: author of a new book, going Public, My Adventures inside
• 16:22
  Speaker 1: the SEC and how to prevent the next devastating crisis. So, Norm,
• 16:26
  Speaker 1: thank you so much for joining us. I would love
• 16:29
  Speaker 1: to get a sense from you. Are you concerned about
• 16:32
  Speaker 1: all of the talk about rolling back some of the regulation.
• 16:35
  Speaker 1: I mean, we've talked about the Department of Labor fiduciary
• 16:38
  Speaker 1: rule getting rolled back. Do you think that this could
• 16:40
  Speaker 1: make the financial system less safe? No, not at all.
• 16:44
  Speaker 1: So much of what was in Dodd Frank after the
• 16:47
  Speaker 1: crisis had nothing to do with the crisis and was
• 16:50
  Speaker 1: expanding federal government power over the financial services industry, which
• 16:54
  Speaker 1: is not something that we needed. Right. There were certain
• 16:56
  Speaker 1: things in Dodd Frank that address crisis issues, but most
• 17:00
  Speaker 1: of what was in there were political, wishless kind of
• 17:02
  Speaker 1: things that have been sitting around for a long time.
• 17:04
  Speaker 1: So I think it's important to get regulation rolled back
• 17:08
  Speaker 1: to some degree. I think you're already seeing the impact
• 17:12
  Speaker 1: of less regulation coming out of Washington, right. The Obama
• 17:15
  Speaker 1: administration passed hundred million dollar rules. That's rules that take
• 17:19
  Speaker 1: a hundred million the economy. The total number of rules
• 17:21
  Speaker 1: they did like that for that amount to more than
• 17:23
  Speaker 1: sixteen billion dollars in several years of the administration. That's
• 17:27
  Speaker 1: taken a lot of money out of the economy. Just
• 17:30
  Speaker 1: slowing that down the last six months, so basically very
• 17:33
  Speaker 1: few federal rules the last six months. I think it's
• 17:36
  Speaker 1: part of why you're seeing the economy do better because
• 17:38
  Speaker 1: you're having less overhang of all this regulation. So I'd
• 17:41
  Speaker 1: like to see them go farther and be able to
• 17:44
  Speaker 1: roll back some of the things that we're done well.
• 17:46
  Speaker 1: We've heard particular emphasis on the Vocal rule, which specifically
• 17:51
  Speaker 1: targets banks trading with their own capital. Do you think
• 17:55
  Speaker 1: that the economy would do better if we did see
• 17:58
  Speaker 1: a full rollback of that and more mission Vocal is
• 18:01
  Speaker 1: an interesting question, right. You had the American Bankers Association
• 18:06
  Speaker 1: and all the lobbying groups talking about VULCAR and how
• 18:08
  Speaker 1: terrible it was and how we needed not have it.
• 18:11
  Speaker 1: Since it's passed, and since the new administration came in,
• 18:13
  Speaker 1: I've I've heard precious little about rolling it back. You know,
• 18:17
  Speaker 1: it becomes another barrier to entry for banking. It becomes
• 18:20
  Speaker 1: another cost that smaller banks can't do. And we've had
• 18:23
  Speaker 1: almost no bank startups in the United States in the
• 18:25
  Speaker 1: last ten years, partly because of all this regulation. Uh
• 18:29
  Speaker 1: so you're not seeing much political movement around repealing vulcar um.
• 18:34
  Speaker 1: I wonder if they will attack some of these things
• 18:37
  Speaker 1: by different means. So remember, if you go back to
• 18:40
  Speaker 1: Congress and try to roll back the Vulcan provision those
• 18:43
  Speaker 1: kinds of things, where have the regulars roll it back?
• 18:45
  Speaker 1: That's going to take time, And obviously on the hill
• 18:47
  Speaker 1: right now, nothing's happening something like Vulcan though, or something
• 18:50
  Speaker 1: like the banks. I'd imagine there they might just reduce
• 18:53
  Speaker 1: the capital requirements. So if you you we took banks
• 18:56
  Speaker 1: from basically three or four percent capital pre crisis to
• 18:59
  Speaker 1: about ten percent. Now, if they just move that down
• 19:02
  Speaker 1: a bit, you're gonna have banks lending more and you're
• 19:04
  Speaker 1: gonna have more economic activity. I have a feeling they
• 19:06
  Speaker 1: might approach it that way as a trying as opposed
• 19:08
  Speaker 1: to trying to attacker. Can you give me a sense
• 19:10
  Speaker 1: of during your tenure at the SEC, what your focus was,
• 19:15
  Speaker 1: what your where you put your efforts to try to
• 19:19
  Speaker 1: make the financial system safer, and where you think things
• 19:22
  Speaker 1: went wrong. To sort of combine into the two thousand
• 19:25
  Speaker 1: and eight to baccle so the biggest thing that we
• 19:28
  Speaker 1: were working on the SEC was trying to figure out
• 19:31
  Speaker 1: how to reform money market mutual funds. So among the
• 19:35
  Speaker 1: many other crises and the fall of two thousand and eight,
• 19:37
  Speaker 1: a fund called Primary Reserve turned out woke up on
• 19:40
  Speaker 1: September twelve, YEP, and it found out that it owns
• 19:44
  Speaker 1: six fifty three million dollars worth of Lehman debt, which
• 19:47
  Speaker 1: was suddenly worth zero, right, And so that led to
• 19:50
  Speaker 1: a run on money market mutual funds. And that was
• 19:52
  Speaker 1: a big problem because many companies are alied on that
• 19:55
  Speaker 1: money and those funds to finance their operations, and suddenly
• 19:58
  Speaker 1: that money was sucked out. You had Treasury have to
• 20:00
  Speaker 1: step in and guarantee all money market mutual funds the
• 20:03
  Speaker 1: United States. They did so with a fifty million dollar
• 20:05
  Speaker 1: fund on a three trillion dollar industry. So, but confidence
• 20:09
  Speaker 1: is a funny thing, and they stopped the run. The
• 20:11
  Speaker 1: biggest thing we were working on is trying to reform them,
• 20:13
  Speaker 1: get them to have a floating net asset value so
• 20:16
  Speaker 1: that investors are more understanding of what the risks are.
• 20:19
  Speaker 1: We partially succeeded on that. We floated the institutional funds,
• 20:22
  Speaker 1: not the retail funds and not the government funds. But
• 20:24
  Speaker 1: you know, it was progress and was better than where
• 20:27
  Speaker 1: we were. Um. What really drove the crisis though, was,
• 20:31
  Speaker 1: you know, not money market funds. What drove the crisis
• 20:33
  Speaker 1: was government housing policy. Government has been and still does
• 20:38
  Speaker 1: ruthlessly and relentlessly push housing, right. We keep registrates low,
• 20:42
  Speaker 1: We guarantee mortgages with the g s s. We do
• 20:44
  Speaker 1: all that to get people into houses. It sounds great
• 20:47
  Speaker 1: to be in a house if you're someone who got
• 20:49
  Speaker 1: four closed on in two thousand nine, two thousand ten,
• 20:51
  Speaker 1: though your experience of owners ownership is not so hot. Uh,
• 20:55
  Speaker 1: And so that we've still got that going on now.
• 20:58
  Speaker 1: We are still lentlessly pushing housing. And one of the
• 21:02
  Speaker 1: tragedies of the Bomban administration is after raising the minimum
• 21:06
  Speaker 1: down payment for a mortgage right after the crisis, only
• 21:10
  Speaker 1: six years later they cut the minimum down payment for
• 21:13
  Speaker 1: a house back to three on a guarantee. More So,
• 21:15
  Speaker 1: do you think that we are just as vulnerable at
• 21:17
  Speaker 1: this point as we were leading up to the chief
• 21:19
  Speaker 1: as in a crisis. I do think banks have been
• 21:22
  Speaker 1: more conservative and who they're lending to. And you see
• 21:25
  Speaker 1: some of these the some of the securitization rules have
• 21:28
  Speaker 1: helped that and have restricted some of the real offloading
• 21:32
  Speaker 1: of the debt from bank balance sheets. So i'd actually
• 21:35
  Speaker 1: in the housing sector we're probably in a little bit
• 21:37
  Speaker 1: better shape, but you are seeing the inflation obviously the
• 21:39
  Speaker 1: stock market. That has to do with low rates, and
• 21:41
  Speaker 1: that has to do with people seeking return. Um. I
• 21:44
  Speaker 1: am concerned about what's going to happen when someday interest
• 21:48
  Speaker 1: rates go up. I have a feeling there are spots
• 21:50
  Speaker 1: in the economy where people are relying on low interest
• 21:53
  Speaker 1: rates that we probably haven't focused on yet, and if
• 21:56
  Speaker 1: we ever get real interest rates, then those are That's
• 21:58
  Speaker 1: a place where I would look for a problems. If
• 22:00
  Speaker 1: you're in the SEC today, what would be your focus?
• 22:03
  Speaker 1: So number one focus would be which the chairman. The
• 22:06
  Speaker 1: very first thing the chairman did was solicit the new chairman, J. Clayton.
• 22:10
  Speaker 1: Very first thing he did was solicit further comment on
• 22:12
  Speaker 1: the Producier rule that you mentioned earlier. And it's imperative
• 22:17
  Speaker 1: that the SEC sees back the momentum and that that
• 22:20
  Speaker 1: be the place. If there's going to be a uniform
• 22:22
  Speaker 1: standard for broker dealers and investment advisors, it should come
• 22:25
  Speaker 1: out of the SEC, not out of the Department of Labor.
• 22:27
  Speaker 1: Department Labor just doesn't understand how these firms work and
• 22:31
  Speaker 1: what's going on. It should come out of the SEC.
• 22:33
  Speaker 1: So that'd be high on my list, second on my list,
• 22:36
  Speaker 1: and I think the Chair is obviously pursuing it. Is
• 22:39
  Speaker 1: we've got to get more companies to go public in
• 22:41
  Speaker 1: the United States. Our markets are still a crown jewel
• 22:45
  Speaker 1: of the US economy. Um, but I p o s
• 22:48
  Speaker 1: are about half and on average what they were before
• 22:51
  Speaker 1: two thousand, So since two thousand verses before, and we
• 22:54
  Speaker 1: have about half the public companies we had twenty years ago.
• 22:57
  Speaker 1: Our markets are not going to stay in the leadership
• 22:59
  Speaker 1: position in unless we take some steps to help people
• 23:02
  Speaker 1: go public here, and that would include we're rolling back
• 23:04
  Speaker 1: some of the DoD FRANK things like pay ratio and
• 23:08
  Speaker 1: some of these very political disclosure items that are discouraging
• 23:11
  Speaker 1: people from going public. Norm Champ thank you so much
• 23:14
  Speaker 1: for joining US. Norm Champ Partner and the Investment Funds
• 23:17
  Speaker 1: Group at Kirkland and ellis also the former Director of
• 23:20
  Speaker 1: the Division of Investment Management at the U S Securities
• 23:23
  Speaker 1: and Exchange Commission. He has a new book it's called
• 23:26
  Speaker 1: going public, my adventures inside the SEC and how to
• 23:29
  Speaker 1: prevent the next devastating crisis. That Amazon bond sale seems
• 23:45
  Speaker 1: to be drawing a lot of investor interest, hearing that
• 23:49
  Speaker 1: the the potential bids to buy this particular debt, which
• 23:54
  Speaker 1: could end up being a sixteen billion dollar offering, exceed
• 23:57
  Speaker 1: twenty billion dollars. Here to give us a little bit
• 24:00
  Speaker 1: more sense of, first of all, just how well this
• 24:03
  Speaker 1: debt offering is probably going to be priced, and also
• 24:06
  Speaker 1: what this means for Amazon's uh fiscal structure. I want
• 24:11
  Speaker 1: to bring in Noel Hebert. He's senior US credit analyst
• 24:13
  Speaker 1: for Bloomberg Intelligence. So Noel, can you just give us
• 24:16
  Speaker 1: a sense of what your feeling is about the levels
• 24:21
  Speaker 1: that this debt is being a price that it will
• 24:24
  Speaker 1: likely be priced out later today, as well as what
• 24:27
  Speaker 1: this means for Amazon's credit worthiness. Yeah, so, I think so.
• 24:32
  Speaker 1: First of all, thanks for having me on, Lisa, and
• 24:34
  Speaker 1: and I think you know, at the front end of
• 24:36
  Speaker 1: the curve at least you know, the initial talk. You know,
• 24:38
  Speaker 1: we saw a little bit of concession or discount to
• 24:41
  Speaker 1: where Amazon's current bonds trade, So I would expect there's
• 24:44
  Speaker 1: going to be certainly a lot of demand at that
• 24:46
  Speaker 1: front end of the curve. It comes maybe pushes that
• 24:49
  Speaker 1: talk tighter later outam of the curve. When you start
• 24:52
  Speaker 1: looking at the thirty and the forty year piece, they're
• 24:55
  Speaker 1: a little bit tight to kind of where Amazon implied
• 24:57
  Speaker 1: would be. Uh so we'll see goin to have that
• 25:00
  Speaker 1: shapes up. But that longer into the curve tends to
• 25:02
  Speaker 1: be you know, as much reverse inquiry, and people started
• 25:05
  Speaker 1: needing that longer dated paper as anything else. So well,
• 25:09
  Speaker 1: no back up, because because when you say like longer data,
• 25:12
  Speaker 1: d da, da da, like, let's put this in a perspective.
• 25:14
  Speaker 1: So Amazon, a company that has completely profoundly disrupted the
• 25:18
  Speaker 1: entire retail industry, is selling bonds that mature in forty
• 25:22
  Speaker 1: years and people can't wait to buy it. And not
• 25:25
  Speaker 1: only that, but they're probably going to accept about four
• 25:28
  Speaker 1: and a half percent yields to buy this stuff, which
• 25:31
  Speaker 1: is markedly lower than where it would have been, say
• 25:34
  Speaker 1: three years ago, just based on market valuations. That's crazy. No, well, well,
• 25:40
  Speaker 1: I think compliance wouldn't like me to say crazy, So
• 25:43
  Speaker 1: let's go it's very unique. It's unique, all right, we'll
• 25:47
  Speaker 1: go with that. So we'll say, but I mean, you know,
• 25:49
  Speaker 1: a T and T just for context, right, So they
• 25:51
  Speaker 1: just came out with a piece of paper for for
• 25:53
  Speaker 1: their deal making, and you're talking about you know, about
• 25:56
  Speaker 1: two basis points over versus a hundred sixty or whatever.
• 25:59
  Speaker 1: We're talking on Amazon, so much tighter certainly to a
• 26:02
  Speaker 1: T and T, more in line than with sort of
• 26:05
  Speaker 1: some of the stuff, maybe a little bit back of
• 26:06
  Speaker 1: what we saw from like a home depot or an
• 26:08
  Speaker 1: oracle for guys that have sort of that similar, longer
• 26:10
  Speaker 1: dated stuff. But to your point, a lot more sort
• 26:13
  Speaker 1: of business volatility potentially in the long term for a
• 26:16
  Speaker 1: company like Amazon relative to a home depot. Well, could
• 26:18
  Speaker 1: you talk a little bit more about that, because with
• 26:21
  Speaker 1: respect to their balance sheet, they have been spending aggressively
• 26:25
  Speaker 1: to increase their domination across the world in various facets
• 26:30
  Speaker 1: of buying whatever. You can imagine. So you know, I
• 26:32
  Speaker 1: can imagine, I can I can see that perhaps some
• 26:34
  Speaker 1: of these expenditures will pay off. But can you speak
• 26:38
  Speaker 1: a little bit about what the uncertainties are. I think
• 26:41
  Speaker 1: there's a number of them, one not least of which
• 26:43
  Speaker 1: being is you know, as they've grown, right, they've increasingly
• 26:46
  Speaker 1: increased their increasingly increased, but they've added that fixed cost base. Uh,
• 26:52
  Speaker 1: so you're turning from sort of that sort of traditional,
• 26:55
  Speaker 1: you know e, calm, sort of low infrastructure dynamic into
• 26:58
  Speaker 1: a much more high fixed costs infrastructure, whether it's with
• 27:02
  Speaker 1: the aw s or now obviously with whole Foods, etcetera.
• 27:05
  Speaker 1: So it's really going to change the mechanics of their
• 27:07
  Speaker 1: business in terms of the capital investment that's going to
• 27:09
  Speaker 1: be required to keep all these investments going. And then
• 27:13
  Speaker 1: of course they're trying to play in just about every
• 27:15
  Speaker 1: space that's known to man, which again, some of those
• 27:18
  Speaker 1: are going to work, some of those aren't gonna work,
• 27:21
  Speaker 1: but at the end of the day, they are going
• 27:22
  Speaker 1: to be left with a fair amount of debt. You
• 27:24
  Speaker 1: don't generate a ton of profit. They generate okay, cash flow,
• 27:28
  Speaker 1: but people have to be careful about how they account
• 27:30
  Speaker 1: for that cash flow because they use capital leases pretty
• 27:32
  Speaker 1: aggressively as opposed to running stuff through capex. So that
• 27:36
  Speaker 1: kind of, from an accounting parlayan standpoint, boost the perception
• 27:39
  Speaker 1: of free cash flow. So you know, they're definitely very aggressive,
• 27:43
  Speaker 1: and not only how they approached the marketplace, but also
• 27:45
  Speaker 1: how they approach their balance sheet that said, you know,
• 27:48
  Speaker 1: you're going to be left maybe a couple of times
• 27:50
  Speaker 1: levered after this deal, depending on how much they do.
• 27:53
  Speaker 1: So it's not going to be you know, totally egregious
• 27:57
  Speaker 1: when you say a w S that's Amazon Web Serve
• 28:00
  Speaker 1: US is uh cloud, So there no problem. But I
• 28:02
  Speaker 1: think that this is an important point that you're making.
• 28:04
  Speaker 1: In other words, uh, you know, whether you're talking about
• 28:07
  Speaker 1: you know, accessing the cloud or building out your tech,
• 28:10
  Speaker 1: or whether you're talking about providing grocery services, this is
• 28:13
  Speaker 1: a very different thing than having an online bartering platform
• 28:17
  Speaker 1: for people to sort of meet and exchange their goods. Right. Also,
• 28:21
  Speaker 1: there has been talk about Amazon possibly building out their
• 28:24
  Speaker 1: own shipping and delivering systems, which also would would require
• 28:28
  Speaker 1: more expenditures. Right, Oh for sure. And I think, you know,
• 28:32
  Speaker 1: it's kind of a unique time and place, I guess
• 28:34
  Speaker 1: in corporate history, right because whether you look at these guys,
• 28:37
  Speaker 1: or you look at Tesla or Netflix or whoever it
• 28:39
  Speaker 1: happens to be, investors have been very willing in this
• 28:43
  Speaker 1: environment to fund you know, money neutral or dollar neutral,
• 28:47
  Speaker 1: cash flow neutral or cash losing operations on the prospect
• 28:51
  Speaker 1: or whatever the future growth might be um. I can't
• 28:55
  Speaker 1: really hark back to think of a time that's quite
• 28:57
  Speaker 1: like that. So for me as a credit investor, it's
• 29:00
  Speaker 1: kind of a bizarre time and place. But but to
• 29:03
  Speaker 1: your point, Yeah, the more stuff they bring in, the
• 29:05
  Speaker 1: more stuff you get a fund, and it gets harder
• 29:07
  Speaker 1: and harder to be successful at everything you do. You know,
• 29:09
  Speaker 1: we've seen even with very successful governies like Apple, you know,
• 29:13
  Speaker 1: they still don't really have a great TV platform. You know,
• 29:15
  Speaker 1: sometimes things fail. So, Nol Hubert, thank you so much
• 29:19
  Speaker 1: for that color. Noel Hubert is our senior US credit
• 29:21
  Speaker 1: analyst for Bloomberg Intelligence and my beacon of reason in
• 29:25
  Speaker 1: this odd market. Thanks for listening to the Bloomberg P
• 29:31
  Speaker 1: and L podcast. You can subscribe and listen to interviews
• 29:34
  Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 29:38
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 29:42
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 29:45
  Speaker 1: You can always catch us worldwide on Bloomberg Radio.