Latest / Bloomberg Intelligence / More Pain To Come For Grocers, As Amazon's Push Grows: Mushkin

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More Pain To Come For Grocers, As Amazon's Push Grows: Mushkin · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: you and your money, whether you're at the grocery store
• 0:18
  Speaker 1: or the trading floor. Find the Bloomberg P M L
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  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. The
• 0:34
  Speaker 1: fight over your dinner table. No, it's not between you
• 0:37
  Speaker 1: and perhaps your children or your other relatives. It's the
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  Speaker 1: fight between grocery stores to deliver the food that would
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  Speaker 1: actually end up on your table. Here to tell us
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  Speaker 1: more about the grocery store wars is Scott Mushkin's senior
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  Speaker 1: retail and staples analysts for Wolf Research. Scott, always a
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  Speaker 1: pleasure give us your sort of thoughts on the cost
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  Speaker 1: that is being borne by companies like Amazon to actually
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  Speaker 1: get the food and products to the table of their
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  Speaker 1: consumers and customers. Because that's not cheap. They say, it's
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  Speaker 1: free if you're a prime customer, but somehow, somewhere someone's
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  Speaker 1: paying for it. Yeah, it's great point, Pam, and thanks
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  Speaker 1: again for having me on. Highly says so, yeah, I mean,
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  Speaker 1: I think the challenge with consumables, and particularly those every
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  Speaker 1: day reordable items like go with toothbrush or toothpaste, high
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  Speaker 1: and deodorant. I we as consumers would like them delivered
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  Speaker 1: to our our house. Our our research shows the challenges.
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  Speaker 1: It's it's not that economical to get us to get
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  Speaker 1: us those products. And so I think there's this push
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  Speaker 1: and pull and trying to understand how the economics will work,
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  Speaker 1: what the model will be like as we go forward
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  Speaker 1: over the next five to ten years. UM and Amazon's
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  Speaker 1: you know, obviously bought Whole Foods. It's in what we
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  Speaker 1: consider the driver's seat of trying to put an omni
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  Speaker 1: channel spin on consumables. UM and we had just the
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  Speaker 1: head the announcement at of Walmart it's gonna be delivering
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  Speaker 1: from a lot of its stores. So the grocery wars
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  Speaker 1: are definitely taking place. We think they favor Amazon significantly,
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  Speaker 1: UM as they don't have and they haven't built out
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  Speaker 1: their assets there in the process of doing that, And
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  Speaker 1: for other bricks and mortar companies, it's it's tough. I mean,
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  Speaker 1: they're having to follow Amazon, who's now setting the strategic
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  Speaker 1: vision for the for the industry. All right, So I'm
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  Speaker 1: just wondering. So Amazon might have the upper hand, but
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  Speaker 1: they've tried to get into this industry before and failed,
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  Speaker 1: and this is notoriously hard hard nut to crack as
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  Speaker 1: far as food delivery and replacing brick and mortar. Do
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  Speaker 1: you think that the stock reaction which has been fierce
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  Speaker 1: with with grocers like Kroger and bankruptcy is of an
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  Speaker 1: increasing number of such companies. Do you think it's overdone
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  Speaker 1: at this point? You know, Actually I don't, uh, And
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  Speaker 1: I think the challenges we go. We look to China,
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  Speaker 1: we look to China and what Ali Bob is doing
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  Speaker 1: with Hima, and we think the purchase of Amazon of
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  Speaker 1: Whole Foods is a watershed event where what we're going
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  Speaker 1: to see, I think is a blend of an omni
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  Speaker 1: channel blend developed um And it's a darn shame because
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  Speaker 1: the stores had a huge home field advantage We've talked
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  Speaker 1: about before where people still buy almost all their fresh
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  Speaker 1: at the store um, and what we're seeing is that
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  Speaker 1: home field advantage being surrendered to the vision of Amazon.
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  Speaker 1: And I think it's going to be a like it's
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  Speaker 1: an omni channel blend and will incorporate some bricks and
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  Speaker 1: mortar stores as you've seen them by by Whole Foods UM.
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  Speaker 1: But so I think they you know, they have some
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  Speaker 1: of their best people working on this. We think they're
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  Speaker 1: going to combine Amazon Now, Amazon Fresh, and Whole Foods
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  Speaker 1: into one offering. UM. But the the idea is to
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  Speaker 1: really bring omni channel, the omni channel experience and incorporate
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  Speaker 1: stores uh into into that offering to make it a
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  Speaker 1: little bit more economical. Alright, So so far this year,
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  Speaker 1: Kroger and Walmart have lost more than thirty billion dollars
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  Speaker 1: in market value combined. Other grocers have also seen their
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  Speaker 1: shares plunge. Is there a specific company you're looking at
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  Speaker 1: that has more pain to go? So we've been pretty
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  Speaker 1: bullish on the U S economy and what's going on
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  Speaker 1: with the tax the tax cuts. We think nominal growth
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  Speaker 1: in the US has got to pick up UM. But
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  Speaker 1: that's really a short term call, short term relief for
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  Speaker 1: an industry that's under extraordinary pain and change. UM. So
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  Speaker 1: our long term vision of staples retailing, as we call
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  Speaker 1: it is is someone is very negative. And the reason
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  Speaker 1: is we think Amazon is gonna grab twenty share, up
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  Speaker 1: from less than three percent share right now, and that
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  Speaker 1: twenty share has got to come from someone well but
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  Speaker 1: but but very negative meaning how many bankruptcy is or
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  Speaker 1: how much devastation with respect to specific grocers. Well, we've
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  Speaker 1: already seen some announcements. We had wind Dixie which was
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  Speaker 1: a private company but had public debt. They did they're
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  Speaker 1: doing a pre pack UH bankruptcy tops up in UH
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  Speaker 1: in the northern part of the US. I think it's
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  Speaker 1: gonna be, you know, part of what we see. One
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  Speaker 1: of the things that we're we're we've been thinking about
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  Speaker 1: a lot is contents. You know, who has content that
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  Speaker 1: people may pay for another majority of one subscription to
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  Speaker 1: Primes you're paying a month and when that's going to
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  Speaker 1: get you as a lot, it's going to get you
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  Speaker 1: access to Whole Food now Fresh obviously all the video
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  Speaker 1: content that Amazon has. So what other retailers are set
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  Speaker 1: up with content specific to them. We actually think there's
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  Speaker 1: actually favors they're not public companies, but we think its
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  Speaker 1: favors some of the smaller private supermarkets. UH. Someone like
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  Speaker 1: h eb Down in Texas, very good grosser, a very
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  Speaker 1: good merchant and probably able to charge for delivery. The
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  Speaker 1: other company that we like is Sprouts. UH. Sprouts Farmers
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  Speaker 1: Market square footstore right and called the best pure foods
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  Speaker 1: pure play, um Natural Organic Fresh. So we like we
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  Speaker 1: like Sprouts. All the other companies public, and some of
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  Speaker 1: them are private by private equity. You know, we get
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  Speaker 1: really nervous because a lot of share is going to
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  Speaker 1: have to move in our opinion, and when that share moves,
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  Speaker 1: it's a lot of pressure. The other thing is it's
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  Speaker 1: just costing more to do business. So you know, Walmart,
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  Speaker 1: they're gonna have two thousand stores that have clicking, you know,
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  Speaker 1: clicking collect They're gonna have another eight stores delivering. That's
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  Speaker 1: all added costs and unless you're able to charge um,
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  Speaker 1: it's going to really hurt the economics of the business
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  Speaker 1: as we move forward. Thing for Kroger, you know, Scott,
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  Speaker 1: I'm surprised that that you that I'm talking to you.
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  Speaker 1: I think you're in Mississippi. I thought you'd be you'd
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  Speaker 1: be at the Shop Talk Uh trade show, because that's
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  Speaker 1: you know where a lot of the Amazon and eBay, Alphabet,
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  Speaker 1: Facebook and all these companies are given presentations about the
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  Speaker 1: future of retail. And one of the points I was
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  Speaker 1: reading about earlier is that Google is integrating the retail
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  Speaker 1: product categories like you know from Walmart or Target. With
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  Speaker 1: what they describe as the Universal Shopping Cart. They're gonna
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  Speaker 1: share the checkout page and the online payments with a
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  Speaker 1: commission pricing model. Any thoughts on it? Yeah, I mean,
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  Speaker 1: so you know, Google is basically going to start charging
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  Speaker 1: some of these retailers for their search um and again
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  Speaker 1: somewhat Amazon has an advantage here. A lot of searches
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  Speaker 1: start right on Amazon for product um and so they
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  Speaker 1: have an ecosystem that includes all of this. And so
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  Speaker 1: if you're using Google, and Google has a lot of power,
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  Speaker 1: they're going to start charging you as a retailer. UM.
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  Speaker 1: I actually think that's an advantage to Amazon UM. And another.
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  Speaker 1: The reason to fear the retailer's economics not that they're
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  Speaker 1: necessary going to go away and go bankrupt all of
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  Speaker 1: these guys, but the retailer's economics are going to be
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  Speaker 1: under pressure UM. And of course we saw today with
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  Speaker 1: an Amazon announcement that pressure tends to roll downhill to
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  Speaker 1: some of these manufacturers. So manufacturers are gonna be under
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  Speaker 1: pressure to particularly again if you don't have good content,
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  Speaker 1: if you're not you don't have things that people are
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  Speaker 1: willing to pay pay for Scott Mushkin, Thank you so
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  Speaker 1: much for joining us. Scott Mushkin, managing director and senior
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  Speaker 1: Staples retail analyst with Wolf Research normally in New York,
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  Speaker 1: but today in Mississippi. Right now the share is of Facebook.
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  Speaker 1: They are lower by five percent, the company grappling with
• 8:23
  Speaker 1: backlash over its role in spreading disinformation. Here to tell
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  Speaker 1: us a little bit more about the story and what
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  Speaker 1: the reaction and congress might be is our own technology
• 8:31
  Speaker 1: reporter Sarah Friar joining us from San Francisco. Sarah, thanks
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  Speaker 1: very much for being with us. Any updates in terms
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  Speaker 1: of the Facebook reaction to this and also reaction to
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  Speaker 1: the news that Alex Stamos, the chief information security officer,
• 8:46
  Speaker 1: is set to leave the company in August. Well, I
• 8:51
  Speaker 1: have a story today that explains how Facebook made this
• 8:55
  Speaker 1: into a crisis almost by the way it responded to it. Uh,
• 8:59
  Speaker 1: they smically by pre empting the news reports with its
• 9:04
  Speaker 1: own blog posts on Friday explaining that it was suspending
• 9:08
  Speaker 1: Cambridge Analytica. It made it seem like they had their
• 9:11
  Speaker 1: own information on Cambridge Analytica obtaining the data they didn't.
• 9:16
  Speaker 1: So now Facebook has as they're spiraling into crisis. They
• 9:20
  Speaker 1: have to show people that they don't actually know if
• 9:23
  Speaker 1: the reports are true on their end, so they can't
• 9:25
  Speaker 1: take stronger action or have Mark Zuckerberg or Cheryl Sandberg
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  Speaker 1: speak until they have completed an internal audit. So they
• 9:33
  Speaker 1: really put themselves in this really difficult position that they
• 9:38
  Speaker 1: didn't need to be in, where they're sort of trying
• 9:41
  Speaker 1: to undo some of the weight that they gave to
• 9:44
  Speaker 1: the reports by pre empting them. So, Sarah, is this
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  Speaker 1: why the shares are down so much? Because the botched
• 9:51
  Speaker 1: response suggects to suggests a vacuum of either leadership or
• 9:57
  Speaker 1: appropriate response thought in the c suite? Or is it
• 10:02
  Speaker 1: sort of a game change, or now that the FTC,
• 10:04
  Speaker 1: the Federal Trade Commission is getting involved and President Trump
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  Speaker 1: also commenting and saying just this morning that all Americans
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  Speaker 1: should expect privacy of data. I think that there's a
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  Speaker 1: number of factors. I think Facebook made this a big story,
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  Speaker 1: in part by taking action before the story happened. Um,
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  Speaker 1: But I do think that this is a moment in
• 10:29
  Speaker 1: in all of Facebook news where people look at it
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  Speaker 1: the way things have worked in they're starting to say, wait,
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  Speaker 1: this is not good, this is not helpful for our
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  Speaker 1: users of these products that are so dominant around the world,
• 10:43
  Speaker 1: So we need to start asking questions about the way
• 10:46
  Speaker 1: it's always worked. Facebook's um stands here is that this
• 10:50
  Speaker 1: is this is a problem that's sort of been resolved
• 10:53
  Speaker 1: by an update they made, uh that they have you know,
• 10:59
  Speaker 1: they have to degraize this is actually true audited. Nobody
• 11:03
  Speaker 1: trusts them anymore. We have people calling for Zuckerberg or
• 11:07
  Speaker 1: Sandberg to testify in front of lawmakers on both sides
• 11:10
  Speaker 1: of the Atlantic. The sec is down falls. This is
• 11:13
  Speaker 1: a point where people are saying that they don't expect
• 11:17
  Speaker 1: that Facebook will have usn best interest in heart when
• 11:20
  Speaker 1: they when they go and try to solve these problems
• 11:23
  Speaker 1: on their own and then reassure the public that they've
• 11:25
  Speaker 1: done so. Sarah, maybe you could just also speak to
• 11:28
  Speaker 1: the perhaps confrontation or the constant back and forth between
• 11:35
  Speaker 1: those people at Facebook who are more eager to look
• 11:40
  Speaker 1: at ways to make money than those who are fighting
• 11:43
  Speaker 1: for the protection of data and information that has been
• 11:48
  Speaker 1: voluntarily entered into the Facebook system by users. So basically
• 11:54
  Speaker 1: saying that the information that was accessed by Alexander Cogan,
• 11:59
  Speaker 1: the creator of this personality app, he that he didn't
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  Speaker 1: in a way that was valid per Facebook policies at
• 12:07
  Speaker 1: the time, which allowed people to give information not to
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  Speaker 1: some themselves but on their friends. So two and seventy
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  Speaker 1: thousand people using the app resulted in information on fifty
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  Speaker 1: million people. Facetoos doesn't allow that anymore, but further policies
• 12:21
  Speaker 1: at the time that was routine. And um, what people
• 12:25
  Speaker 1: are saying now is is okay, we understand that you
• 12:28
  Speaker 1: change those policies Facebook, but did you ever look into,
• 12:32
  Speaker 1: you know, once these third parties received data on white
• 12:36
  Speaker 1: floss of people, did you ever look into whether they
• 12:38
  Speaker 1: were doing right by it? Didn't protecting it? Of course,
• 12:42
  Speaker 1: in this case, Alexander Cogan gave that data to Cambridge Analytic,
• 12:47
  Speaker 1: to which the users had not agreed to. And there's
• 12:50
  Speaker 1: a big question here about like, how how does Facebook
• 12:53
  Speaker 1: audit these relationships with third parties and the company you know,
• 12:59
  Speaker 1: I don't know. Sincesarily think it's an odds with their
• 13:01
  Speaker 1: business model. I mean, their business model is all about
• 13:04
  Speaker 1: making sure that the information that people give Facebook, uh
• 13:09
  Speaker 1: their demographic information, their interests, their groups that they've joined,
• 13:12
  Speaker 1: all that information can be used with marketers to target them.
• 13:16
  Speaker 1: Add that's like, that's like the promise of the free Internet, right,
• 13:19
  Speaker 1: you get the internet for free. These companies get your
• 13:22
  Speaker 1: data and they get to target you add based on
• 13:24
  Speaker 1: that data. Um, advertisers, I spoke to one last night.
• 13:28
  Speaker 1: They actually want Facebook to show users that they are
• 13:32
  Speaker 1: good with their data privacy. Advertisers don't want to be
• 13:36
  Speaker 1: advertising on a service that users have a bad feeling about. Um,
• 13:40
  Speaker 1: it's not going to be good for their business. And
• 13:43
  Speaker 1: I would, well, you tell me. I mean, with the
• 13:46
  Speaker 1: revelation that Alex Stamos is gonna be leaving the company
• 13:48
  Speaker 1: in August, Uh, didn't he lead a group of engineers
• 13:52
  Speaker 1: that found out in June of that and that was
• 13:55
  Speaker 1: the month of Democratic National Committee announced that it has
• 13:58
  Speaker 1: been attacked by Russian hackers. They said, yeah, there's a
• 14:01
  Speaker 1: lot of Russian activity and that they actually had people
• 14:03
  Speaker 1: paying for these fake accounts. Yeah. I actually I was
• 14:08
  Speaker 1: speaking with the head of news Feed in August of
• 14:10
  Speaker 1: that year and he said, oh, yeah, we've been starting
• 14:13
  Speaker 1: to look into misinformation on Facebook and the spread of it.
• 14:17
  Speaker 1: I mean, the company was starting to see the signs.
• 14:20
  Speaker 1: Just remember Facebook's position at that time. The company was
• 14:24
  Speaker 1: responding to a controversy over its its news curation, that
• 14:31
  Speaker 1: it may be silencing conservative viewpoints. So the the company,
• 14:35
  Speaker 1: the company's reaction to crises is very, very reactionary. They
• 14:40
  Speaker 1: don't want any bad news out there. They want everyone
• 14:42
  Speaker 1: to feel like they are this unbiased rap for anything, seraphire,
• 14:47
  Speaker 1: We're gonna have to leave it there. Thank you so much,
• 14:48
  Speaker 1: and thank you for all of your fantastic reporting. Sarah
• 14:51
  Speaker 1: Fryar is a technology reporter for Bloomberg News trade tariffs
• 15:09
  Speaker 1: and China. I'm here to help us understand the current
• 15:11
  Speaker 1: situation and what is likely to unfold this week. Is
• 15:14
  Speaker 1: Andrew Mayetta. He is our global economy reporter for Bloomberg News.
• 15:19
  Speaker 1: He can be followed on Twitter at a Mayeta and
• 15:22
  Speaker 1: he joins us from our nine one studios into Washington,
• 15:25
  Speaker 1: d C. Andrew, thanks for being with us. Maybe just
• 15:28
  Speaker 1: bring everyone up to date on what is going on
• 15:30
  Speaker 1: between the United States and China as it relates to
• 15:34
  Speaker 1: trade in tariff wars. Sure, so, the US Administration has
• 15:39
  Speaker 1: been investigating whether China basically disregards US intellectual property and
• 15:45
  Speaker 1: forces American companies to transfer technological know how to the Chinese,
• 15:51
  Speaker 1: and that investigation is nearing a close. Report has been
• 15:56
  Speaker 1: submitted to the president, and he's considering a number of
• 15:59
  Speaker 1: different options, including UH sixty billion dollars in tariffs on
• 16:03
  Speaker 1: Chinese products. All Right, Andrew, I was struck by a
• 16:07
  Speaker 1: top headline today on the Bloomberg Terminal about how China
• 16:10
  Speaker 1: is pledging not to interfere or violate intellectual property rules
• 16:16
  Speaker 1: with any foreign companies coming to the nation, basically saying, guys,
• 16:21
  Speaker 1: let's just work this out. We're not going to do
• 16:23
  Speaker 1: anything bad. Please trust us. Does that Does that work?
• 16:27
  Speaker 1: Does that fly? I think Larry Cudlow, who just replaced
• 16:31
  Speaker 1: Gary Cohen, is going to say this is positive, this
• 16:35
  Speaker 1: is encouraging. We should work with this. We should sit
• 16:38
  Speaker 1: down at the negotiating table where the world's two biggest economies.
• 16:42
  Speaker 1: You know that global recovery is actually going pretty well.
• 16:45
  Speaker 1: Let's not mess this up. I think Peter Navarro is
• 16:48
  Speaker 1: going to say, these guys have made promises before, they
• 16:52
  Speaker 1: haven't lived up to them. They've been making promises since
• 16:54
  Speaker 1: two thousand one, since they joined a w t O
• 16:57
  Speaker 1: and talk is cheap. Well, Andrew, can you give us
• 17:01
  Speaker 1: some specific examples of products that might be hit with
• 17:06
  Speaker 1: these kinds of tariffs. I mean I was looking at
• 17:08
  Speaker 1: things like textiles, and the details there are really astounding
• 17:13
  Speaker 1: because it, you know, it really goes everything from the
• 17:15
  Speaker 1: kind of fabrics that you might use in uh, clothing,
• 17:19
  Speaker 1: to the kinds of products that boy I mean, uh,
• 17:23
  Speaker 1: you'd never you know, whisk brooms, ethel alcohol, milk and cream, olives, tuna.
• 17:28
  Speaker 1: I mean, it is a dizzying array of products. Yeah.
• 17:31
  Speaker 1: My understanding is they're looking at everything from shoes, apparel,
• 17:37
  Speaker 1: travel goods, so we're talking luggage to you know, higher
• 17:41
  Speaker 1: end consumer electronics. I understand that one way USCR is
• 17:46
  Speaker 1: looking at it is they're taking China's own economic plan,
• 17:51
  Speaker 1: the made in China Plan, and they're looking at areas
• 17:56
  Speaker 1: of technology that China is trying to lead in and
• 18:00
  Speaker 1: they're trying to target those areas for tariffs. All right,
• 18:04
  Speaker 1: So one thing, as we are watched the headlines coming
• 18:08
  Speaker 1: out of the G twenty meeting in Buenos Aires, uh,
• 18:11
  Speaker 1: in Argentina that's ongoing right now, there actually is a
• 18:15
  Speaker 1: greater call for trade, free trade and trade tariffs loosening
• 18:21
  Speaker 1: or any other restrictions being sort of released among countries
• 18:25
  Speaker 1: other than the US. Can you talk a little bit
• 18:28
  Speaker 1: about that and how much that could potentially offset talk
• 18:31
  Speaker 1: of a trade war, tariffs or other rhetoric that we're
• 18:34
  Speaker 1: hearing out of the White House. Yeah, I think that overall,
• 18:38
  Speaker 1: actually the situation for the global economy and trade volumes
• 18:43
  Speaker 1: is pretty positive. UM. For the first year in a
• 18:46
  Speaker 1: long time, trade growth and trade volumes actually outpaced growth
• 18:52
  Speaker 1: in in overall outputs. In other words, trade resumed being
• 18:55
  Speaker 1: an engine of global growth. So so things are actually
• 18:59
  Speaker 1: going well, and I think that most countries in the
• 19:01
  Speaker 1: world don't want a trade war. What's unusual about the
• 19:05
  Speaker 1: situation is you have the US, which has been kind
• 19:08
  Speaker 1: of at the vanguard of creating the current global training system,
• 19:13
  Speaker 1: basically trying to blow it up from within UM and
• 19:16
  Speaker 1: pushing for major changes. And you have China, which for
• 19:20
  Speaker 1: years has kind of been seen as a pariah, pushing
• 19:22
  Speaker 1: for the status quo. So how exactly that equilibrium works
• 19:26
  Speaker 1: out at a place like the G twenty, It'll be
• 19:29
  Speaker 1: interesting to see how it works out. Andrew any any
• 19:32
  Speaker 1: word or any any inkling of how does it work
• 19:35
  Speaker 1: out between the United States and let's say, Canada and
• 19:38
  Speaker 1: Mexico in terms of exemptions on some of the already
• 19:41
  Speaker 1: announced tariffs. Well, Canada and Mexico have been excluded from
• 19:46
  Speaker 1: the steel tariffs that President Trump announced earlier this month. Um,
• 19:52
  Speaker 1: but President Trump, as kind of is his want, has
• 19:55
  Speaker 1: added um a condition to it. He's basically said, look,
• 20:00
  Speaker 1: your exclude for now. I'm recognizing your important security partners,
• 20:04
  Speaker 1: but I want a good NAFTA. And if you don't
• 20:06
  Speaker 1: give me a good NAFTA, then you know that that
• 20:09
  Speaker 1: exclusion could go away. So that it's kind of creating
• 20:12
  Speaker 1: a bit of a storm hanging over the NAFTA talks. Well,
• 20:16
  Speaker 1: we're gonna have to wait and see what happens. But boy, Andrew,
• 20:19
  Speaker 1: I think you're gonna end up in the nitty gritty.
• 20:20
  Speaker 1: I mean, I've been looking at things like the commissioned
• 20:22
  Speaker 1: voting on things like rubber bands from China, Sri Lanka,
• 20:25
  Speaker 1: and Thailand, as well as digital video receivers. So it
• 20:29
  Speaker 1: really just covers the you know, an entire encyclopedia of
• 20:34
  Speaker 1: products and services, encyclopedia of agencies that have to weigh
• 20:37
  Speaker 1: in on this, which is going to be a part
• 20:39
  Speaker 1: of the issue getting all of them to agree on
• 20:40
  Speaker 1: on rubber bands. And you know, I'm gonna follow you
• 20:43
  Speaker 1: know what I'm gonna do. I'm gonna follow Andrew Mayetta
• 20:45
  Speaker 1: on Twitter. Follow you back. Okay, Andrew Mayetta, our global
• 20:49
  Speaker 1: economy reporter for Bloomberg News, joining us from our ninety
• 20:52
  Speaker 1: nine one studios in Washington, D C. And uh, well,
• 20:56
  Speaker 1: we'll have to see what happens to the rest of
• 20:57
  Speaker 1: the week. Sixty billion dollars potential hit to two trades.
• 21:17
  Speaker 1: We do have a Federal Reserve meeting that is underway
• 21:20
  Speaker 1: in Washington, D C. And will conclude tomorrow, most likely
• 21:24
  Speaker 1: with an additional rate hike. Here to talk about what
• 21:27
  Speaker 1: we can expect and what we ought to be paying
• 21:29
  Speaker 1: attention to, is Ira Jersey, chief US interest rate strategist
• 21:33
  Speaker 1: for Bloomberg Intelligence. Ira, let's start by taking a temperature
• 21:38
  Speaker 1: of debt markets. What are they expecting j Powell to
• 21:42
  Speaker 1: do tomorrow in his first press conference as chairman of
• 21:46
  Speaker 1: the Federal Reserve. Yeah so so a like you mentioned, Lisa,
• 21:50
  Speaker 1: a hike is all but baked in the cake here. Um,
• 21:53
  Speaker 1: the shock would be if they didn't hike. Actually, we're
• 21:56
  Speaker 1: now a price for hike tomorrow. Um. The other was
• 22:00
  Speaker 1: saying that the market's going to be looking for is
• 22:03
  Speaker 1: will some of the hawk is comments that J Pale
• 22:05
  Speaker 1: made during the Humphrey Hawk and testimony, and a number
• 22:08
  Speaker 1: of others have have hinted at will that UM show
• 22:11
  Speaker 1: up in the summary of Economic projections that are also
• 22:13
  Speaker 1: be released with the statement tomorrow, and uh, and then J.
• 22:16
  Speaker 1: Powell will have to kind of describe them in more
• 22:19
  Speaker 1: detail during his press conference. Because the market is now
• 22:22
  Speaker 1: pricing for five hikes by the end of ten and
• 22:24
  Speaker 1: I think that that's pretty Uh, that's pretty interesting because
• 22:27
  Speaker 1: when we talked just a couple of weeks ago, the
• 22:30
  Speaker 1: market was only pricing for four, so we were pricing
• 22:32
  Speaker 1: in a full other hike now over the next year
• 22:35
  Speaker 1: and a half or so. Alright, what if you could
• 22:37
  Speaker 1: bring into this conversation the global issues having to do
• 22:41
  Speaker 1: with the reduction and quantitative easing Because European Central Bike
• 22:46
  Speaker 1: President Mario drag announcing that he's going to phase out
• 22:50
  Speaker 1: those monthly asset purchases by the end of yeah. So
• 22:54
  Speaker 1: so I think the ECB action is is kind of realistic,
• 22:58
  Speaker 1: but they're trying to temper that with UM, you know,
• 23:01
  Speaker 1: saying look, we're gonna we're gonna stop our asset purchases.
• 23:03
  Speaker 1: We're gonna try to avoid a taper tantrum, and so
• 23:05
  Speaker 1: far they kind of have. Um. I think we had
• 23:07
  Speaker 1: our taper tantrum for for that last June UM. But
• 23:12
  Speaker 1: but by saying that, hey, we're still not going to
• 23:14
  Speaker 1: hike for a very long time, I think that that's
• 23:16
  Speaker 1: tempered the expectations of of how steep the yield curve
• 23:19
  Speaker 1: can get in Europe. And and that is the one
• 23:21
  Speaker 1: thing that could probably significantly steep in the U S
• 23:24
  Speaker 1: yield curve is um is if if European rates back
• 23:28
  Speaker 1: up quite a lot. So he's still very low interest
• 23:30
  Speaker 1: rates in Germany and a lot of developed Europe, and
• 23:33
  Speaker 1: if those were to move forty sixty basis points, those
• 23:36
  Speaker 1: would have significant, uh knock on effects to US rates.
• 23:39
  Speaker 1: But so far it's been um pretty orderly at least,
• 23:42
  Speaker 1: you know, you've seen a little modestly higher rates, but
• 23:44
  Speaker 1: they haven't really spiked higher like they did last June
• 23:48
  Speaker 1: when he first suggested that that that quantitative easing might
• 23:51
  Speaker 1: be coming to an end. Okay, now take that possibility
• 23:55
  Speaker 1: of the effects of reduction in asset purchases by the
• 24:00
  Speaker 1: European Central Bank, and how do you factor in the
• 24:05
  Speaker 1: risk that Shinzo abe prime Minister of Japan. He's got
• 24:09
  Speaker 1: a political scandal that he's dealing with, and that could
• 24:12
  Speaker 1: also affect what the Governor of the Bank of Japan Kuroda,
• 24:17
  Speaker 1: is forced to do. They may be thinking about unwinding
• 24:21
  Speaker 1: their stimulus stimulus package. Yeah, so I think, you know,
• 24:24
  Speaker 1: Japan is an interesting case because it's it's been a
• 24:27
  Speaker 1: long time since the since the actions within domestically within
• 24:31
  Speaker 1: Japan have really played out on a global horizon. Um,
• 24:35
  Speaker 1: you know, it's certainly affected the yen and versus the
• 24:38
  Speaker 1: euro and the dollar. It's affected um, you know, Japanese
• 24:41
  Speaker 1: rates obviously keeping uh with the Bank of Japan saying hey,
• 24:45
  Speaker 1: we're going to keep our tenure rates near zero and
• 24:47
  Speaker 1: we're going to buy whatever we need to do that. Um.
• 24:50
  Speaker 1: It's it's it's very unclear what would happen if they
• 24:54
  Speaker 1: let their tenure rates they go up from you know,
• 24:57
  Speaker 1: ten twelve basis points up to uh yeah, well right
• 25:01
  Speaker 1: now is at four, but up to say fifty or
• 25:03
  Speaker 1: sixty basis points. Would that have a knock on effect globally?
• 25:06
  Speaker 1: And it's it's less clear what the what the relationship
• 25:10
  Speaker 1: of the Japanese market is to the rest of the world,
• 25:13
  Speaker 1: and I suspect it will be less men um some
• 25:16
  Speaker 1: people fear so I I want to focus on something
• 25:19
  Speaker 1: that is happening. It's not a potential, and it's actually
• 25:22
  Speaker 1: raising a lot of eyebrows. We've talked about this before,
• 25:24
  Speaker 1: the gapping outspread between libr and o I S translation,
• 25:28
  Speaker 1: the cost of borrowing dollars has surged even related even
• 25:34
  Speaker 1: when compared with the Overnight Index swap rate, which is
• 25:38
  Speaker 1: basically the FEDS rate. This is generating a lot of
• 25:44
  Speaker 1: eyebrows being raised and questions. We've talked about it. You
• 25:47
  Speaker 1: don't think it's banking stress, you don't think it's much
• 25:49
  Speaker 1: to worry about. But City Group came out with a
• 25:51
  Speaker 1: report that said that there are real world negative consequences
• 25:56
  Speaker 1: from this increase in libor, which really is a mark
• 26:00
  Speaker 1: for trillions of dollars of us. It's do you agree, yeah, Well,
• 26:03
  Speaker 1: for sure, it's raising the borrowing costs for anyone who
• 26:06
  Speaker 1: borrows at a floating rate. In particular, UM, this is
• 26:09
  Speaker 1: raising the cost. So this could be raising the cost
• 26:12
  Speaker 1: for people who have mortgages that are going to reset soon,
• 26:15
  Speaker 1: for example, and if those reset the librar, it's certainly
• 26:18
  Speaker 1: affecting people who have credit card debt that's based on
• 26:22
  Speaker 1: on live war and and anyone who issues floating rate
• 26:24
  Speaker 1: notes that are again live war based. Now what's interesting
• 26:27
  Speaker 1: is that a lot of live a lot of floating
• 26:29
  Speaker 1: rate note issuance UM is so so companies that issue
• 26:34
  Speaker 1: these floating rate notes, a lot of them swap those
• 26:36
  Speaker 1: back into fix So what they do is, especially when
• 26:39
  Speaker 1: interest rates were lower, So anyone who issued, say a
• 26:41
  Speaker 1: year or two ago, when interest rates are very low,
• 26:44
  Speaker 1: they might have issued a floating rate note because it
• 26:46
  Speaker 1: was cheap financing, because investors said, I don't want to
• 26:48
  Speaker 1: buy fixed rate debt when treasury yields are at one
• 26:51
  Speaker 1: and a half percent, so but I'm happy to buy
• 26:53
  Speaker 1: a floating rate note because that protects me when the
• 26:55
  Speaker 1: FED starts to hike. But then um, but then those
• 26:58
  Speaker 1: companies then do an interest rates up that flots it
• 27:02
  Speaker 1: back in the six So it's probably not it's it's
• 27:05
  Speaker 1: not like there's a systemic risk here, but for some borrowers, certainly,
• 27:08
  Speaker 1: it's increasing um their cost of borrowing a little bit more.
• 27:12
  Speaker 1: It's kind of like another two Fed hikes have happened
• 27:14
  Speaker 1: for borrowers who who tend to borrow against lieboard. Thanks
• 27:18
  Speaker 1: very much for being with us. Ira Jersey is always
• 27:21
  Speaker 1: an expert when it comes to interest rates. He's our
• 27:22
  Speaker 1: chief US interest rates strategist for Bloomberg Intelligence. Thanks for
• 27:30
  Speaker 1: listening to the Bloomberg P and L podcast. You can
• 27:33
  Speaker 1: subscribe and listen to interviews at Apple Podcasts, SoundCloud, or
• 27:37
  Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm on
• 27:40
  Speaker 1: Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 27:44
  Speaker 1: It's one before the podcast. You can always catch us
• 27:47
  Speaker 1: worldwide on Bloomberg Radio