Holidays Sales Remain Strong Despite Inflation Numbers

or Bloomberg dot com. You can also listen to our radio show at the two pm Eastern time on Bloomberg Radio or stream us live on YouTube and Bloomberg dot com. With us, we've got a great force. James Demmert his chief investment officer in Main Street Research roughly to billion dollars in assets under management, and it joins us via zoom here in the United States. So James, good to have you here with all of us. Um, how do you think about We've just got a few more days

left here in two that China news. Does that dramatically change your thoughts for happy holidays? Um? You know it doesn't. And I think that this is the you know, the hallmark of two is the markets continue to fool themselves. That the fete is done, China is going to reopen, uh Inflation is coming down faster than expected, and it's this classic bear market rallies, you know, with this head

fake that we've been going through throughout the year. So I don't don't you know, in our research suggests that this bear market. Yet we've made a lot of progress, you know, I'd say we're two thirds of the way through it. But the evaluation of equities versus what's going on with FED policy and the economy, there in dis equilibrium and that needs to be brought together. And let me think it probably happens in the first quarter, right before we start a new business cycle on a new

pool market. Well what's the catalyst for that, though, James? I mean when we talk about sort of what sort of gets us to that equilibrium? Is it a fat pause is at that pivot that everybody is waiting for, or is it something else? Thank you? I don't think it is as clear as as people like it to be.

And I think you could go back to a metric that we use often when when the fete is in this goal, which is you really want the FED funds rate, which is now what for and change to be closer to the inflation rate, which is seven, so we're far away, So that would be one metric I would look at and say, you know, those two, those two have to come together. Now. That can happen with time, and I think maybe a few months might do it, or it can come with prices, right, Inflation could come down faster

than expected. So any of those things could cause the FED to be less determined. But we know from their last meeting they made it very clear they are determined to try to get to two, which we frankly think is a recession without question. I mean, you were far from to at this point, so they would really have

to bring the hammer down and they may. And I think that's why equity investors need to understand it isn't over yet with the bear market now the bullmark is not far but price wise, it could be painful before well how painful because I know that you and the team expect that the market will bottom, perhaps in the first quarter of How deep is that bottom, How painful is it going to be? And what kind of bull market are we expecting in an era of higher rates.

I think those are great questions and and there's there's something that you want to make a New Year's resolution about to bring that up. You meditation, do it right if you've owned test of stock or the sp whatever, use risk management tools and stop losses and all that stuff. As we go towards the end of this bearer market, and you know, think about it this way. We think the odds of a mild recession are very high and something deeper possible. So if that's the case, look at

market history. Indexes typically fall somewhere between thirty eight and depending upon which case you want to look at, at our worst case, what we were down twenty in the large indexes. So we really haven't even if we go back to the old low gotten valuations to where we normally see a real bottom. And I think on top of that, you just haven't seen investor's sentiment get to those levels. Also that you know, you sort of want to say, hey, valuations, sentiment is awful. This is probably

marking that bottom that we're looking for. And again, yes, we're looking for in the first quarter of the year. The cool thing is, at least we do think it's cool as as finance geeks, is that the new bowl market. Another new Year's resolution you don't need to be as heavily in technology, and I think that that's really going to be important. I've heard that before, only from people to come roaring back into technology. Having said that, James, you've seen a lot of market cycles, more than three

decades worth. Uh Barns has singled you out as a top advisor ranking. Um, that's a good place to be and it means you know, you've made some really good market calls. So in terms of this market environment, does it remind you of another how do you see it? Is it very opportunistic for investors at this point? Or another difficult one and just got about a minute or some minute thirty. Yeah, I think it's always there's always

an opportunity. I mean, you know, if you if you owned you know, the healthcare companies as we have the consumer stables this year, those were great opportunities and they continue to work and I think that's that's what's important. Is this a classic bear market? Absolutely, this is just a normal process. We're going towards a new business cycle. We're getting rid of the old one. It's based on inflation.

The inflation will be put away. It's already working and once that's done, We're going to start a new business cycle new Boomark. It's very exciting. I think is gonna be a great year. Maybe not so good at the beginning, but gonna end lovely. All Right, we'll be interesting to check back in with you next year as we work our way through. I guess whatever we're working our wait through. James, have a wonderful New Year's. If we don't here, talk

to you before then. James Demer there helping to kick off today's program, Chief investment officer over at Main Street Research. Please sees Bloomberg Business Week with Carol Massier and Tim Stinebec on Bloomberg Radio. And let's talk to Jeanette Guarantee. She's managing director and she's chief economist Robertson Stephen. She joins us today from Menlo Park, California. Janette, good to

have you here on this Tuesday. The economic news that we got today, what in particular stands out for you, Well, actually, the trade deficit, the trade and numbers are really really interesting. Um, it was a big narrowing of the trade deficit. It was the largest a little bit more than decline in

the trade deficit that we've seen in years Uh. And the lowest trade deficits since the end of and it it shows up, it comes to pass because of a decline or deceleration and exports excuse me, and the import import exports went down as well, but not as much. And and that fits this narrative that the US consumer is pulling back on goods and services. Manic, that is what you would expect to see. But it's a notable number.

I realized we're focused a lot on China this morning for all the obvious reas but but there's also slow down going on out Oh yeah, John, I'm totally on board with you. When I saw that drop, I was something like seven eight percent here. Uh. And obviously this

is just one data point. But I am curious that when you sort of look at your experience over the years, over the decades, when we start to see these types of numbers come down, important numbers come down here, is that typically indicative of economic pain or economic pressures or is there something else at work? Uh? Well, you know it can be moved around these days by things like

oil prices and and and energy flows, commodity flows. But I think in this case, i'd say at the time when you see a movement like this, it almost always traces back to the U S. Consumer consumer spending rising a lot. You tend to get an expansion of the

trade depth sit and and the opposite happens as well. Um, so I I you know, I it's it's an interesting, big story, but I think for many of us it's it's a confirming signal on the some of the slow downs that we've been saying in November entrest to October on the consumers spending side. Again, much of that concentrate on goods and services. The other the other issue in play has already been referenced by your previous speakers, which is the order book for businesses is moving all around.

You know. That's that's notable to Jeannette, though, isn't isn't this what the FED wants to see? Isn't this what Jerome Powell wants to see? A pulling back so inflation will leave, so it'll come under control. Uh? Yeah, you know what does Chairman Powell want to see these days? He seems to want to see a pullback and employment. So yeah, you know he's not going to go out there and say I want to see the economy decline

that's not really what he wants to say. So what he's saying is I want to see a pullback and employment, he's not really tracking it to. Okay, can you tie this data to employment at all? Then? Ah, well, you know, this is a remarkable economy on the employment side. Uh. The the employment numbers which will come out on January six for the month of December will be very very interesting to watch, but I don't think they're gonna show

a lot of pullback yet. Maybe the most interesting month is going to be January because that's when the decisions of businesses to cut labor force really will come into play. So we'll see like there's still yeah, there's still a lot of help wanted signs out there. And what's interesting is I'm just looking at the nuances of the data. Imports of consumer merchandise have fallen from a record earlier this year, they still there remain well higher than the

pre pandemic average, so they are high. So we need some perspective. I mean, how much of this data point potentially is inventory worked at, you know, working down some of these inventories. We're seeing that with the retail space, no doubt about that. And also just again for US consumers, they're shifting from good goods excuse me, to services specifically. So I do wonder about the nuances of this data.

Absolutely great points and especially inventories. I I think when we look at some of the numbers that are being reported out from some of the real time GDP trackers that show very strong growth in in the third in the fourth quarter here, some of that is inventory bill that occurred in October that is still a reflection of the the weirdness of the supply chain. You know. Finally, as the supply chain improves, you start to get these

orders coming in, they go into inventory. But I think we start to see in this month and already at the end of November some draw down in those inventories and and so that's definitely a factor. I want to get your thoughts here about what we've been seen in the housing market. I mean, obviously the effects of what the FED has already been seen there and we continue to see significant drops in home prices or home price growth, I should say, uh, including the most recent data that

we got this morning. The sense here that maybe certain things have been right size Are you seen it that way? Um? Maybe starting to get right sized. I don't think we're there yet. That that case Chiller number that we've got this morning, the way it's calculated, it has a big lag in it. It's really looking backwards in a significant play. I think there's going to be quite a bit more

in the way of price declines. Building permits have fallen on this thirty percent in the United States since June, and and so the home building is going to fall off. That's where the Fed interest rate impact is really hitting. Signod and and I and we cannot underestimate the degree to which home sales dry soon. We're spending and even sir visiness, landscaping, all this kind of stuff get gets tied to that. So it's a it has a big

impact on the economy. Yeah, absolutely well said and really great to catch up with your great insights here out of Jeanette Garrity, Managing Director and chief Economists over Robertson Stephen Please sees Bloomberg Business Week with Carol Massier and Tim stinebec on Bloomberg Radio. No better person to have this conversation within. Dana Telsea joining us right now in studio. She's the founder and CEO of the Telsea Advisory Group of brokerage firms serving customers worldwide. I have a lot

of questions here, Dana, so let's start overall. I'll give you. I'll give you the easy one. I mean, I think the National Retail Federation said something like six growth in holiday shopping. That was their projection. Are we going to hit that? Are we going to exceed that one? Well, look, we already heard MasterCards number this morning from November one December.

The seven point one percent a little bit lower than there's seven point six percent forecast, but compared to the eight and a half percent last year, which was a great year last year, it's still up. Was it really flattish if you include inflation? Probably, but the consumer is much more stress this year than they were last year,

not having the same amount of dollars from stimulus. And you have the high end on the luxury side impacted by housing in a volatile stock market, and even we're seeing the luxury growth rate moderate from what it was. It's a decent season. Retailers have product to move and consumers are going to get a bargain this week. Well, we were already seeing it from Target there marking down

and things I think so. I mean, so how do you net net it like at this point, because it sounds like there's a lot of caveats in which there are. And the reason why we may have a good increase what it means to the margins the bottom line is different than a percentage increase. And I think we're going to see retailers have leaner inventories. But could the margins be negatively impacted? Yes, And I think next year and we as we go three just a couple of days away.

I think the focus is on expecting the unexpected and it requires agility. So I think we're gonna have a tough first half of the year. I think we'll have a better second half of the year. And these retailers, who can be the cleanest on inventory is going to be who wins the day. So what's the unexpected to

expect in the first part of the year. I think the positive surprise would be a consumer that's stronger than expected, where you have look at the jobless rate and you have people going to work again, the labor costs are running higher, so are they're going to invest in discretionary goods not just experiences? The negative part of it is you look at the retailers who are still going to have over inventory and we're going to have margin pressure in the first half of the year. It's it's it's

up in the air right now. I am curious about the agility where that comes from, specifically on the inventory level, because one of the reasons why they're in this situation is is that the inventory supply chain. I don't care how well you're running your company right now, it is still broken. And so I'm just wondering, how did they do that, How do at least the good companies, how

do they find that agility. Well, one of the things that we're seeing is when you think about the ordering patterns for the first half of twenty three, on average, many the wholesale accounts are ordering down ten to the reason why to get some pricing power back. And when you think about this consumer overall, if we have a stock market that's even a little bit steady, that'll help us.

Balance sheets are pretty strong. One of the interesting things I was at one of the real estate conferences earlier in the month. Retailers overall, our net store openers, not closers. The headwind is the fact that they might not have the h VAC equipment or the fixtures ordering in time to get the goods there. But we have healthier consumers. Yes, the savings rates down, but retailers also have healthier balance sheets. Two questions discounting. Did you see it earlier or hit

the same as typically? I know we talk you're talking about remain meet our guest Na tells, But I mean in terms of discounting, like did it start allot earlier? What of course it started earlier. You look at the month of October with Amazon having its second Prime day. You mentioned Target, Walmart, Old Navy all having goods to move, and there's more goods to keep coming and moving. I think that the discounting is there. I think it impacts

the margins, but I think it moves the inventory. You know, one of the things I saw in sacks, like on Black Friday, was like you spend a certain amount of money and you get like seventy five dollar gifts. It was crazy. I didn't buy anything. So I mean I saw a lot of those discounts prior to Christmas, and now just what two days removed from Christmas, I'm not getting a ton of stuff in my email box now and it's from certain retailers that aren't traditionally known for

providing big discounts. I won't name them, but I was kind of surprised by that, because I felt like there was a certain discipline that these retailers has sort of gotten over the last couple of years where they felt like they didn't need to discount, or at least not as heavily in order to get you in the door. I think part of it is everyone wants to be clean on the inventory to make way for new goods.

Products don't increase in price the longer they sit on the shelf or the longer they sit on the website, so moving them out, moving out out early, your first markdown is your most productive markdown. So I'm seeing what you're saying, fifty six seventy off. Some of it from who you'd expect, some of it from who you wouldn't. But when they report their earnings, if they want to have a stock price that even holds steady, you're better

be lower on the inventory than last year. Dana, back to the strength of the consumer, especially at this time as we head into any indication that the strength that we saw over the holiday season is perhaps this last hurrah from the shopper. One of the things we saw is a focus on events. Look at restaurants, which are continuing to have double digit increases since many consumers haven't celebrated the holidays with their friends and family in the

past two years. Yes, they've all bought some new clothes, they bought some new makeup, but they weren't out celebrating together. And don't forget, experiences are what creates memories, So I think people want some of these memory is I don't

think this is the last hurrah for the consumer. I think it's the management for the retailer in order to say, what looks like three can we deliver an upticking earnings on that point with the services versus good What do you make of some of these retailers that have tried to straddle both words. I think it's sort of like r H, which is still selling furniture, but of course they have the restaurants and hotels and the cruises and something god knows what else. But I mean, is that

sort of the model that retailers have to follow. I think it works. You can't just be a one category company. Look what's going to open here in New York City, not far from where we are now with Tiffany's opening sometime later this year, and there's gonna be they added a new floor for the restaurant. You look at Oxford Industries with Tommy Bahama and their Marlon Bar. What is it doing. They're selling products to women while the men are sitting there having a drink or if they're buying

something else, they're buying both. It's my it's my husband's biggest nightmare that there's gonna be like Champagne and Tiffany's, and you just go to the floor in mind by what's happening? Is a company that I think of with this because it's a company that you know, even years ago offered yoga classes in the store and the idea, of course was that you'd associate the product with these services and then you know, create some sort of brand

loyalty there. What's the actual hard data though, the connection that shows this type of thing actually works and leads to increased sales. When you look at the Marlin Bar and Oxford Industries with Tommy Bahama, there's there can be at increase in your sales when you have a Marlin Bar, and not just in your sales and men's just the alcohol, but it's driving women test driving women's where it's not just that. I mean, I think Ralph Lauren also has

the cafe and alcoholic. They have coffee and other things. The room Bloomingdale's right here with the fifty carrots or whatever. Forty carrots vanilla is the best life by time that the carrots. All right, So we talk retail. We lump so much in there is there's what are the retailers that are really just knocking get out of the park. Which are the ones that you're like, oh, there could be still some problems. So I think overall who's doing well? I think cosmetics is doing well, ALTA and so we

talk about for all the time. There's lines there. Sephora is owned by LVMH. They don't just have the benefit of Sephora, but they have Christian Door and Louis Louis Vuitton also. But that's also an experiential shopping moment, right. You go in and you try, you know, you try on the cosmetics, and you have people there who are trained to help you. And that's not something that can

be replicated online. Nope, you need you need that experience also, and I feel like we're talking about something in I can't tell you how many times buying different things. We've got to look good. Okay, it's important. Look everyone sees you gotta look good. What isn't doing well? I think overall you're taking a look at something. There's not a lot on the watch list that isn't doing well lately.

We definitely have a slowdown and home given that everyone added to their home back in with the pandemic, so we're seeing that weakness right now. You have some of the regional department stores, like privately held Belks that's having its issue. Take a look at bed Bath and Beyond. Lots of question marks there. Yeah, I am curious about sort of some of the direct consumer brands that we saw that we're kind of proliferated, and some of them may be to pull back from that model. Some of

them have moved. I mean, there's a Warby Park on every corner now in New York City for some reason. But I'm curious whether that model is still holds the same sort of cache for these companies. From evaluation perspective, you need to have the product be right in order to have that cache. And the one thing that came out of this, they all need physical stores. Physical stores. You're advertising window and they're also the omni channel window.

Buy online, pickup and store and ship from store. It's the most profitable purchase. You can talk to some of these companies about how to streamline that because they get the buy online part pretty well. But then when I go to pick it up, it's always like, you know, I gotta stand it for who are you? And it's like, well, I could just come into the store. Well you look at the mobile pick up. What's what Starbucks is doing? And it certainly can be fast and I think others

are beginning to work that way. Fifteen seconds. One retailer to watch this year, I want to watch Ralph floren I think Ralph Florid. And you know why, of course, with the expanded customer base, it's not just your dad, it's the son's son also, and it's the mom too. I think they're going to become more the lifestyle brand and drive attention. It's going to be one of the more enduring like compail brands, because actually these apparel companies

always sort of bad at some point. But yeah, thank you, Dana. What a treat. Thank you so much. Happy, Thank you for having me. Happy to your everyone. Same to you. Dana telsa founder and CEO of the tels Advisor Gap. Thanks for listening to Bloomberg Business Week. Download the podcast on iTunes, SoundCloud, or Bloomberg dot com. You can also listen to our radio show at two pm Eastern on Bloomberg Radio or stream us live on YouTube and Bloomberg dot com