ADP Report, Economy, Markets, Cannabis

Bloomberg dot com. We're sitting here in our Bloomberg ter Active Broger Studios trying to peg what my co host and colleague very correctly called the smoking gun or the red flag with the smoking talking the smoking gun, smoking flag for why markets are feeling so low today. A lot of people pointing their fingers at the ADP report. Carracadana, who is the chief US economist for Bloomberg Economics, sitting here maybe agreeing right, I mean, is this is this

a surprise? The disappointing ADP reproach showing the payrolls at US employers cooled in September. I don't think it is a surprise. I mean it's a little bit weaker than what the consensus was looking for, but not materially just a five thou in or so, but we are slowing down relative to what we saw earlier in the year.

That being said, this kind of negative sentiment in the market, it was evident during Asia hours, intensified during europe trading hours, and then now what spreads into the US, although not quite to the same degree as what we saw in Europe. So I don't know that there's a single smoking gun. It's more of a confluence of events. So a DP tells us to labor markets a little weaker. Boris Johnson, continuing to try to wrangle hard break for today's everyone

sings a few bars in this song. Right, you have W t O talking about trade sanctions with Europe over you know, squabbling over airbus and bowing and whatnot. So there's just a lot of little things adding up which kind of build on what we saw in yesterday, which was a big surprise in the manufacturing. I s m alright, Paul, some blame Boris Johnson, Yes, exactly. I always like to blame break another among others among others. So Carl, is this change you good folks down in Bloomber economics. You're

crunching the numbers. You've seen the you know, the manufacturing are you know, the I s M for the latest month was weaker than expected. So we know that manufacturing UH is weak and probably weakening, certainly in the US, and we know what's happening internationally. Um. Sorry, you kind of taken down your outlook or preparing to take down your outlook is maybe the consumer isn't quite as strong

as we thought. Well, we took our outlook down on August one when the next round of tariffs were announced back after the July FED meeting. The very next day, President Trump announced that the tariffs would go into effect at the start of August, start of October, excuse me, uh, and also again in in December, they moved that October first deadline back to October. But it does look like the tariffs will go up to in the middle of

this month, it doesn't. You know, there've been very little indication that we're actually moving away from that at this point in time, and you see the impact of those trade for action showing up in things like the I

s M survey yesterday. Additionally, another roughly a hundred and fifty billion of product subject to tariff in the middle of December, so the price tag on tariffs is about two and a half times larger in twenty nineteen compared to eighteen and so that does move the needle on growth. And we're in a slower moving economy already, so when you have slower growth, the economy is more susceptible to

those types of shocks. That being said, I know there's been talked this morning about one handle on GDP and whatnot. We have been looking for about one point eight one point seven percent to GDP growth in the back half of the year, and we moved to that call back on August first, when the tariffs went into effect. So, uh, the tone we were seeing in the market was not

consistent with sub two percent GDP growth. Now we're starting to see that reality set in as job creation, manufacturing activity all looks more consistent with US sub two percent number. But to answer your question, stall speed for the US economy, it's about one point four one point five percent growth, So we are closer to stall speed, but we're not there yet. And that's why my team thinks that we can actually muddle through this soft patch, thanks very much

to consumers remaining resilient. So that was my question, right, at what point do you reach a tipping point. How much pessimism should be baked in right now. Is it a recession that we're facing, or is it simply uh, lower inflation, lower growth, and just lower asset increases. Well, it's not recession, uh, And it's not even growth recession. And there's a distinction between recession and growth recession. Everyone

knows what recession is. Growth recession is a period where growth slows down so much, not that we fall into contraction, but actually that things start to unravel, like the unemployment rate starts to drift higher. I don't think we'll even get to a growth recession in the back half of this year. So labor market continues to produce job gains in excess of eighty five thousand per month, that will keep the unemployment rate out relatively steady at the current levels.

So I think we're just accepting a reality of a of a much more sluggish profile to the economy here in the US, and then much weaker conditions abroad Germany probably slipping into technical recession uh UK on the cusp of recession once Brexit is executed. Boom Brick Economics have a GDP forecast. GDP growth will be about two to two and a quarter percent, So we're kind of refining things as we look at that. Um. That being said, one thing we should keep in mind here right everyone's

talking about the R word. Uh. The ground is very fertile for a significant rebounded activity if these trade headwinds are removed. So the Fed has policy rates set in a very accommodative stance right there, giving the economy steroids, so to speak. So rates are accommodative, Corporate profit growth is positive, corporate balance sheets are in good condition. In the unemployment rate is the lowest sense of Vietnam Draft

was in effect, So things are well posed. Issue that if we don't just squandered this all with increase in tariff after increase and tariff now the economy could rebound quite nicely and beyond. Carraco Donna, Chief economists for a Bloomberg Economics, thanks so much for joining us here on our Bloomberg Interactive Brokers studio. Today we're joined by opinion columnists Terres Rafael. She joins us from the London Bureau.

So Terres, it looks like bars. Johnson today outlined his plan for new Brexit agreement and warned the European Union to compromise or watch the UK walk away from the talks and leave the block with added deal. How did that go over? Well, we're still waiting to hear an

official EU response. UM the the EU said it wants to examine the details of the proposal, but the kind of early indications uh were that, uh, you know, we're not that warm to the deal because it's proposing what looks like a breach of the EU's read lines in that there is no way to do the Johnson uh

deal without putting customs checks somewhere. Now he said they wouldn't be and we're talking about Ireland in the border between Northern Ireland the Republic of Ireland, which is the key to sort of unlocking this whole Brexit problem and getting a deal. And Johnson has said there will be no checks at the border. Um, they will honor the Good Friday peace agreement. However, he's also said they will have to be checked somewhere, and so I think the

sticking point is how you actually do that. The other sticking point is that Boris Johnson is quickly losing support even from his own party. I mean, how much power does he have in setting this this this proposal over to EU. Well, he doesn't have power if you look at the number of sort of MPs that he commands

in parliament. Um. However, the real, uh, you know, question is whether he would have enough support to get his deal through before October nineteenth, when parliamentary legislation requires him to seek an extension. Now, if the Northern Ireland Land Democratic Unionist Party go along with Johnson is say, has indicated so far they're open to doing, and he can reclaim Tory MPs that he expelled from the party, whip from from the sort of the voting part of the party.

If he can get their support and a few Labor MPs on side, then he gets a deal through and then we're in very very different territory because he can then call an election claiming he's delivered Brexit and uh, you know, and then it's really game on for Johnson. But whether you know, the Labor Party is going to give him that you know, gift, whether the EU is going to give him enough to allow him to recommend the deal to Parliament, all those are unclear right now.

So tre's can you just update this on the timing. I know we're kind of getting towards the thin at the end of this process, and somehow the Halloween holiday kind of is stuck in my mind. So okay, it's incredibly confusing, But you know, let's start by saying the next forty eight hours or key to find out how the EU responds to uh to Johnson's proposals. If they agree to negotiate, then we've got a sort of ten day period before the EU summit, which is happening on

the seventeenth of October. Now, legislation passed in Parliament requires Johnson, if he cannot get a deal, to ask the EU for an extension by October nineteen. October thirty one, Halloween is Brexit Day. If nothing else happens. If there's no extension, the UK leaves the EU without a deal on October one. The parliamentary legislation is designed to make that impossible. It's triggered this request for an extension. Johnson is vowed that he will not seek that extension. He said it would

signal the extinction of the Tory Party. So don't be surprised if this ends up where else but in court. Again. The other thing it could do, what about a second referendum, right. I mean, are we still talking about that or does that seem less likely more likely? Now I'll tell you who's talking about it. The Labor Party is talking about it.

So at their conference which was a week ago, they agreed that the official Labor policy would be to win an election, uh, renegotiate a deal or renegotiate Theresa May's deal, so they would would be a Labor deal and then put it to the people in a referendum, with the Labor Party not specifying which way it would urge people to vote. So you could have a situation which they've negotiated the deal but but you know, campaign against it. So the Labor Party wants a referendum, that's very clear.

The other two sort of major parties, mainly the Conservatives, they want to just get Brexit done is we've heard in their party conference. And the Liberal Democrats, who have been revived are campaigning to revoke Article fifty, that is canceled Brexit all together. So just real quickly, I know you said we're gonna were waiting on the EU, but they haven't given any indication that they're going to budge. Right, Well, I think the for the EU it's a very delicate

UH point in this process. They don't want to be blamed for allowing a no deal Brexit to go ahead. Of course, they will be blamed if it happens. Johnson made very clear in his speech today and in his letter to UH European Commissioned President Jean claud Yonker. He says it would be a failure of state craft. So the EU wants to avoid the blame, which means so I think they're likely to engage to some extent um

in negotiations. But this is a very big ask for them, because it's Johnson dismisses as a technicality what the EU regards is very fundamental, and that is maintaining the piece on UH in Northern Ireland by ensuring that there are no physical infrastructure that could be attacked by by terrorists or sectarian groups. Jos Raphael, thank you so much, as always for that insight on the morass that is Brexit. Teresa Hale is Bloomberg Opinion editor joining us from London.

I remember after I had my first child, there was a game changing moment. Moment. It was when he was big enough to fit into an Ergo carrier. It was a carrier where I could carry him around, not have a stroller, get on the subway, go up and downstairs, and it was fine. And here we have a Lia Sabo who just joined us in our offices here, chief executive officer of Compass Diversified Holdings, and one of his

portfolio companies is the Ergo company. So I I had to I had to sort of reminisce a little bit. But I want to just ask you about a company like that, which has expanded tremendously since the time when I had my first child. I'm wondering, how do you expand it when it's got such a specific focus, well, remaining true to the brand, but also getting big enough scale. And this is sort of a really key question right now as we look at say we Work, and some

of these other companies that are struggling to do just that. Yeah, So, Lisa, it's one of the challenges that any consumer company has. And you know, in our business we invest in industrial and branded consumer companies. You know, a company like Ergo.

When we acquired the business, it was from the founder car and Frost and Karen was looking for us to help build the business distribution wise globally, and so the first part of the playbook was to establish distribution in Europe and Asia, China being one of the faster growing

markets that we have right now. And then, as with every consumer product business that we own, the lifeblood of it is innovation, So figuring out what are the pain points that consumers have with that product, how can we innovate to create, you know, a better product that better addresses the consumers needs. And then to understand what freedom the customer is going to give us to be able to extend, expend into adjacent markets without deluding down the

you know, the core market that we're addressing. So last, your your company, Compass Diversifi Holdings is essentially a holding company and you you mentioned you have some brand new consumer uh companies that you own. So what we're seeing in the markets stay is concerned about the consumer, uh you know, and I think so from your perspective, what

is your sense of how the consumer is right now? Yes, So the consumer has been strong, and the consumer has been strong over the course of twenty nineteen, and it's really been a carryover for a number of years. And what we're seeing is, you know, in today's market, the consumer has a lot of choices, so you have to give them reasons to want to buy. And how you connect to your consumer is changing dramatically. Clearly, the rise of digital media and social media is change changing the

connectivity and how you interact. But generally the consumer feels strong. Labor markets continue to be very tight, wage gains continue to be strong, and that continues to fuel spending. And you know, at the same time, we have very easy financial conditions. So I think if you look at balance sheets of consumers today, they are incredibly strong. And so that would I would say, you know, from our standpoint, is the real pillar of strength in the economy. Luckily

that represents the economy. So the economy is still you know, growing, but uh, you know, it's remained strong throughout the year. Well as how many of your portfolio companies sort of sit within this retail consumer facing category? Yeah, so we have four companies in the consumer facing and then we

have four in the true industrial side. Okay, so of those four, how many do you think that the tariffs will be a serious concern if they do go into effect, the more serious or significant tariffs that have been proposed by President Trump in China. Yeah, so we're fortunate and that we have very little exposure to tariffs. We move production out of China years ago, so Ergo Baby would be a classic example. We moved into Vietnam many years ago for reasons that were totally different. There was a

lot of IP theft. As we hear about a lot in these trade talks, we experienced at firsthand, and so as a result of that, we redomiciled where a production base was gonna be for Ergo and for all of our companies out of China. Now we've had some minor exposure where products are still produced in China, and on those instances, what we have found is with tariffs going into effect, the dollar is strengthened. Our vendors find that

they have significant capacity in China. So the vast majority of the tariff has been pushed back on the vendor and dollar strength is enabling that some of the cost pressure that you do get. We've found receptivity with our retail partners and pushing through, but the vast majority, you know, has been pushed back to our our trade partners. So alias again about the four companies in the industrial space, four companies in the consumer space, Where is Compass diversified

holdings looking now to deploy capital. Yeah, well, now is an interesting time and I would say we were looking out and as our strategic direction this year was we were looking to be more net divestors than investors. And the reason for that is we looked at risk that

seemed elevated from the economy. Um, we have a trade war that's ongoing, we have a presidential election, we have brexit, you have seventeen trillion dollars of global negative rates, which probably tells you everything you need to know about the global economy and the health of it. And so we felt that the environment to be putting capital to work today was not conducive because at the same time, prices are extraordinarily high, and so that felt like a you know,

upside down risk reward balance for us. Now that being said, we're constantly out there looking for new opportunities. I would say we principally are looking to invest through the eight different platform companies that we have to do add on acquisitions, and we still remain open to divestitures just as a broad strategy mandate. So, given your experience, what do you think the next downturn will look like? And this is The reason why I ask is because that's what's on

everyone's mind today. Yeah, well, so, I guess this could be a bit of a you know, I don't know if it's contrarian or it maybe a little bit of an outlier. But you know, our view is the policies of the Federal Reserve have really pushed a lot more in terms of the you know, the money, the quantitative easing, the lowering of interest rates. We believe that it has pushed the cycles to be both stronger on the up cycle and longer in duration, but probably more violent on

the downside. And I think you know, what we saw in two thousand and the first correction was a pretty significant you know, draw down in economic contraction. But then the policies that created the two thousand and two to two thousand and eight expansion, driven by you know, quantitative easing type policies, caused a much bigger draw down. I think today we fear that those could it could be

an even bigger draw down. That would be our fear. Well, interesting, Elias say, well, thank you so much for joining us. Elias's chief executive officer accomplished diversified holdings, joining us here

in a Bloomberg Interactive Brooker Studio. There has been a big question hovering over the cannabis and the tobacco industries over the past few months, and that is what will the vaping outbreak the deaths that are mounting in the United States tied to vaping due to their industries joining US now, Mark Zuglan, he is CEO of Canopy Growth

joining us from Ontario. Mark, I want to start there because it's something that I'm sure all of your investors are asking, what do you do with the fact that the FDA has raised serious concerns about vaping devices and that fifteen people at least have been uh, have died in what has been linked to the cigarettes at a time when that is sort of the preferred vehicle for

using cannabis right now. Yeah, I think you know, the stories that we're hearing, certainly out of the out of the US are are tragic, and I think you know, compounding um that tragedy is that um, there's still a lot of unknown people are still this many months later, UM, trying to gather the information and understand um, you know the role of of of the illicit market, whether it's people are tampering with products, whether it's you know, vitamin

E is being added. You know, a lot of a lot of questions on on what's happening and so UM, it's very hard for me to speak to that particular set of details. But what I can do is speak to can Be growth and what's happening in Canada because as as you point out, in the next several months, um, you know, we will be launching bait products in Canada, and I think it's important to talk about what that

structure looks like. Right in Canada, we have a fully regulated market, so the way we make our products, what goes into the products, where those products are sold, UM, all have rules that surround them and rules that we need to operate in. And you know, I think that the second thing if you look at you know, players like Canopy, you know we we did not go out to China and just source the first product we could find and ask somebody else to fill it and put

our brand on it. Um. We've been building these products for two years and even you know, many many months ago. You know, the focus has been on consumer features and consumer safety. So our products, our tamper resistant, our products will be UL certified, meaning the heating elements are controlled and the battery is controlled. You will have you know, serialization, so God forbides something does happen, you're able to trace it back and immediately know what's happened. And again we

control the full process. We control what goes in, so we can ensure it is only cannabis and it is only turpins, which which you know do naturally occur in cannabis. So there's a number of things so I think focused on and it comes down to threefold. One being transparent. There are unknowns and there are risks associate with vaping, and we need to be transparent about that. And we need to do research to understand more. To a regulated

environment to control the products going out is essential. And three have companies that are investing long term to build products and brands. So Mark, just give us a sense of kind of in your experience and based upon your knowledge, how are consumers using vaping products with cannabis and is

that a problem in and of itself. So you know, in in Canada today there are no actual legal venues to sell th HC or CBD bait pen so you know, anything being sold in Canada today is essentially through an unregulated, uncontrolled market in the United States. UM, there is you know, of course state level rules governing some products, but you know other products you know, are are our listens? I think you know the the Again I fall back to,

you know, this need for regulation. You know where one of these these few companies who who go on there and ask for more regulation, ask for more UM controls because I think it's it's good for our sector, it's good for UM the consumer. So what lesson should the United States take from Canada? If you're saying that you do have the regulatory regime, is there a lesson that can be derived as the US tries to understand the

underpinnings of this vaping epidemic. So, you know, without even speaking specifically to to Bates, you know, be, this is a message we're carrying with respect to CBD and frankly with respect to UM. You know, a state's right system, you know for UM, for th HC products, which is UM. You know, a clear federal set of rules, a clear set of regulatory processes UM UH, you know testing that a consumer can rely on UM. You know, understanding a brand and how it relates back to the producer. You

know all of these things. You know these are these are good things for for the sector, for the businesses in the sector, and the consumers who buy the products. Mark so cool and thanks so much for joining us. Mark is the CEO of Cannopy Growth Corporation, calling us a vafone from Smith Falls, Ontario. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform

you prefer. M Paul Sweeney, I'm on Twitter at pt Sweeney and Lisa bram Woyds I'm on Twitter at Lisa bramwo wits one Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio.