Apparel Industry Issues Dire Warning: Prices Going Up

the week. And of course these earnings come with a backdrop of potential tariffs. President Trump did delay some of the additional tariffs they p planned to impose on goods from China to December from September, but still the mood is highly wary among retailers. Joining us now as Rick Helfenvine, he's president and CEO of American Apparel and Footwear Association. He's joining us from Las Vegas during a convention there,

and Rick, thanks for being with us. Let's start with the convention with the with the mood that you're hearing from the retailers in attendance today, Well, storm clouds over the port bow. I'm telling you, I'm here in Las Vegas. Ninety thousand people come to our semi annual industry trade show called the Magic Show, and they're buying and they're crying. Nobody is happy. Um. Yesterday, early in the morning, we thought we had some terrific news from the administration. We

thought the Grin should finally spirit our Christmas season. But later in the day, as the lists they called him for A and four be started to pop out, we realized we really weren't in much better shape. Seventies seven percent approximately of the goods that we bring in for the holiday season will be hit by tariffs I have on September one. It's not a pretty picture. People are scrambling.

And the reason least that it affects our industry so much, is it quite simply fortable of parallel of or We're eighty four percentable accessors, including backpacks and hand babs come from China and we don't really have a place to move it. So someone's got to pay these tariffs. We've been telling the administration over and over and over again, please don't do this, Please don't hit the consumer so the question is will it hit the consumer, will it

hit the retailers? How much will we pass along to consumers versus sucked up by the retailers. Well, you know a lot of smart people in our industry and I speak to them regularly. No, no tariff is a good tariff ten percent? You know, maybe it's survivable, but is not. And every time the President has said ten percent, it goes to So we're anticipating the worst, not the best. We'll do the best thing that we possibly can to you know, avoid earnings compression. But you know what, the

end results gonna be loosing. Honestly, Prices are gonna go up, sales are going to go down. Jobs are gonna get lost. It's not going to be a pretty time. It's gonna be retail ugly for our industry. That's what's unfortunately gonna happen. And we told them, we told them, we're telling them. Nobody's listening, and you know, you don't want to hear

something really sad um. Approximately of all newborn, infant and todblet goods sold in the United States is ten dollars or less, and they're gonna get hit with a tariff September one percent. What is ten percent due to ten dollars? I mean, think about what we're doing where they exempted car seats but not children's clothes. I mean crazy stuff.

I will say that one important thing for me when my child children were babies was to buy those ten packs of ones Ease and then be able to if they if they had an issue, just simply throw it out that having to worry about it because it was five dollars for ten onesies or whatever else. But Rick, you know, I want to I want to talk into all seriousness looking forward at some of the retailers and

how they're adapting to this scenario. Some people would push back and say, why is so much of the apparel manufactured over in China? Why can't the supply chain be moved? Well, you know what, our retail consumer for the last several years, particularly the millennial customer, is very conscious about product quality, product safety, um sustainability, environment, workers, right to human rights. And we've been able to do that in China and do it effectively, whereas when we go outside of China

it becomes a much more difficult gold to attain. The Chinese have been extremely efficient to work with so they really generally meet the high expectations of the American market. So what's the administration telling us? They're telling us point blank get out of China. So where are we gonna go? You know? Number two places Vietnam. The presidents threatened them with tariffs. Number three is India. He's threatened them. We don't even have a second choice. So, um, we're in

a tough spot. We're gonna we're gonna work through it at ten percent. If it goes to at least, I don't know what's going to happen. So Rick, it's been a pretty gloomy Wednesday. A lot of people talking about the worst case scenarios. You're definitely piled on there. But you are in Vegas and you're at this huge trade show. Anything getting excited today? Um? Yeah, I mean it's funny. It's funny. I'm winning hand. Um, it's positive. There's a lot of people, here's a lot of activities, a lot

of buying going on. On the other hand, people are worried. So, you know, the economy finally got good, We're finally getting to where we're supposed to be, but you know, retail has been challenged. Leasa for the last couple of years ago back to two oh one seven, we had more bankruptcies than than two o eight. Uh. And then too, oh wait, you go to two o one eight, we lost over a million square foot of retail in this

year to oh one nine. The first four months of the year, we had more announced store closings than all of the last year. So retail businesses a struggle. And then you you, you know, look as a as a bell weather for the economy, and you know, two thirds of our economy is based on the consumer. Ten percent of the jobs are in retail. We keep telling the administration, hey, great,

you're talking to China. That's a good thing, but stay away from the consumer because we're the ones driving the economy and they we just worry the administration's getting bad advice. Rick helfan Bin, thank you so much for being with us. Have fun in Las Vegas. It sounds like perhaps another another go at the slot machines. Rick Helvin bine At, President CEO of American Apparel and Footwall Association, phoning in from Vegas. Thirty year yields in the US currently two

point oh four percent, the lowest on record. Tumbling in the wake of fears of a recession of a global turndown as we do get weaker than expected manufacturing data out of China as well as the German economy shrinking in the second quarter. Joining us now Axel Mark, President and chief investment officer at MERK Investments, coming to us from San Francisco. Axel thank you so much for being with us. What do you make of these thirty year yields today? Great to be with you. Well, as you

point out, they do reflect fears of a global slowdown. Um, the the biggest sue I have with all this coverage of the markets is that all the issues you're mentioning is are not issues the fit can fix. The fit cannot fix China, the fit cannot fix Germany, the fit cannot fix the trade war. And financial conditions are super easy,

and so rate cuts I'm not the solution. The reason these long term rates are low is because obviously when you have a global trade war, the business sentiment is declining, and and yes, you're going to invest less when those sort of tensions are about, but you you're giving it the wrong medicine if you call for a right cut in the sort of environment. So if the FED can't do anything. Then are people not pessimistic enough? Um? Well are they? The question is what sort of pessimistm is there? Right?

The U S economy is a fairly closed economy, um. The and if in many ways it's astounding how well the US economy has held up in light of all of this, Right, it's not. It's not a surprise that global businesses um face some headwinds. But consumers have been doing very well. Um. Indeed, as I may remind people, the unemployment rate is near a record low. Right. And

also the the sort of challenges that we're facing. A tweet dependent tomorrow, the President could come out with a tweet and saying everything is great on the trade front, um. And then what then we're faced with potentially overheating economy. And here we are talking about the recession because maybe maybe somewhat terrors are going to be imposed. Now. What's happening is, of course, um, the inventories are being jolted around as people are holding things, and then maybe investments

don't take place because of the uncertainty. So clearly that's the headwind. But again the FIT can't fix that. And that's also why the yield curve is not inverting the way historically inverts. Normally you would have the three year ten year in word and then gradually going from the kind of the three month tenure. This way, it's going the other way around. So we're imposing their recession the other way around around the FED tightening because of an

overheating economy. It's the President inducing a slowdown with the tweets and and the trade tensions. And this is not this You don't need the same sort of cure to the disease because the disease is different. So I'm trying to put together a lot of what you're saying, and it's interesting, it's sort of a controversial issue. You're actually making an argument that the the U. S. Economy is closer to overheating then many people think, and that the

FED should really respond to the economic data. That just isn't that that bad at this point? What are you looking at to indicate that we're closer to an overheating than anyone else who I speak to seem to think. I'm not saying this is the baseline scenario, but it is a risk not to be ignored. Right um, And and absolutely, the the the inversion of the yelk cuve is but one indicator that there's a slowdown. There's clearly global headwinds. But um, the difference I make is that

we do have an election coming next year. The president will want to be re elected just like any president perfo him as well, so he wants to have a strong economy, and so he has every incentive in the world to reduce those straight tensions which I saw yesterday. Right, you can take some of these things off again very quickly. Questions how much damage will have been caused in the interim and and and what we can do about it.

But the feder Reserve, in my view, would be very well served to to be data dependent and patient rather than be allowing political development. And nobody knows what the heck that even means. Instead, it's egging on the president to to escalate the trade war, and he did it

the day after that was said. And so my view is that if the FED just took the long view on this and took a deep breath, Um, yeah, maybe the s MP would plunge more, But maybe that would send a signal to the White House and instead of the FED becoming a tool of the president. They suddenly don't want to become a tool. But Powell is exactly doing what what the President wants and and is egging him on in many ways. Axcel, just real quick here, what would you have to see to change your view

and say, you know what, markets are right? The President is right, the Fed should cut rates well. Financial conditions need to deteriorate. Financial conditions is not the VIX index. The financial conditions is. And look at the financial the Chicago Fed Financial Conditions Index rather than most of the other ones that have too much weight on the VIX. You need to have a deterioration in the transmission channel. That is what the FEED should look at. Access to

credit needs to become more difficult. You don't need to have the hiccup in d s MP. And so if that were to happen, lowing rates helped. Lowing rates doesn't do any good. And and that's why I'm not suggesting that is in the slowdown. But the FIT can't help the slowdown if we already have accommodative monetary policy. And so there's really nothing the FIT can do at this stage. And it would be very helpful for the FETE to just communicate what it can and cannot do. Yeah, axel Mark,

thank you so much for being with us. Axel Mark, President and Chief Investment Officer at Merk Investments in San Francisco. We Work filed it's s one form ahead of its initial public offering today and our reporters an analysts have been parsing through the document. Quite a description of losses and also hope for community and what that could potentially

reap in terms of joining us. Now, we're very lucky to say is Jeff lang Baum, his senior reat Sirie equity analyst for Bloomberg Intelligence, and Ellen Hewitt Startups reporter for Bloomberg News joining us from our Bloomberg nine sixties studio in San Francisco. Ellen, let's start with you. What do we learn today from the WE Work Companies I p O filing. There's so much to pass through. I'm still going through it, and I still have a lot

to go through. I think the main story is, yes, this is a company with a lot of growth and a lot of losses. They have been losing, um, you know, close to two billion dollars in Those were numbers that we knew already, but we're starting to get a closer look at just how quickly it's growing and just how quickly it's losses are growing. And there's lots of other interesting information in there as well, in particular about the relationship between its CEO and co founder Adam Newman and

the company. There's a lot of complicated financial structures that over the years we work has done to help support UM. Mr Newman and vice versa. There's this very close relationship with a lot of financial structures in there. So Jeff building on Ellen just said, we saw just how quickly their their revenues are growing and how quickly their losses are growing. At first blush. What's your big takeaway? Was this better than expected from your from your point of

view or worse? UM? I would say probably about the same. UM. The one thing that really stood out to me was that it's it's not clear how they can continue to grow revenue the same magnitude that they've been growing it

without also continuing to increase their costs. Right, because their revenue um grows when they add new incremental locations, and that's a costly endeavor, and so in order for them to approach profitability, they really have to I think scale back the the expansion um and and then that, you know, kind of gets you back to what's the valuation and how are we looking at this thing? Is it a high growth vehicle or is it an eventual profit generator? Ellen?

This morning Tom Keene was parsing through the filing and he found numerous references the word community. I imagine it was over ten and I'm wondering what actually at its heart is this business, what is its competitive advantage and what will distinguish it from from from other companies that try to do the similar kind of thing. If you ask we Work, they'll they'll give you an answer that's

that's pretty abstract. They talk about the idea of the power of we, and that's connected to this idea of community. It's this this sense of togetherness and and working together better and and it's part of this brand that we Work has really developed that they try to use to set themselves apart from your Regius or your other sort

of stayed office providers. They really believe that building a global network of these flexible office spaces is going to provide something that is beyond just easy access to space. You know, they have a lot of enterprise customers that I imagine look at we Work as a very simple and easy way to, for example, set up a satellite office in a city where they maybe don't currently have

a presence. It's much easier to do that by paying we Work, then by you know, hiring your own real estate team to go and look for places and signed a ten year lease and and that's maybe the more practical business application. But yeah, they talk about this idea of community being really central to what makes me work different. In fact, when they sold UM bonds last year for the first time, this was when we first encountered the infamous metric community adjusted EBIT, which many people mocked UM.

But it's interesting that we Work chose that because it is indicative of how much they believe in this idea of community being central to uh their business. If you'll notice, community adjusted EBA does not in the s one, although I looked back at some of the draft versions and it isn't the first three draft versions of five, so some made it some of the way. Banker said, no way, are you subjecting yourself to that again, guys, no, just stop, Jeff, I do want to ask about the business model from

a real estate perspective. I always am unclear of how much of we Work property is own versus least. What sort of the breakdown here the majority is least. They disclosed in the s one that they have forty seven billion dollars of lease obligation UM and that compares to

four billion dollars of committed revenue backlog. So UM. You know, if and when we have a economic downturn that pulls tenants away from office space there on the hook for a lot more than what they are obligated to receive UM and and you know that this will that will really test the power of their community. How many of these tenants that are on short term leases with them stay UM as opposed to you know, pulling back and

finding somewhere else to run their business. UM, if they don't need that cost, And then what does that mean for we Work going forward? Ellen, what's the what's their goal as far as how they plan to expand revenues here? You know, I think it's just continuing to look at growing in parts of the world where they don't have as big a presence. Commercial real estate is a huge

addressable market. This is something that they always talk about when they're trying to make the pitch for why you should believe that this company is worth forty seven billion dollars,

which was their most recent private valuation. They look to areas such as in South America and in Asia and point to, you know, the low penetration that their business has among you know, the office real estate market, and and they say, look, we've really figured out how to retrofit and fit out with furniture and office very quickly,

very cheaply. You know, it might also look the same as we work somewhere else in the world, but look, we can do it for not a lot of money and not a lot of time, and that's going to help us grow more quickly than everyone else. Um. And as as we mentioned earlier, they talk a lot about how if they needed to get to profitability, they could

just stop growing. And in fact, in they s one they cite a couple examples, including one in London where in the wake of Brexit they felt like maybe they should slow down growth, and in doing so they were able to show that their occupancy rates went up. So they're obviously looking for examples where they can point to and say, look, if things go poorly, we have a little bit of a place to fall back on, which is, if we stop growing so quickly, we won't lose money

as quickly. Um. But yeah, while they think the going is good, they'd like to grow as quickly as possible. Reverseas Jeff, I do have to wonder, especially if most of their contracts releases and not ownership over these commercial properties, what the asset liability balance is, Like, I mean it's not secured. What are their assets that they could liquidate if they do have a problem. That's unclear. Um, they

do own some, but they're all kind of complicated structures. Um. But but realistically, this is a it's a it's a very complicated large sublease business. Right. They lease off the space, they turn it around, they make it cool, um, and then they sublease it. And they've got average lease length of their leases are average fifteen years and there's member leases are average fifteen months, and so they are definitely mismatched.

And you know, the over the past ten years, as they've been growing, it has worked because the office market has been expanding. Um. But that is has yet to really be tested. Jeff Langbaum, Senior read and Sirie Equity analyst for Bloomberg Intelligence. Ellen qwittt Uh, startup supporter for Bloomberg News, joining us from our San Francisco studios. Thank

you so much for your time. We talk a lot about the war in technology, the war for the latest advancements, and a lot of times people talk about quantum computing, the idea of what's next, sort of what's the next see change within the computing industry. Luckily we have Dr Bob Sutor, he's vice president and IBM QUE Strategy and Ecosystem at IBM joining us here in bloom We're gonna active broker studios. So, Drs Sutor, I'm wondering, can you just start by explaining what is it that you do? Well,

I'm in IBM Research. Okay, there we go. I mean, basically we talk about quanting quantum computing. What are we actually talking about here? Well, I mentioned IBM Research because we deal with the really, really, really new things that are going to be coming to market in five, ten, or sometimes twenty years. So quantum computing, which is what we do. UM is developing an entirely new type of hardware and software stack to solve problems that really today

are just not tractable using existing systems. So give us an example. So let's take um um option um risk analysis. Right, So you're trying to figure out you have a portfolio and you could be a hedge fund, or this could be your retirement account. When you start thinking of the stocks and bonds and derivatives and all these different types of instruments, they're so many different connections between them and

also things that are happening in the world. When you start to analyze these things, the combinations just grow exponentially, and here I literally mean exponentially and not just a lot all right. Current computers can't handle that. They can't handle that growth, and so they require either a tremendous, in fact ridiculous amount of memory to process or maybe

only a million years to do the computation. This is a really important point and it's something that a lot of businesses are looking into, and even from a governmental standpoint, there have been proposals that perhaps regulation of banks, for example, should be done with quantum computing to basically abstract out what the potential risks could be given what you're seeing on the ground when it comes to current day application of some of these technologies, what are you seeing in

terms of that So first quantum computing is several years away. I really need to emphasize that. So we are looking for the applications that can do better than cloud csicle computers in three to five to ten years. So this isn't a situation where you use a quantum computer today to help you. It's longer term. But people who have longer term research programs, who can invest in this and want to be first to market will get behind this.

So I mentioned the financial services applications. Uh, there are some situations where quantum computing may help find new patterns and data, so to help AI, to help machine learning, and then also chemistry. There's always this idea that we want to find new drugs, discover new drugs. Now, when I hear drug discovery, it's almost like you're wandering around

in a forest looking for the great drug. Let's compute that instead, right, Let's actually model the molecules exactly in a computer, so we can compute with them, we can manipulate them and figure out how they're going to work with you. It's quantum getting basically just really fast computer. It's a completely different type of computer. So it's not like your laptop or your phone from the very lowest level. It's completely different, which means all the software above it's

completely different as well. Who's ahead in the race for the secret sauce when it comes to quantum computing? I mean, uh, we talk about the US versus China. Are we seeing a greater degree of development in China than the U S on this? On this front, well, we really can't tell, so I can't comment. I can only talk about what I know about um in for example, the United States and Europe. Um all of us are doing a tremendous

amount of work. They're different quantum computing technologies. UM, I would say right now, and yes it's my organization, but I think IBM is ahead in terms of producing the quantum computers and making them available. We've had quantum computers online. I mean, people can go to the IBM q experience right now and use use a quantum computer. We've had them for three years on the cloud. Hundred forty people registered, So that's really interesting. That brings me to my next question.

Are you finding the talent that you need to hire to bring into the fold who can do this work and pushes forward. We're finding some of it, but education is a big part of what we're trying to support right now, because if this is so different, if you think about all the software engineers out there, none of them a priori know how to code a quantum computer. Now, it turns out in many organizations there's the occasional quantum physicists who you can recruit, uh, But we're trying to

train more in undergraduate classes. We're supporting graduate students um. This, in fact, though, I will say, is the most common question when we talk to clients, who should I hire? What sorts of people should I have and get on board now to help me with this quantum computing future? Which industry do you think will be most radically changed

by the advent of some of this technology? First up, financial services, Second up all those things that relate to chemistry, so ultimately healthcare, but also material science, creating new alloys, all sorts of materials that people will see. Bring this down to the level of you know, when you go to buy clothes, is it something where you could potentially have a jacket that keeps all of your warmth in

and yet is paper thin? Or I mean, what, what's what's the actual kind of application here to give people a tangible sense of how different things could look in their physical world. As a response to this, or in on the heels of this technological advance, well dime Lar Mercedes, for example, who is one of our partners in the ibm Q network. They're working on new battery technology. So future electric cars, if everything goes well with quantum computing,

will be much more efficient and last much longer. And that's how you will see it. Most people in their day to day lives will not say, hey, I'm using a quantum computer to do this. They may see new shampoos. Yes, they may see new materials, new new textiles, um, new materials in their cars. Uh, you know, we may actually use quantum computers to create new materials to create even

better quantum computers. What about cost wise? I mean, is it going to be cost prohibitive for anyone with the biggest companies to sort of engage with this technology at the outset? Uh? No, it won't be because it will be available on the cloud, So people will not be buying their own quantum computers. They will be accessing them over the cloud in different models. In fact, the IBMQ experience which I mentioned before, If you want to get up and started. It's no charge. The software we use

is open source, there's no charge. I'm sure it's sort of a good tactic. In other words, get enough people in the fold and understanding what this is to have the ecosystem to keep it going and push it ahead. Dr Bob Sutor, thank you so much for being here, fascinating vice president of ibm Q Strategy and Ecosystem, joining us here in our eleven three oh studios. Thanks for listening to the Bloomberg P and L pod Cast. You can subscribe and listen to interviews at Apple Podcasts or

whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa abram Woyds. I'm on Twitter at Lisa A. Bram wits one. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio