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We got those sticky inflation numbers this morning. I ran, I want to start with you because the treasury trade is what we're looking at most when it comes to the debt ceiling impact. Talk to me about how that's looking today as we head into this long weekend.
Yeah, so, you know, everyone is very hopeful that there's going to be a some kind of deal. So you've seen a little bit of a pullback in some of the some of the t bills that had been trading, you know, amazingly cheap to to other areas of the market, and they still are right. So there still is this risk priced into the market at the moment. I don't think that that's going to change until we actually see
a deal. You know, risk managers and money market mutual funds are just going to avoid these tea bills that that potentially could have delayed payments because those investors just need to have the daily liquidity and certainty that they're going to get their money when it's promised, and if
if they don't, they're just going to avoid those. But but then there's others, you know, there's other investors that are speaking to are like, well, I'm okay if there's a one or two day delayed payment, so I'll maybe buy some of that instead of holding it in other instruments that that are similar, like a bank account, for example, which yields, you know, way less than what a what a one week T bill is currently yielding.
And a hotbunt in here because I were just described kind of the the bond trade there, talk to us a little bit about what the US economy, the US budget actually does look like if this deal does come through.
Right, So, the basic the deal looks like, the biggest piece is the two year spending cap, and that will basically be the element of that entire deal in terms of its impact on the economy. I think that you know, if it's a two year cap, then it means that likely that the hit next year from the spending cap would be about you know, taking away two underd k of Josh relative to baseline. It's not a significant amount, right, it's it's probably you know, it won't amount to too
much impact. But once they do lift the cap in twenty twenty five, it will also generate some kind of recovery, mild recovery. So yeah, it's just a it's not a very big spending consolidation, so I would say, yeah, just not that big.
All right, Well, we do have our Michael McKee in studio now. Would never be joining us on the phone on a big inflation day like this one, Mike, how bad is the pc.
News for the Fed?
If you assume that their goal is to get interest rates lower and the economy come in reasonably strong, that it's not good news because you're going to probably have to raise rates higher. That's the kind of the story that inflation is telling us at this point. Now, we'll get another CPI right before they're meeting on June fourteenth. But the economy looks very strong. Consumer spending very strong
in the month of April, and business spending. The Durbal goods orders were relatively strong, So you got a combination of a strong economy and prices not going down, maybe in part because businesses are taking advantage of the strong economy, and it just tells the fact that what they have done so far to put restraint in place hasn't worked.
The argument is that maybe it takes a while for the cumulative effect to start to have an impact, but right now it looks like the people who think they need to do more may carry the day.
Well, McKee, we spoke this morning, and one of the kind of concerns that I had was, Look, if you're capping fiscal spending for two years in theory, shouldn't that mean that the government spending kind of tail went to the economy is capped as well, And isn't that a reason for concern?
Tell me why I'm.
Wrong, Because they're not really cutting spending. This is the standard Washington game where you move money around and sort of shuffle where the pot comes from and where it goes to. But it doesn't really change the amount that the government is going to spend. You're going to put spending caps on non defense discretionary spending, which is the smallest part of the budget, the entitlement programs Medicare and
Social Security. They'll keep spending at the same rate that they are because they're exempted, they have their own formulas for how much they go up. And defense spending, according to what we have seen reported about the deal, is going to go up three percent as it was planned to. So the amount of money that they're talking about cutting back, they're really cutting back the increase in what was going to be spent, rather than actually spending less.
Now, you know what's interesting about that, if I could jump in here a little bit, is that when they did something similar to this with sequestration back in twenty eleven, it did have the effect of limiting budget deficits, right, just because you wound up having growth be somewhat bigger
and higher than government spending increases. And I think that in a way, that's the that's kind of the Goldilock scenario here for budgetary hawks, right, people who want to make sure that the debt doesn't continue to increase at such a rapid pace. But making it, you know, a two year deal also limits some of that some of the inks that might occur around some of those you know, bigger chunks of the pie. But like Mike said, things like,
you know, it's social Security spending for example. That's one of the big things that is really driving some of the debt limit aks that we have right now. Right, So, there was some news yesterday that the Treasury Department is going to be issuing net debt of sixty four billion dollars that that matures next Thursday, and everyone's like, well, how are they issuing net debt of sixty sixty four
billion dollars? Well, one of the ways is because sixty billion dollars of non marketable debt is coming out of the Social Security Trust Fund to pay effectively to pay the social security payments that are due that day. So that debt is going down. But at the same time, the government doesn't have any cash in order to pay. So that's why the public debt has to be increased. So it's not that the government has more you know,
a bigger pot of extraordinary measures to use. It just you know, basically taking from one hand giving to the other. But that gets bigger and bigger as time goes on. So to Mike's point, deficits are still going to be positive, right, You're still you're still not going to have a balanced budget, you know, but it does slow the growth of the of the debt over time.
There is a problem that we haven't really focused on coming up that I reckon comment done because right now the Treasury has forty nine and a half billion. It will have much less next week. But suppose we get a deal, Treasury needs to build up his cast reserves normally wants about five hundred billion in there. So according to the Treasury at their last three funding announcement, they said they anticipated having five hundred and fifty billion in
their account by the end of June. And as we just noted, forty nine and a half of is all that's there? So IRA, who's going to buy all that stuff? And what is it going to cost?
Well, there's a couple of pieces to that. Actually, Number one is it probably you know that five hundred and fifty number assumed that the debt limit was going to be raised when they had, you know, several hundred billion dollars in cash already in the Treasury General account. So one is I think demand will be pretty decent for
four bills at this point. You know, money funds and ultra short ultra short money wants to kind of lock in these higher rates now in the anticipate patient that maybe in the future the feder Reserve is going to ease interest rates, so there will be some of that. Number one and number two, there will have to be about five hundred million dollars in issues very very quickly, and probably two hundred billion almost right away. And I think, given where yields are right now, for some of that paper,
it'll be pretty well received. There'll be plenty. There is an issue about what happened to the Fed's balance sheet, because the reserve balances are likely to go down and go down quickly, and we know that from September of twenty nineteen. What can happen if reserves really go down and the plumbing in the financial sector ends up being a little bit squishy, It'll be really interesting to see what happens in the repo market at that point.
Yeah, certainly a lot dies. And I gotta say, we got to get Nana Wong's take on this. We're going to bring her back shortly. Bloomberg Economics is Anna Wong, Iour Jersey actuallyf us interest rate strategies, our Bloomberg Intelligence, of course, our star player, Mike McKee, Bloomberg International Economics and Policy correspondent.
We thank you as always interesting stuff.
Markets in the green folks, stick with us.
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Maddie, A lot to digest here in terms of Federal Reserve, the debt ceiling, these markets. But I think at the end of the day, it's really all about do we or do we not hit a recession by the end of the year.
Who better to bring in and to.
Talk about this is Philip colmar Am I saving that right, Cort colmar It is managing partner and global strategist over at MRB Partners. Philip for somethingk you for joining us in the Studiosmini was here. He'd give you a gold star. Talk to us about these recession onds.
Yeah, the marketplace too high of an expectations towards recession, particularly following the SVV or banking system strains. More generally, you know, our view, as has said, a recession is not likely over certainly throughout this year and probably over the next year. And the reason is, and I think we're seeing it today in the data is the US consumer is in a lot stronger shape than people give.
It credits for.
It's spent ten or fifteen years de leveraging, has healthy balance sheets, has low debt burdens, and a tremendous amount of cash transferred to it, but thanks to fiscal policy during the pandemic, so it hasn't needed to tap into credit to do It makes the US consumer a lot less interest rate sensitive because the consumption is such an important part something like seventy percent of GDP. It makes
the overall economy less interest rate sensitive. And I think people have just chronically underestimated where that breaking point is of interest rates or total cost of capital, whether that be FED policy or bond yields. Before we tip into recession.
Did any of the retail earnings that we got change your picture on the consumer? I know it was a little bit muddied, but a Walmart, for example, seemed pretty clear that the US consumers struggling. They're moving to those lower margin food purchases because they just can't afford much else.
Yeah, I think you see some downshifting we saw in the retail sales data in the past, as well, we've seen a little bit affirming as a less print, but we have seen some softening down in the consumer. Now, we'd expect that coming off of sort of an economic boom almost that we had. There's been a big down shift in terms of economic activity from really boom like dynamics fueled by fiscal and monetary policy, and so in that boom, there's there's space for weakness. There's been higher inflation,
and all the wages are there. It's only now that it's starting to turn into real wage growth, so there was a bit of a bite. I think that that's going to work for the consumer heading forward as inflation moderates a bit, I don't. I think it's going to stay a lot stickier as we saw today. Then certainly the FED hopes and investors have been predicting, so watch it for that bond market. But I do think the consumer will ultimately be resilient ultimately, if even if downshifting here.
But do recessions happen kind of in a vacuum. It's not the slow grind lower, it's a it's a very sudden drop essentially. So if you're seeing a resilient consumer, that doesn't necessarily mean that there isn't a sudden drop in the near or distant future.
What would be kind of the canary and the coal mine for you.
Yeah, so whenever you're normalizing interest rates or the cost of capital is rising, you're going to blow up things. That's just natural. So the difference between this cycle and say, you know, the two thousand and eight cycle, is that household sector gives you a really strong anchor to the global economy or US and your area economy and there for the global economy because they're so resilient. So that
makes the challenge of tipping us into recession harder. That being said, when you lift up interest rates, you do things like cause banking system strains, you take out some zero yielding assets, You'll hit the private investment space and those kind of things, and they can have ripple effects through it. So it's these kind of weak links that we monitor closely to see when you build up what
we call critical contagion to tip it over. People had rightfully feared some elements of that with the banking system strains. The problem was is the magnitude just wasn't anywhere on compared to the you know, on size of the GFC. It was a much smaller issue this time around, but it's those kind of things you look for, is some
kind of contagion that's strangling through. I think the missstake that a lot of the recession camp made, though, is that they look for in dedicators and old rule of thumb measures, particularly in the manufacturing confidence those kind of things. They forget that that's shrunk in terms of size of the overall economy, and the service sector has been accelerating. It's been strong, and that's kind of thing. It's a much bigger sector of the economy than manufacturing, and people
often forget their go to ism manufacturing index. It's dipped below the fifty line. I think it is twelve times if you count this one since eighty three and eight of them have been headfakes. They haven't been recessions, so it doesn't have a great batting average. Focus more on the service sector doesn't have as much history, but it's not signaling a recession at this point.
I love the optimism because I would rather us not have to deal with a recession, particularly on the consumer side. I'm going to try to get some extra credit on this Friday, though, by pointing out the warp function on the terminal warp for folks listening to us, and it tells us the anticipation of rate hikes moving forward. In June that went up to fifty four percent, saying a hike.
Tell me why you think they're wrong.
Well, I think the Fed is signaling that it wants to to go to the sidelines, do a weight and see mode, mostly because the banking systems strains a bit of vasing and inflation. Obviously, today's numbers has been tough. I think the real mistake in terms of interest rate expectations is pricing in the deep rate cuts. Now we've seen a lot of that come back out this month alone, right, but there's still significant rate cuts, and that's predicated on
the recession camp. At this cost of capital. Back to being the optimist or the optimist on the economy, it's at this cost of capital we don't see the breaking point. It doesn't necessarily mean the Fed has to do a lot more.
It means the.
Distortion of the yield curve. In many ways, the lower bond yields is subsidizing. Remember, a lot of the economy borrows at the long end, not the short end of the curve, and so the inversion of the yield curve, even though recession or economic bears would point to that as a recession signal, it's actually subsidizing economic growth here,
so it's actually preventing in many ways that recession. So I think the caretful thing is is if you get away from the recession camp, be careful in the bond market, and of course that causes ripple effects and volatility through the asset spectrums in general.
Are you worried at all about that bond volatility? I mean, you're seeing such a a kind of selling baked into, especially in T bills, but you're seeing it on the front end of the curve as well, as you point out the unwind of that in the next few weeks or a few months. Are you at all concerned about the volatility or the risk taking in the bond market right now?
Yeah, I think that's I mean, bond volatility has been a very big issue pretty much for the last couple of years, and I continue to see that as an issue. So there's a difference between if you're in a fixed income investor, we'd be shorter on the duration and expecting bondials go up. We've seen some of that. We still see a move higher. Equities gets a little bit more mixed, so well, we may not be in the recession camp
here at this cost of capital. So that's good for equities as we reprice or do an upward shift in terms of economic expectations. Keep an eye on the bond market because that's the flip side of it. As bond and yields come up, it hurts that discount rate. It creates that volatility ripples back into the equity market. And so we say with clients, you've got to be a lot more selective in this environment on equities. Favorite places where you get your valuation discount and places where you
get relative earnings upside. So I look at the market right now. We get a bit of a frenzy going on in tech. Again, some of it's AI driven, but that's not the spot where you get your relative value discount, and even relative earnings are eroding. You know, you flip over and you look at large cap banks. They look a lot better in terms of both of those things.
For the most part, that also lends itself outside of the US into some of things like European markets and stuff like that where you get better valuation discounts relative earnings favoring. But selectivity is going to be the name of the game here because of as you said, that bond volatility and a fields continue to ratchet higher. That takes a lot of wind out of the equity market.
Are the tech plays then in kind of the comps and peers of companies that are going all in on AI?
Is that the move?
Yeah, I think there's there's a frenzy around that move at this point. I think the tech starting you don't like it, well, I think there's I think there's going to be momentum behind it. So there's a trade probably in that continuing. I think it's going to take time to develop that technology and really try to materialize it
into profits, and so there's some of that. I think the original tech rally started here even before a lot of that in the context if we were in a sluggish or week maybe even quasi recessionary growth backdob but that we were going to get significant rate cuts. That's those longer duration assets, the growth sphere or growth index tends to benefit in that backdrob. But if we undwind that recession risk we push up bond yield, then you want to be in more of the value cohort rather
than some of this. And if you are going to dip your toe into the growth cohort, we would recommend communication services that spot where they got beaten up last year and seems to have a better valuation support at this point.
Okay, quickly in our final minute here, I'm working on a story about what happens if the dollar dips. Can you tell me if the dollar is going to dip so I know whether or not I should be working on that story.
Yeah, yeah, the dollar. I mean, I'm cyclically negative on the dollars, so I would expect it to dip. It was over sold recently and we got interest rate expectations starting to wind up of the curve, so we got some firmness in the dollar associated from that. But I think you've got to catch up story on a relative growth basis in the rest of the world, Europe and
in Asia from their lag openings. I still think the you should has some work to do, but the FED kind of goes on hold, so I think that the dollar slides.
So yes, nice, oh man.
Just as we talk about the dollar, we gotta go. I have so many follow up questions. Philip Colemar, Managing Partner, Global Strategists over at MRB Partners, we thank you as always coming in in studio without a time.
Might add though, is that allowed on a Friday? Apparently? I'm told it is hard disagree on my end. Never less, we'll forgive you. Have a good weekend.
Thanks Philip Colemar again MRB Partners. Folks, we are seeing green on the screen. The S and P five hundred higher by one percent. That rally has really taken off in just the last thirty minutes or so, the Nasdaq significantly outperforming, higher by one point four percent. The VICX though we're a seventeen handle. There is a lot going on this market. We're going to dive into it.
You're listening to the tape cans Are Line program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa, Play Bloomberg eleven thirty.
Next guest is pretty exciting, Liz McCormick, our chief markets correspondent. She has a little bit of everything over on Bloomberg News, and she has this really interesting story about kind of hedge fund trades and how they're navigating all of this debt ceiling debate and how how kind of go wrong. So, Liz, welcome to the show. Thank you for making time for us on a Friday. How can some of these trades go wrong?
By the way, saying yes to you was the easiest yes. So wow, you know what.
I'm recording this and putting it in my email.
Well, so you know, Shanali, who you know well, and several other of our great lady reporters are on this story together just looking at you know it. You know we've talked before. The basis trade is a long favorite
of hedge funds. But you know, there's a lot of things we saw in March twenty twenty, especially when things get bad, the march is not functioning, and especially when repro rates go high, because these are trades that make a little money but make a heck of a lot more when they use a lot of leverage, which is
what these folks do. So that's long been an area that regulators say, you know, we want some more oversight, you know, and they've been trying to do things that bring you know, hedge funds more under the fold of oversight. But there are blind spots like the bilateral repo market, which the Treasury's Office of Financial Research has done a lot of good work on getting data but said that's still kind of a blind spot, and that's how a
lot of this repo is done. So, you know, now we're saying things are going to work out on the debt ceiling. I hope it does. But some of the chaos that people are worried may ensue is repro rates could surge and things like that. So there that puts, you know, kind of the risk. So that's why I think there's been folks tapping around checking, you know, how's the leverage positioning and things like that on we don't want to know blow up.
This was the exact question that I wanted to ask you, Liz. If the US's credit rating is impacted over these debt ceiling debates, what does that do to these requirements?
Well, isn't that It's interesting because first of all, it is number one, it's interesting to know what happens to treasury. So as you guys remember in twenty eleven, SMP downgraded just after the deal was done, but it yields went down. There was like a flight to safety. People still wanted treasury, So there is an expectation that probably treasuries, you know, and that wasn't a default. So if we have a default, that's a different ballgame, and that's kind of like uncharted territories.
But if there was just a downgrade, the system may be able to withstand that because if your collateral is treasuries and the value goes up, you're okay. But embedded in these trades are the risks they don't you know, because every time is different. So even on a downgrade, if these you know, the longside of a basis, say you're long to cash. If there are major issues and
the value goes down, there could be margin calls. So that could be a recent you know, we've done a few stories on you know, after twenty eleven, twenty thirteen, FED Treasury made and the market participants, you know, the overseers and let's call it like SIFMA, etcetera, made like backup plans. How can the market function if there's a delayed payment, but nothing has been tested yet, so you know, we kind of hope to never go through that, but hopefully things would function, but it's an unknown.
Speaking of unknowns, a lot of folks, Liz, and correct me if I'm wrong. A lot of folks are obviously off already on the road starting the Memorial Day weekend a little bit earlier.
But there is a reason to pay attention to tonight.
Aren't a lot of the credit ratings updates coming out Friday night?
Well they never tell us, you know. And but that's what I was going to say, like, now, why are we not off already on our long weekend? That's another story, But I was going to say, like, ugh, that's all we need is like we have to keep any open for is there some let's just say that somebody else could go on watch, you know, put them on watch, because that's what Fitch did put the U. They didn't downgrade the rating, but they put the US on like
a negative watch. And you haven't seen that for Moody's or S and P. Now it looks like a deal's coming, but if things break down over the weekend, You're right, we could see that, even if it's not late tonight. It they can do that at any time. So I think they feel like if a deal gets done today, there's enough time because they need about two days to get you know, the bill signed, et cetera, and to get you know, not hit that X state where treasury
runs out of cash. But you're right, if things fall apart Saturday and everybody walks out and it, then you could, you know, see some more ratings watches and who knows Fitch could do more. I have no idea. They didn't tell me, but it's a concern of course.
Well still Liz refresher memories here from kind of the twenty eleven saga when we talked about these credit Ultimately the credit downgrade, it kind of happened over the span if I think like six weeks or something the downgrade actually happened. I want to say, maybe mid August or end of August. But the first warnings came out I think in early July. So it feels like this could still take a couple of weeks, right right.
And remember now, definitely not saying there's a repeat of this happening, but S and P there was a deal in SMB downgraded because they say they didn't like, you know, they're looking at overall, how is the you know, the nation's fiscal leaders functioning, how's the everything work, And they were just very displeased with how things went. It didn't vode well for the fiscal outlook for the US, so they downgraded. Now, as you know, there was a lot
of pushback, et cetera. That's another story. But that happened even though a deal had been been done with Obama and you know the other side of the aisle. But so I think, you know, the people are waiting. You know, the outlook is one thing, but a downgrade is another. And I think this thing has to fall apart hard for that to happen. But twenty eleven, you know, Blomberg even did a lot of stories afterwards. It was almost kind of mind spinning that if rates go down, bonds
rally after downgrade, does that mean ratings matter? I mean, clearly they do, because you know, they're front and center of people's mind. But it was just kind of weird. You know, I lived through that, and so it didn't kind of go as you would think.
And Liz, just to go back to the story here that you have that's so great. I wonder if you can explain to you know, my mom listening to him on this conversation, how this sort of risky trade might impact consumers. Right, is, what is the end impact that this might have on regular, everyday people who aren't on Wall Street.
Well, yeah, your mom and my mom isn't particularly, they wouldn't know and they wouldn't be so concerned about this basis trade. But what will concern them is if it's like when SVB went down, my mother, I know pool who that was. Maybe some of us didn't either, but it tightened the total credit conditions of the US economy, the financial system, and that's not good. That may make it you know, harder, you know, to get loans, to
be more costly, et cetera. I think with hedge funds in the basis trade, if you have a blow up where funds go under, then that is another kind of like feeling of tightening of conditions and the financial system. It's never good for funds that you know. You might say, oh, that was a rich folks own those hedge funds. It doesn't matter, but it kind of does because they helped
grease the wheels of the system. They provide you know, both sides of a trade sometimes, So I think that's where the regular mom and pop make care if they hear, oh, another big firm, I don't know who that is, but collapsed and you know that's not good. And you know, sentiment is a lot of things, you know, for people. So if they're feeling like, well, things are bad, It's like when you hear all the headlines about layoffs, people are like, oh boy, I better watch out and not
buy this thing. So I think it might be sentiment. It might be tightening up financial conditions because these folks don't really care about the nuance of the trade.
Yeah, bless you Liz McCormick for connecting the Wall Street story with the Main Street story, because it does matter to her point, not just trades in the bond market, in the equity market as well. And I would say every market that is out there, listener the last thirty seconds when we're talking about kind of the unwind, how much does liquidity that we've already seen the last few months matter? Are we kind of set up for the bond market to panic a little bit twenty seconds?
Yeah, a loss of liquidity would not be good, and a panic is not good. And you know really quickly if we do get a deal, there's some idiosyncratic things happening with the Treasury having to rebuild their cash buffer selling a lot of bills that's going to siphon liquidity out anyway, So a blow up and basis and less liquidity that would be a mixture that is not ideal.
Liz McCormick, our chief markets correspondent, true expert in all things bonds.
We thank you as always.
You're listening to the team Ken's our live program, Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app and the Bloomberg Business app, or listen on demand wherever you get your podcast.
It's get a little bit more on what someone was just talking about.
Dana Telsey a true expert here, chief Research Officer and CEO of Telsey Advisory Group. And look, if Paul Sweeney was here, he'd say she is the best in the biz. So I'm gonna say it.
She is the best in the biz.
Dana, thank you as always for joining us.
Let's talk about when the company.
Thank you for having me.
Of course, the pleasure was there one of the company stories that someone was just talking about the Gap stories really surprising to the ubsite.
Give us your take.
So my take is that you've had obviously years of week results. Something's going on with the women's business, that women are all of a sudden spending. You heard about that both at the Gap brand, and you also hold about it at the Old Navy brand in terms of the strength and frankly, the cleanliness of the inventory, which frankly was down around twenty seven and a half percent, I think helped. I think it's helping to move the needle.
This does not say that the Gap is fixed by any measure, but it says they're on the path of progress and that even though they don't have the CEO, they're not letting grass grow under their feet.
Dana, help me understand the bottom line here when it comes to these retail Ooh, I'm sorry.
Well good, I'll take We'll take it from here, Dana, talk to us. I think what Maddie was asking specifically about the bottom line when it comes to Gap, and we know they've had their own inventory issues as well and certain partnerships.
What's the update there?
I'm sorry, Can you just repeat that?
Sure?
What is the update when it comes to inventory and their partnerships on the bottom line.
For a company like.
Gap small, the inventory partnerships are first going to get into the fold. You take a look at Mattel, what they're doing the partnership with these are things in order to drive brand relevance and drive brand heat to re engage consumers. I think the inventory management that they're putting in place in order to be closer and chase into
goods is really what is beginning to happen. We all know that the headwinds of supply chain disruptions led to over inventory last year that is first being positioned and cleaned out. One of the key themes coming out of retail earning season so far is inventories are coming down and it seems by the second half of the calendar year will be clean with inventory levels in line with sales growth.
Dana, sorry about that, we were having some technical issues, but excellent answer there. The other thing I wanted to hear from you is, you know, what is the takeaway from this earning season? After it felt like the Target Walmart story made sense to me. The consumer is struggling, But then we had beats. Like you said, we had an Old Navy doing well, we had Abercrombie doing well Urban.
So what am I supposed to think about the health of the consumer When I look at the totality of these retail earnings.
I think you have to slice it up into the income levels of the consumer. You have to slice it up into where is the particular company. And I think everyone is working to manage the headwinds of crime and shrink that is out there, the uncertainty of the levels of consumer demand, and the focus on product innovation to drive conversion. I think conversion matters. I think essentials versus discretionary. It hurts me to say that essentials is still winning
over discretionary. I can't wait until my world comes back in discretionary. But we're going to need confidence and to stability in the macro to drive discretionary well.
On that exact topic area. When it comes to discretionary, some of my sources have told me that they see the dollar continuing to descend because of these debt sealing issues and that that might be good for consumer discretionary. What is your outlook on that.
I think overall, for consumer discretionary, I think we're going to get to lapping easier comparisons in the back half. I think investors are going to look by the third quarter out to twenty twenty four and will we be going to begin to see some improvement. I think right now, I think cautiousness is there, and even on the luxury end,
there's a moderation to spend. Even though from twenty nineteen to today, luxury brands many of their revenues are up fifty percent plus, but in a year over year basis, you're seeing a moderation.
Are you thinking a lot about a dollar impact in that calculation?
Though, yes, yes, I am. I think that's something to be mindful of.
Dana expand on what you were saying about luxury specifically here, it's largely a lot of the gains have been largely China driven. Correct me if I'm wrong, But what happens when you start to see a Chinese consumer moderate as well?
Well?
So far, there's the reopening in China is happening, and it's pretty solid for some of the accessories companies. I would say that the tourism track to hear in North America will be the next benefit. We have not seen that so far. We have not heard of moderation in China on the luxury side, it's been more here in North America that we've seen that.
And does that make up for the slowdown in the American consumer? What is kind of the tug of war essentially between the American consumer and the Chinese consumer when it comes to read.
Through, I think the read through is that the Chinese consumer hasn't been able to go out socially engage. They are a year behind us in re engaging with social occasions and events. Here in North America, the macro headwinds and concerns over debt sealing, stock market volatility, and also the allocation of capital to going out and experiences for this core luxury consumer. At the super high end, mezzas
and Chanelle's are still winning and showing big games. I think the others where it can be upper accessible, that's where we've seen some of the moderation.
And for when you're.
Looking at the opposite end of the spectrum, must take a look at say Walmart, for example, When you look at the stock Dana, it's kind of almost an outperformer in a lot of.
These recessionary periods.
Do you think that's kind of a worthy stock to look at right now, We've got about let's just say forty five seconds.
Yes, I do think so. They're having an investor day next week. It's a worthy stock to look at. They manage inventory as well, and look at the market share opportunities they still have, even as big as they are.
Gotcha, Dana Telsey, we think you as always she covers the gambit, but she had on my Paul Sweeny voice here and say she is the best in the biz.
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Now, just to update everyone who has been keeping a key watch on this indicator, Krety and I are still without rings on our left hands. So we are going to have a great conversation next with birth Gerstein, CEO at Brilliant Earth. We're going to talk about the wedding industry, diamond prices, engagement rings, all those fun things. Just to keep in mind for us creedy moving forward as we as we you know, continue this journey. Hint, hello listener, So let's get to it with Beth. Beth, thank you
so much for joining us on this holiday weekend. Just kick us off by giving our audience a quick recap on Brilliant Earth and what you guys do for those not familiar.
Great and I'm happy to be here, thanks for having me so. Brilliant Earth is the next generation fine jeweler for today's consumer. We were founded on a mission for sustain ability, transparency and inclusivity, so we've really been driven by mission, our mission from the beginning. We also have a very unique omni channel model, so at this point
we have thirty one showrooms. We are a digital first company and we offer a really beautiful wide assortment of engagement rings, wedding rings, and other fine jewelry products for a wide variety of occasions beyond bridle.
What are you seeing in terms of the trends there? I mean maybe two three years ago during COVID, it felt like the big trend was pause, wait, like don't get married just yet, postpone your wedding, and then there was this influx of kind of booking some of these things.
Beth, where are we now on that?
Yeah?
Absolutely.
So last year was actually one of the biggest years in weddings in decades. There were two point six million weddings in the United States, and I think nineteen eighty five is the last we'd seen such a boom. I think part of that is just with COVID, a lot of people were waiting to have the big day when other people could gather. Obviously there was some disruption in
dating and how relationships formed. I think actually that through COVID, it made those relationships tighter, and so you had a lot of engagements as well, And so this year is more of a normalizing year. I think one of the great things about Bridle is it's a very recession resilient.
It's very overall resilient category. Like typically there's about two point two million weddings in good times and bad and I think just coming off of these peak years, we're just in a phase where it's normalizing to a more regular time period versus COVID.
Talk to me a little bit about your foot traffic. I know that you've expanded your showroom footprint, going from fifteen to thirty locations. But foot traffic is something that I feel the wedding industry can really benefit from because you got to go in person to try on the dress, to try on the engagement rain. What numbers are you seeing and how are you planning to grow them?
We think about things actually a little bit differently because we really focus on this omnichannel model.
A lot of times.
The way that our consumer shops, they start the process online, it's very education driven and then they'll often make an appointment to come into one of our showrooms and then you know, it's very seamless in terms of where they end up purchasing. So foot traffic for us is a little bit different because of that appointment driven model. You know, we're seeing really nice overall traction in terms of people
making appointments, in terms of people walking in. We have a variety of different formats, so some of them are upper floor and we've just expanded more into some of those ground floor locations where it's more easy to browse the collection without an appointment and seeing really nice results
there as well. So one of the metrics that we look at, for example, is we're really looking at how the metro overall grows, and one of the things that's really exciting for us is after a year period, we see the bookings and the revenue in that metro actually double. So it's more about how we can drive that incrementality and offer a really seamless experience for our customer.
Beth.
Of of course, you are the CEO and co founder of Brilliant Earth. It is also listed on the nasdeck. By the way, b r LT is your ticker, Beth. A lot of optimism around the wedding industry, trust me, me and Madison. No, the amount of money we are shelling out and just being yes at these weddings are are kind of insane. But that being said, talk to us a little bit about your stock performance here. If you're looking at the last year or so, your shares have really taken a little bit of a hit.
What's the stock market missing?
Well, I think that you know, one, we think that there's a ton of value in Brilliant Earth, and you know, we're not necessarily concerned with stock performance on any given day. You know that said, we are a profitable company. We've really been able to differentiate with our brand and being the largest single brand independent jeweler in the industry have
very strong brand awareness. I think the figure I mentioned in our last earnings call where we were at sixty six percent aided brand awareness, which was a twelve point increase over the same measurement a few years ago. So overall, I think that we're continuing to gain share, we're profitable, we're really differentiating ourselves in a fragmented industry. And yeah, we're I think we were part of the twenty twenty one IPO class. So I think oftentimes, you know, people
don't tend to understand our differences versus others. Perhaps that when public that maybe shouldn't have.
And when it comes to the interest in specific products that you offer from consumers, can you talk to me about scifically sort of the ethically sourced diamond space and how you're thinking about that and how the demand story for that is going.
Yeah, you know, as I mentioned earlier, we really were founded on the belief that the consumer deserves an ethically sourced product for such an emotional purchase that really represents love and commitment.
It was so important that.
We could trace the source that we were really transparent about the offering that we had. We are really focused on giving back. We have a brilliantarre foundation that gives back to a lot of projects within mining and responsible sourcing as well as climate change, and this resonates with the younger consumer. I feel like sustainability, transparency or table stakes, but customers, I think really appreciate buying from brands that they believe in and that come across as authentic to.
Who they are.
And so that's what we've been about from the beginning. And you know, we talk about this in a really open way and I think our customers appreciate it. So one of the things that we offer we have a really nice selection of sustainably rated lab diamonds. We have a really great selection of blockchain enabled diamonds. So we're constantly investing in the technology and the underpinnings to show to our customer.
So this is.
Very blockchain enabled diamonds.
I did, Yeah, we're using blockchain. We're using blockchain to be able to really showcase the journey of a diamond to a consumer, so you can understand the manufacturing practices. You can understand everything from the rough carrot weight and looking at a video of the rough diamond from when
it's unearthed from the mind. So, I think it's just the technology is quite frankly, it's really state of the art, and it shows that we're really investing in transparency and traceability along the way for the consumer.
All Right, we'll certainly have to have you back on to talk a little bit more about the updates there they're seeing in the blockchain space. Bet Gerstein, the CEO and co founder of Brilliant Earth, training on the Nasdaq with the ticker br l T. We thank you, as always for your time.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
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