Retailers Face Long, Tough Road As Unsold Inventory Builds

at Bloomberg dot com. Paul, I'm going to go out in a limb here and guess that when people work from home, they're not putting on a suit and tie, and they may still be in their pajamas, depending on who you are. And there's a question of will they ever put on a suit again, and will they find themselves and pajamas more often going forward as they increasingly work from home, regardless of the progress or the progression

of the pandemic. Joining us is James Fallon, editorial director of Women's Where Daily, to talk about pajamas and the new workplace attire. James, aside from being tongue in cheek, there's been an absolute ravaging of the retail landscape, with hundreds of thousands of people furloughed or laid off within the industry and a real exerstential question facing the entire

industry of whether we'll ever recover. Can you give us a sense just right now of what the thinking is among major retailers and fashion houses in terms of whether they think that a lot of these people can be brought back and be restarted after this as things get back to normal. I think the sense li says that

they will come back, but very very slowly. And um, you had the announcement from CA Prix Holdings this morning that they were furloughing set their seven thousand North American retail employees and they're saying their stores now won't reopen until June one, and that's probably one of the latest

dates we've seen of stores being reopened. Um. So if consumers aren't being able to go to a store for six months of and this sole social distancing becomes part of our every day norm, I just don't see people rushing out by, you know, clothing right away, um, beyond essentials. So you're looking probably if then before people begin to

behave quote normally and stop the arnking suits and pajamas together. So, Jim, what a retailer is actually going to do with the inventory that's been sitting in the store for months, that's the key question. I mean a lot of it will go, of course into the off price channel, but even the t j x IS and Ross stores can only take

so much of it. Um. You had many Chariko PVH last week saying that what they're looking at doing is taking some of the existing more classic spring summer merchandise and basically putting in a warehouse until spring and then bringing it out again. Um. You know, a pair of Chinos is a pair of chinos, so that will last. The downstream effect that will have on manufacturers, however, will of course be significant. I mean they're all their orders

already or in cut for fall. If suddenly for spring, they're basically getting of what they normally are expecting to get. That again, it's going to have a real impact on overseas manufacturers, particularly in China. Jim, is it's just accelerating a trend away from brick and mortar. Yes, really, I mean it's it's a systemic change, and the US was overstored for decades, and so this is probably going to be a major shaking out of whether the consumer returns.

Once we're all allowed to leave our houses. We may actually find the stores an escape mechanism. But I think again, it will very much shake out the weaker players and even some of the medium level players, and will begin adjusting the square footage per consumer that's needed to be adjusted for years. Jim, what do you think the impact is going to be on luxury luxury? You're probably going to I mean they're already down again. I mean in

China they were down, etcetera. I mean luxury may come back faster, but again depending upon the nature of Wall Street. I mean, luxury, of course rebounded pretty quickly after the two thousand two thous financial crisis. If the stocks come back and those people start making money again, definitely, But so much of the luxury market was dependent upon the Chinese that it will be depending on whether the Chinese

consumer comes back. We're already seeing anecdotal evidence of that consumer beginning to spend in China, but a lot of that luxury spending also was dependent upon the Chinese tourist, and I don't see the tourists coming from China again, certainly through the second half of the year. So when you talk about the acceleration in the shift away from

brick and mortar to an online presence. I'm wondering about an increase in bankruptcy since there are a number of retailers that have been holding on by their clause to their existence free years and have a lot of debt that have been enabled to do so by their investors. Do you think that this will actually lead to a shakeout with increasing bankruptcies or do you think that there will be sort of tripping along here on an ongoing basis.

I think you will see more bankruptcies coming through. I mean, if you take the number I think I saw Moody, seventy seven percent of the bad debt within Moonies was really held by six companies, Um you know j C. Penny and Jay Crew being amongst them. So you already saw the reports. Others than us have written that Neiman Marcus is maybe looking at a bankruptcy. So you are going to see more bankruptcies, probably even during this let

alone coming out of this. Absolutely, I don't think the Week can hang on if they're not getting any business for six months, they can't. They can't hang on forever. Jim Fallon, thanks so much for joining us. We really appreciate your commentary. Jim Fallon, editorial director of Woman's Where Uh Daily. At least I thought that was a good question.

I think, you know, it's certainly reasonable to assume that there will be a This will cause a big shakeout in the retail space, a lot more store closings, which is a theme we've heard about. Yeah, I think that it's going to be brutal, and it's brutal for for the tens of thousands of people who have been laid off from the industry. I also do wonder how it

will change style going forward. I mean, it seems almost silly chat to think about something like that, but I feel like working from home will change people's perspectives at least a little bit going forward, and what people want to get dressed up and go out or does that what that seemed full of has given what we've just gone through. Or on the other side, were people just really want to you know, rip loose done. You know,

I'm actually voting more on that side. I gotta be honest, looking around, but just saying, you're listening to Bloomberg Markets with Lisa Abrama, Eds and Paul Sweeney on Bloomberg Radio, you know that's a real question right now of whether the pendulum has swung too far to the bearish side or whether it's not bearish enough, And that is a question the analysts are trying to answer completely blind, since you cannot model chaos, and since you cannot know a

lot of the questions or answers to the questions currently in the market. Joining us right now is Marco Paypeck, chief strategist for clock Tower Group, and he has a compelling view of this which actually goes against consensus. I would argue, Marco, you argue that people are perhaps a little too pessimistic. Am I getting that right? Yes? I would say that that's the case. Thank you for having

me on, Lisa. Okay, So why well, because I think one of the things that's happening in all the modeling community out there is whether it's you know, looking at the medical data, whether it's looking at the economic data, is that we're largely linearly extrapolating from really really bad data. The data on the virus itself is universally poor on

almost every single um characteristic. The only thing that we really know about the virus, the only thing that we have pretty good data with is that it does attack different age cohorts in different way. Other than that, we don't really know the mortality rate. We don't really know, uh, the intaction rate. Um. So that's the first thing. The second thing is we don't really know, um how how the economy is going to develop over the next several months.

And one of the reasons we don't know that is that we don't really understand how policy about social distancing will change over the next several weeks or months. And so what I propose is that we kind of think about how policy reacts to something like a balance between you know, um, a virus and economic impact. And I think what's going to happen over time is that the unit cost of fear is going to rise. And what I mean by that is that at the beginning of

a crisis like this, fear is cheap. I mean, there's no real cost to staying at home for the first week, second week, third week. But as uneflorymed amounts, as people start to project their own economic well being into the future, you will see the unit cost of your rise, and that will then compel policymakers to alter the current social bustancing policies in some way. Thus, mitigating the ultimate economic

impact of the virus itself. That's a dynamic argument. It's really difficult to model, but it's not just linearly extrapolating for where we are today um to the next two to three months, which obviously would produce a very bearish forecast.

All right, So Marco pencil aap force if you would kind of your g d P a look for you know, the remainder of because there's a question and I guess initially people thought it might be a v quick snap back, then maybe you maybe not so quick, and then maybe even something like an l which is we're in this for a long term. Okay, well, let's let's go back a little bit and think about what is currently priced

stin in terms of GDP kind of outcomes. And I think that um on March three, we hit an intra day low of SP that's a thirty six percent draw down, which is, you know, just the average draw down in a recession. So I think the SMP five really really quickly priced in a relatively bad outcome for the economy. What I would say is that you know that was March, we already had at that point about a week worth of social distancing policies. Um, clearly we're gonna have them

throughout April. According to the o E c D, each one of those months will produce a two decline in the annualized GDP. So I think it's fair to say that globally speaking, we're probably gonna lose for sure from an annual growth perspective. FO So instead of three and a half, we're already down at negative zero point five, we could say maybe another half a month or month

of that. So I think that on an annualized basis, we're going to be at minus one, minus one and a half percent global GDP growth, which is obviously absolutely terrible. But then there is this dynamic aspect where we see social distancing policies alterned, alternated, mitigated, reduced, and then you have the wall of tsunami coming behind you, this wave of fiscal stimulus that is absolutely unprecedented, and it is something that I think the market didn't price in on Marche.

The speed with which we priced in a recession tells you two things. One, we have no idea, as you said, Lisa at the beginning, we have no idea how to price chaos. So that was one of the reasons we fell down so hard. The second thing is that I think most investors, and I know because we speak to a lot of macro hedge fund at the firm that is their business. Um, you know, most of them did

not expect anything like this. Most of them use the two thousand nine stimulus playbook as the best case scenario. And then on top of that, many said, well, politics of the upcoming election will actually there delay some of these stimulus efforts. Yes, this is sort of game theory, right. It's basically how bad does it have to get before the tsunami of money gets even bigger? And that basically this sort of feedback loop will provide a backstop to markets.

Am I getting that right? Well, here's what I would say, Actually, Lisa, I don't even think you need to get better much worse. So, for example, right now, I think you can objectively say that things are actually getting better. You know, once the market saw that Italy and Spain and figure this out, it doesn't matter how bad it gets into the US this week. In other words, once we as market participants can kind of check off that a relatively incompetent O C D country I Italy can get a handle of

this issue. It doesn't matter if we have two bad weeks going forward into us that will be kind of like priced out. So I actually think that in terms of what's coming down the pipeline on the stimulus front, it doesn't even have to get worse for us to get more of it because paulicy makers now have figured out that they can use this as the reason to kind of get a lot of a lot of things that can pass in the past. Because of Paul polar Is, they're not putting like a shopping list together for the

infrastructure plan. There may be a month away that could be wanted to trillion dollars without really even needing that extra ten percent of GDP, because remember we're at twelve percent of GDP in terms of stimulas. That's more than double what in two and nine the American Reinvestment and Recovery Acts m basically gave us. We're already double that, and we may get more no matter how bad things get over the next couple of weeks. And Marco, thanks

so much for joining us. We appreciate your point of view. Certainly, I think that more optimistic than I think we've heard generally speaking over the less several days Marco topic partner Chief Strategies for the clock Tower Group, based out of Santa Monica, California. So that was at least a certainly a different take on how this could all proceed to over the next several weeks and months. I see how pandemic mentality is allowing people to lobby for things that

they might have wanted anyway. I'm certainly getting lobbied at home for all sorts of electronic devices that they had wanted anyway, and me being my too, are willing to sell out to keep them occupied. So there is so there is that. I mean, you've got my own fiscal stimulus going on right here. This is Bloombird Markets with Lisa RAMOWDZ and Paul Sweeney on Bloomberg Radio. Well, like all financial markets, the municipal bond market has certainly been

racked by volatility over the last couple of months. But the upcoming and potential fourth fiscal stimulus plan is likely to include a pretty big slug for infrastructure. The question for a lot of investors is what would that mean for the music bond market. Fortunately, we have Michael Jays as chief US Public Policy and musicipal strategist from Morgan Stanley joining us. Michael, thanks so much for joining us. Let's start by just giving us a lay of the land.

What it's been like to be a mimunicipal bond investor over the past couple of months. It hasn't been fun. Um the volatility that you've seen over the last three to four weeks. Uh, it's prettiest on the So the movie you had from basically the types of the muni bond markets to the wides, we're both bigger and magnitude and speed by several degrees than what you had in

the global financial crisis. So, uh, you know, is this is not something that is necessarily unexpected because you've got a muni market structure which is given to about the volatility and you saw this in Taper tantrum, and you saw this, but this is this was just degrees further off the chart, literally quite literally off the charts. Michael. There's a question about just the volatility that comes from

a market that's not as liquid as a treasuries. And then there's a volatility stemming from the question of whether we're gonna start seeing municipal defaults. And I'm just gonna go full catastrophic. Here is a subway system in New York City going to default. Um, you know that's that's actually that's a more complicated question to answer than you would think. That's not what I want to hear. The answer is no, these major metropolitan areas are solvent and

we're going to be fine. Is that not the reality that we're talking about? Well, well, major must politan areas,

different subway system. Here's what I say. The chief of the mt A basically expressed the view that they need extra cash flow support because they're down ridership, and I don't think that's necessarily Probably now, in the bill that was just passed by Congress, they got about three point eight billion dollars worth of external support, So from a you know, from a cash flow perspective, once they're saying that they need more than that, uh, and probably a

lot of this is going to be contingent on how long ridership is depressed. As it is, I wouldn't necessarily conflete what's going out with the m t A as being indicative with kind of broader metro areas generally, right, the mt A sort of its own system. New York city government is its own sort of separate balance sheet

and income statement per se. So I think we have to be a little bit careful about looking at credit like the MTA, which has a lot of debt and is experiencing a substantial decline in ridership, and extrapolating from that to the broader kind of you know, you know, high grade city metropolitan area world of MUNI bonds. So, Michael, there is talking the upcoming fiscal Stimus number four that there would be again a pretty big piece of infrastructure.

Hearing that from Speaker Pelosi, how do you think that might play out and how kind of the market reacting to that kind of potential um At the moment, I don't think the market is terribly focused on this, probably more focused on whether or not the Fed is going to intervene here eventually. But here's what I say about infrastructure when it comes to two muni's. Obviously it matters

quite a bit how the spending is structured. But historically, when the federal government has decided to boost the amount of infrastructure spending, um, it's doing what's actually done. This takes some of the credit pressure off of those state and local government. If the thorough government is putting more money in of the systems that will government spend a little bit less of their own so effectively helps them, uh, improves on their capital needs, but not on their dime,

so to speak. So if you've got that slug of money, you know, I kind of viewed it as a modest credit positive, uh, not necessarily addressing what are the acute needs of the muni credit system right now, But I'd say it's some modest positive. I guess the reason why, the reason why I asked about subway system, and yes, that's an idiosyncratic credit, I guess on a broader level.

And you're talking about the amount of money that's going to get injected in states municipalities from the Care Act and from Congress, and I'm just struggling to understand the depth of the pain. You have a slowdown in local economies, you have an incredible increase in spending trying to build out the health care infrastructure. Is there a high chance that we're going to see muni defaults in a significant way, in a way that we've never seen before, especially when

you throw in the pensions and the underfunded status there. Yeah, Well, if you have to answer the question sector by sector. I guess the first thing I would say is that hundred fifty billion dollars out of this bill going to state ends up being somewhere around kind of two to five percent of general fund revenues of states. Now, our economists have us UH in real GDP terms being down over the course of the year about five and a

half per cent. So if you assume and I don't know if it's a good assumption it or not, we're still doing our own work on it, but you assume that UH state reve state tax revenues might be done at least that much, then it's probably fair to say that we've only addressed part of the kind of year term shortfall. And if you're a state, then you're gonna have to either draw down on your own reserves, do some casual borrowing, or undertake some austerity, or probably some

combination of all of those. And you know, state, this is this, You know, the severity of this downturn is much greater than anyone expected. But coming in to this, I think it was it was fair to say that governments had necessarily build reserves back up the levels where before the global financial crisis they would have been able to just rely on their reserves. So it's a sector we've been underway for a while, and I think you're

still supposed to look at it that way. But if you're looking at something like airports, for example, which you know, on the surface could look pretty scary because no one's flying, the liquidity in the reserve position of airports is um almost off the charge on the other side, so we think there's a lot more opportunities there. Michael Jesus, thank

you so much for being with us. Michael Jesus, chief US Public Policy and mdicipal strategist for Morgan Stanley, joining us putting to bed some of my absolute catastrophic situation extrapolations, which is a good thing. My father is a mathematician. He and I were talking about how you can't model chaos,

and we're kind of entering a chaos type situation. So there is that when we talk about chaos and sort of to fall out, you think about commercial real estate, and you think about all those stores that are forced to shut her and unable to pay their rents. And we're scaring that not only with stores and other businesses, but also individuals, which really raises a question what's the value of commercial real estate and will ever be the same again as people work from home and increasingly choose

remote work paths rather than going to the office. Kevin Thorpe joining us now. I'm really looking forward to this conversation. Chief economist and head of global research at Kushman and Wakefield. Kevin, you know, we've heard a lot of gloom and doom, a massive dislocation the commercial real estate market, with a lot of people saying that not only will miss payments lead to increasing declines in current values, but a shift away from the office place, uh moving, moving the valuation

permanently lower in the longer term. What's your view on that? Yeah, so first thanks thanks for having me on, and I do want to give a big salute to all the healthcare for fessionals, the doctors and nurses as well as you know, the cleaning staffs, building maintenance, just really everyone who's on the front line, uh doing their part to

battle the outbreak. I'm truly in awe of these people, and I think I heard earlier the earlier point made that you can't really model chaos, and I couldn't agree more that ultimately the commercial real estate sector, you know, has strong, strong links, strong correlations to the broader economy, and there's just so much that's unknowable. The path of

the virus, duration, it's severity all. I mean, all of these factors are central to our ability to model the impact on property, and right now there's just just too many unknowns. This is why forecasts are just all over the map on this and and consistently being revised downwards weekly. I mean, what we do know is that ten million people just over the last few weeks have applied for unemployment benefits, and that recession is truly just a given

at this point. In terms of property, I mean, in pricing, uh, it's it's difficult. It's not impossible to price risk right in this environment. And so what we're seeing is that many lenders and investors have just adopted this wait and see posture. UM, but would emphasize that this is not the great financial crisis, right, that households and balance sheets are in much better shape. There's last cycle. Dry powder wasn't there when when you called at this time it

probably will be UM. And I do think that the big institutions remember the missed opportunities and not to blank capital towards the bottom. So a lot of unknowns, but you know, certainly there's different scenarios where the capital markets and property could could come come storming back once we have more certainty. So, Kevin, give us a sense of how the commercial real estate industry fared in the context

of the two trillion dollar fiscal stimulus plan. Yeah. So, um, well, I think the really starts without I'll come at from the perspective of the land lords, of the building owners to landlords, and it's um, you can't emphasize enough that the landlords are being impacted by the decline in the economy,

right that's really the central issue. And many businesses are just struggling to make money right now that through no no fault of their own, just paying rent is just already difficult for some, and if this drags out, it will become increasingly difficult for many. And so you know, the Care Act, any really any policy that aims to get the economy back on its feet more rapidly, is

generally good for landlord, generally good for tenants. And so what the Care Act does, then it does a lot um It provides, you know, qualifying tenants with different liquidity options. It allows some of them to apply for aid their tax provisions, and then sort of their feed through impacts on the consumer side with the cash payments to households and expanding on employment benefits. I think all of that should help. I will say that, you know, we are

encouraged by what we're being so far. So landlords and tenants are, you know, they're they're working on solutions together. They do recognize it's just a horrible thing that it came out of nowhere. It's no one's fault, and so you know, there's a very much it let's work together to get through this mentality. Yeah, and Kevin, to your point about first responders and healthcare workers. At seven pm every night, everyone opens their windows here in New York

City and cheers for the first responders. And yesterday people cheered for three straight minutes and had pots and pans that they were banging, and it was it's getting more

and more robust with every day. I do want to get to the question though, of how we're going to emerge from this and some of the sea changes that people are going to experience, and and the office place really has been in the center of that do you foresee a time in which a much greater proportion of the workforce does start to work remotely, and we do see the office space take less relevance in downtown in

metropolitan areas become less crowded. Well, I do think that what you'll see is every you know, almost all businesses are are stopping or thinking, let's let's take another look at that. Uh. What I would emphasize and we're we're thinking through that all of that right now and studying this and talking to different scenarios with our clients. I would emphasize that there, this isn't the first time that real estate has had to adapt to just changing a

changing macro environment. And you kind of go back to last ten to fifteen years, we've we've observed so many disruptions when you think about property in real estates with these technology shifts, coworking, the movement towards density, you know, packing more people in recessions and real estate does you

know evolved through these through these macro shifts. And I do think teleworking is kind of a good example, especially right now, where you know, people have been able to connect to the internet and work from home for a long time is going on, you know, fifteen twenty years, and demand for office space has continued to grow, right so the throughout that period. So the world continues to build office buildings for the for the I think the

simple reason that there is strong demand for them. And so yeah, I do think this event will cause businesses to take another look at their space. But you know the I do have confidence the property markets will adapt

to continue to play an import role in the economy. So, Kevin, you know, I think there's a fairly obviously very good consensus about the second quarter GDP UH contraction is gonna be very deep, very severe, But obviously they're probably a little bit more of UH confusion or just you know, I think people discussion about how the country will come

out of that second quarter contraction. How are you thinking about it at Kushman and Wakefield in terms of you know, third quarter, fourth quarter in sure and and you know, very just doing back of the envelope math when we model this, you you get to a negative twenty Q two GDP g g P number UH in the second quarters. To your point. The other other point I would make is just mathematically, just in terms of arithmetic, even if it's not a super strong, you know, rebound in the

third quarter. It may look strong just because you're coming the math of it has lowered your base so much on g d P coming off of Q two, I think timing this again is just nearly impossible. So the way I I we've started to think about is what's the framework for recovery, and I do think that's becoming clear.

So there's the phase one, which is where I think we are now, this defensive phase, which has contained the virus as much as possible, mitigate the economic damage through robust policy measures, and you know, I think that's where we are. Phase two is the disaster recovery phase, and so that's likely to be a partial reopening of the economy. People start easing back to work, confidence begins, UH sort of incrementally coming back, as as as hopefully the infections

begin to abate. And then there's Phase three, which is the sort of the march back to healthy, let's call it march back to healthy GDP gross domestic product. And economically, we're certainly aiming for the v shape, a snapback recovery, but there's certainly plenty of other shapes. I do think ultimately the trajectory of the recovery comes down to the path of the virus itself and where we are in

it and when competence is restored. Uh, my gut says this is slower U shape is looking increasingly likely at this stage. We're speaking with Kevin Thorpe, chief economist and head of Global Research, Akushman and Wakefield, and I do wonder there have been a number of calls for the Federal Reserve and the federal government to take a stronger role in back stopping real estate valuations, including commercial real estate.

What's your view on that, given the fact that a lot of people are saying, you know, focus first on the people who are losing their jobs and supporting state's municipalities. Yeah, so, you know, so first, I think the policy makers, both fiscal monetary, the response to this economic crisis. I mean it's it's it dwarfs anything we've ever seen before, right,

I mean its disfer perspective. If you sort of take the two point two trillion dollar Cares Act, the other two bills that came before that, you factor in all of the big bold moves by the Federal Reserve, flash interest rates, restarting QWEE you know, launching new credit facilities of dollar squall lines. I mean, all of that really summed up to a huge over g d P, so they haven't. I'm so sorry to do this. UM let's continue this another time. I'm sorry to say, but we

are getting Muriel Bowser. That was Kevin Thorpe of Cushman and Wakefield. 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. I'm Lisa abram Woit's I'm on Twitter at Lisa abram Woit's one before the podcast. You can always catch us worldwide on Bloomberg Radio