Surveillance: The Retail Transformation with Cowen's Chen

out of China and out of Europe. Have we seen the worst of it? That's a question we've been debating over the last couple of weeks. What do you say in response, Yeah, not yet, not yet. You look at the churn of p M I that's very nice. China, we know, has problems. They've got the pork holding back the consumer, they've got the trade stuff holding down industrial production, they've got secular changes in their growth. Blah blah blah.

That's all very nice. But when we look at the major economies in the world, and we look at the hard data, and we look at the stuff that economists should be focusing on the front page of high frequencies. Weekly Notes on the global economy today is all about inventories, and inventories are at a near record high, other than during the financial crisis in Germany, in Japan, in Canada, in Britain, in Europe, at the Mercedes lined up, that they care more than just Mercedes. It's too much to

be just Mercedes. And certainly in Japan they don't have Mercedes lined up, and in Canada they don't have Mercedes lined up, and um, you know it's it's a backup of goods that have been not been sold. And typical traditional economic theory says that when you have high inventories, companies cut back production and they feel orders out of stock. So please give a narrative to this. Is this the global economy slowing or is it a shift away from

stuff towards other types of purchases. Well, even if it is a shift, there's a mismatch between the amount of stuff they're making and the amount of stuff that's being bought. So while that mismatch occurs, companies will cut back on production, throw workers out of jobs, and that's how a recession begins. Well, I guess my question is really how concerned should people be about the recession in manufacturing? Is this a sort of telltale sign of a broader problem. Well, heckly so.

We have a recession in manufacturing, let's not give it a different name. Industrial production in Japan reported on Friday, while we were all enjoying our turkeys, down four point seven percent in a single month. European production flat, German industrial production down, British industrial production down. I mean, it

doesn't get worse than that. We have one. The question is when do we turn the corner and I say that we The way to use these inventory charts is to say, look at we're not going to emerge from this until these inventories are restored to more normal levels. And there's no sign of that happening. They're still rising. Now you want to get philosophical about it, you could say, well, maybe too low interest rates or zero or negative interest rates.

In real terms, is it possible for firms to afford to hold up to build up inventories rather than fire workers. It's cheaper to build up stockpiles and to fire somebody, and that's how we got into this mess. I'm not ready to say that yet. That'll be for the historians. But for where we are right now, as long as the inventories are still rising, I don't see an end to the industrial recession. We've had three mini cycles through this expansion, out of oh nine, out of twelve, and

out of sixteen as well, coming out of nineteen. Is a belief that we're in the early stages once again of another mini cycle within this expansion. Carl, I can hear you push him back against that, So put someone beat on those bones? Why is that the case? The meat on the bones is that maybe, just maybe what happened in two thousand and eight two thousand and nine isn't over yet. That if we look back to the Great Depression, everybody thinks, well, nine stocks failed, banks failed,

everybody jumped out of windows, and it was over. But it was a ten year event with three distinct cycles of stock market crash, banking banking system failures, and economic recession, with a third one was the deepest of all of them. So I'm not so sure that we have adjusted our financial system. Certainly not in Europe, Certainly not in Japan, probably not in Britain where the two biggest banks are

still owned by the state. All right, and Therefore we are looking at really what history will record as a depression that runs about so far twelve years and we still haven't bounced out of it. Then why are equities up? I get all you're saying. And you know, your your newsletter, your your research is acclaimed both your China note, your US note, your international great. But I believe we're in the greatest mother of all bull markets. Is it a

bubble because it's manipulated or is it real? Well, you know, everybody talks about keeping interest rates too low for too long, creating a distortion of the allocation of resources, creating bubbles and markets. So we look at an investor and where does an investor put their money? Alright, with negative interest rates, bonds aren't attractive. With negative short term interest rates, cash

isn't attractive. You know, where do you put your money to work to either take on more risk which increases the vulnerability of the system, that's the I left thing, or you buy stocks. So we have a wall of money going into stakes. And John this was very important one of the great insights last week in our conversations with Jeffrey you of ubs and that the money is unmeasurable that's waiting to go. So that's been the challenge of I think you can get the macro call right

and then the market call very wrong. At the start of the year, if you called for a weaker global economy, you were right. If you called for lower global equity markets to go with that, you were dead wrong. Looking at the performance of sake Germany on the decks and here in the United States on the SMP five hundred, just a final word, car if you may, on the prospect of fiscal stimulus out of Europe and out of Germany more specifically. We'll talk about this in a little

bit more detail through the program. But Chancellor Mirchle's coalition partner has a new leadership, and the new leadership would like some loosening of the black zero policy, that balanced budget. Do you see some loosening coming out of Germany anytime soon? Well, I think there will be. I don't think it will be as much as we would get to be. And the reason is is that the new SPD leadership only

has limited leverage in what it can do. They can bring the government down and have elections, but the latest polls show that they're polling lower than the extreme right wing parties. So if they pull the government down, they're out and they're not going to get back in. So that pulling the government down would lead to a minority government, which is an untested political system within Germany. So I don't think they're prepared to pull the button on this

whole thing. So they can negotiate some flexibility in order to keep peace and smoothness within the process. But it's not clear to me at all that they can get all of the fiscal stimulus that they want. Cal Wind. But great to see you this morning. I appreciate your time.

High Frequency Economics founder and chief Economies. What a joy to wander in Oliver Chen when cow and he writes incredibly granular notes about big box and of course is well a tune to luxury retail all the stores that you and your family and loved ones are going in,

and we're thrilled you could join us here. I want to get away from all the roads, cyber this and cyber that, and there's like eight ways to go here with a Tiffany Merger, Let's let's cut to the chase on something everyone's talking about, which is women renting clothes. Does the income statement work in that business. Yeah, what

we're seeing is tons of growth here, growth revenue. That being said, a lot of these business models are really focused on customer lifetime value, so they have to leverage a lot of fixed costs in terms of turning profitable. To answer your questions, leverage fixed cost means they've gotta make a lot of revenue just to begin to be profitable. Rightly, are they gonna do it? Are they going to take enough social psychic market share of women in renting the

runway to change your world forever? Well, our forecast calls for growth. You know, retail is struggling to be flat, so um we forecasts to continue to grow. And what's happening in retail is really the uberification of retail, which means rethinking clothing as a service. How do you rethink all material goods and other things in your life as services, including fashion and clothes? How small my classet is at

home because we're uberfying. So you're scaling bang classic rent the runways where the focus is at the moment Oliver, it's one fifty nine a month for the unlimited plau listen to you, but you get it terms with a retail value of up to three tho dollars, And from what I see with Rent the Runway, which has been a massive success as I'm well aware, is there at three thousand dollars. This is the high end of the apparel market, and I'm wondering whether this works for clothing

at the lower end. As H and M tries to sound in Sweden and others begin to make a push in the United States, can others do the same thing at a LEBA price point? Yeah, I mean we've seen business models like Castle. Castle powers many of the retailers like Bloomingdale's, Banana Republic, Scotch and Soda, and when they do this, this is a very profitable high royalty model

where you really use the inventory effectively. Running a platform like Rent the Runway, profitability is more of a question, but Castle and outsourcing a lot of these capabilities, it can be very profitable for both parties because you really need someone that operates a lot of the back office, operates a lot of the dry cleaning and capital intensity. And these retailers have to go where customers are going. And this is an engagement play too, with new customers

coming to the table. So the lrification of retail definitely ongoing, but still people buying a lot of stuff and this has been cyber uh Monday, Tuesday, Wednesday year decade. I'm trying to understand how to read the shift towards the online efforts and how we see the traffic declining in department stores. When do we hit rock bottom here? Well, m at different stores, we actually need to close more physical points of distribution. So it really depends on the retailer.

Macy's for example, needs to close you know, fifty d stores in our estimation. UM, what's happening is blending the channels. So what will actually be important this season given their six year days is the immediacy of the store, the buy in line, pickup in store, boat channels working together. Um. At retailers like Target and Walmart, the unit story is fine because a lot is grocery. But for the foreseeable future we see in store traffic declining negative low single digit.

That being said, UM, you can convert at a higher rate given that when you go into the store you're very purposeful. UM. So it's about managing both channels. But at some retailers it is about closing stores. This is when you're going to store. Brandy Melville is real purposeful. Are you complaining about your shopping trips? That right, it's so done. We can do that in a commercial brain.

If let's talk about the successes of and it's not just bricks and morti verses online for many, it's how bricks and more to compliments your online presence and how your online presence complements your bricks and mortar presence. Who's doing that really really well at the moment. Well, the real reality of the future is curbside pickup. Curbside pickup is used by over ten percent of America very very quickly. And Walmart has been a real pioneer of enabling you

to drive up, get your goods quickly and leave. That's been a very successful technology because customers are satisfied, customers are spending double the check size, and it's a younger customer using it, it's a wealthy customer using it, and it's highly highly convenient. So life and retails about saving money, saving time, and curbside pickup elegantly merges the online and the off flying as well as mobile. Mobile is the new mall, So rethinking retailing the context of mobile is

very important. To Speaking of mobile, I just got in John for you Advos Canadida, Goose the ericson parkass Is John Ferrell, I love it when you're focused in the morning. We've lost you after twenty four minutes. You've just drifted. It's Monday to it's a big week aheads, please get engaged. I just getting he's mobile shopping for you. He's trying to you want to protect him. A little later Rost Friday, plenty of reason of your Jed Oliver Chen, thank you so much for being with us. A Cow and its

senior equity research analyst. Happy holiday is happy if you had a bad weekend, I did not have a bad weekend. The TODs the to for a little bit, what's happened, Yeah, there's a little bit of that. I'm going I'm shopping a dead elephant when this is all over. Dane Smark joins us from Grandthorte, and of course she is a wonderful and important focused Midwest view. Diane, what is the distinction right now have the greater Middle West economy versus the focus we have on the two left and the

right coast. Well, what we're seeing is, of course the rise and unemployment tied to terrorists and tariff uncertainty in some of the states Michigan, Ohio, Wisconsin doing better. Um. In fact, Wisconsin has been interesting because they've had some manufacturing increases even as plants have closed, and they've been trying to get it some of those workers to try

to get them into the plants that are opening. But you really see the uneven performance here in the Midwest, much more uneven that gets masked as we get to the national data. If I had a cup of coffee with Charles Evans and you in Chicago, and I said to you, do we overemphasis size farm economics? Do we do that? Or is it valid that dairy farmers in Wisconsin flat on their back is a big deal. It's actually more valid that farmers across the board are um

actually flat on their back and suffering from bankruptcies. The smaller farmers are not getting the subsidies that we're seeing. In fact, most of the subsidies are going to very large farms, which you guys had a very good article about out there over this week. And I think that's the real issue, is that there is collateral damage to bank balance sheets from that. So I know Charlie would certainly take that as something he's concerned about. Is the

rise in bankruptcies that we've seen across the board. In bankruptcies in the farm sect or not. It doesn't mean as much jobs because not many people are employed on farms anymore, but it does mean something in terms of bank balance sheets in those areas. Yeah, one thing I'm struck by. I was reading this story in the New York Times how Amazon wove itself into the life of an American city, and I talked about how, yes, there are jobs, and they're growing number of jobs, but they're

worse paid. And it talked about Amazon and how it's offering employment which is good, but at much lower price levels in terms of compensation than the labor unions of your How should we view this in terms of the U. S economy, this transformation to the Amazon amazon ification of retail. Is this generally going to be a negative just because of the amount that people are paid, or is this sort of a temporary blip as we try to rejigger to the new economy. Well, unfortunately, I think it's a

long term trend. It actually started with Walmart. We called it Walmantization in the nineties and now it's Amazon, so you know, we've spread it from one to another. And the good news is they do have jobs. The bad news is, as you mentioned, they are much lower paid. And this gets into the Halloween out of the middle class. Another really key component of what's going on today with

these large, very large retailers like Amazon and Walmart. They're paying more to their workers who are entry level workers, but they've actually cut and circumvented the move up in pay to management pay. They've actually either lowered management pay or reduce the number of managers they have, which is derailed something we usually see in an economy, and that is when low wages, that wages at the lowest end of the pay scale pick up, they tend to trickle

up and move into middle class households. And so you've got that sort of double whammy of not only they're replacing jobs that once paid a lot more, but you're not seeing the mechanisms of moving up the wage scale that we once saw. And it's because these are such dominant players in our economy today. Dan nineteen minutes ines of the program, and I don't think any of our guests have mentioned the federal Reserve once. Steve Ingmander of Standard Shot and will be talking to me around about

thirty minutes time. And he's made the point as well that he's just come back from Europe and hardly anybody spoke to him about the Federal Reserve and it's just not part of the conversation at the moment. Should it be? Well, I think the Fed's pretty happy about not being part of the conversation, given hop center stage. They've been particularly in tweets out there, so they like being on the

sidelines and like being non existence. Um. I do think they will become more part of their conversation again as we get into twenty money. The critical issue is does the President pursue what he has been pursuing with trade with China, which would be an escalation in trade horse or can we really believe that we're going to get a pause in trade work which keeps the FED on the sideline. Can I ask you a quick question the show se Dion Swank, How close are we to stand

Fisher's ultra accommodation? Nobody knows and there is life. The hard u answer of them all is that we just don't know. We do worry about um sort of juicing the economy a bit too much right now in the bubbles that do seem to be forming, particularly in corporate debt markets. That said, we don't know anymore, and the FED has finally gotten home eating the humble pie enough to say we're not sure ourselves. SWAK always great to

get your thoughts on a program. Big week ahead for the global economy, and the US economic data will be coming through through the weight. We'll bring that to you right here on Bloomberg rightio. Okay, we're doing six minutes twelve seconds with somebody you need to listen to. Here's how it works. There's a percentile thing and it's pretty good.

It's like you're in your class and what you do in this case with Bill Smeede, it's a value and like if it's a big number, that's a good number up to a hundred and I guess being in the nine six percentile is okay, Paul for three year and if you're in the five year percentile and you're in the percentile, that's like, that's okay. So let's in terms of the holiday greetings, say to the wonderful Bill Smeede, value guy, Bill, what's the number one determinant of that

leads you to that excellence. Here overwhelming me. I'll give you overwhelming. You're in the nineties six percential for three years. How do you do it? The first thing is we looked to buy meritorious companies when they fall deep in the doghouse. And and uh, the courage to buy when you're you're almost nauseous when you put the orders in in the first place. Um is the starter. The second thing and maybe in the last Remember, we've been in a tenure bowl market that has been led by growth,

and we we hold our winners to a fault. And and that is not the typical thing in the value world. Most value people buy a fifty cent dollar, it goes up to ninety cents, they sell it and go try to find another fifty cent dollar. Charlie Munger says, that's really difficult. What he just said. You and Walt Disney, I mean to get away from the show and Walt Disney. Just as one example, I gotta go to you and carl Icon. I know you and Icon are going back

and forth on a daily basis. Occidental Petroleum off the anti Darco transaction ten year mediocrity negative three point four percent per year. The thing has been an unmistakable train wreck for a year and a half, and you like oxy. Yeah. You know what's funny about this, tom is I mentioned in a note to you folks that I think this is kind of the antithesis of ninety one. So, so what happened was we saw a chart that shows that that only four percent of the S and T is

an energy. And in nineteen eighty one it was in one Dr Doom and Doctor Death Woe, jin Allower and Henry Kaufman said there's no end to this inflation insight and that rates were going to go to t And today the ECB and the Federal Reserve say there's virtually no inflation anywhere in sight. Uh So what that means to a contrarian like us is you want to exchange

expensive debt for assets in the ground. So if you go back and look at the Occidental situation, uh, Chevron offered to exchange ten percent of their common stock and uh uh and eight billion dollars in debt for Anadarko Petroleum and instead Occidental paid five billion more by offering, you know, thirty three billion dollars in debt, including ten billion dollars of Warren and Charlie's uh, you know Berkshire Hathaway money, uh, and five billion of equity they gave

up way less equity. This is too many numbers from Monday morning. Sorry, sorry, actually gonna go up. What does Carl Icon and Bill Smeat know that I don't know about oxy? Well, Carl the difference between Bill Smeat in this situation and Carl Icon. Carl Icon is a fantastic investor. He finds an undervalued security by the way he thought it was undervalued at fifty two dollars a share sixty dollars a share, and hopes to make in a year and a half about a fifty percent gain by in

links influencing what the company does. What we do is we love to buy something that absolutely no one wants, that has merit. And let me tell you that oil in the ground has more merit. And let me tell you what, in the next ten years, the ninety million millennials in this country are gonna double their use of gasoline. And you know you're in the E. S. G. World.

That's got to bring tears to somebody's eyes. But we have good research from fund Straft that shows that the largest popular adult population group is gonna double its use of oil and gasoline. How does the price of something go down when ninety million out of three thirty million Americans are going to use twice as much of the product as they used to. So so this is just a dream set up. And Buffett has got warrant at six fifty. If he makes money, We're going to make

an awful lot of money. We got to leave it there. Bill, You're going on for everyone Ox. That was Alin. If you're on Global Wall Street, certainly American Wall Street. This is the conversation of the morning. She's our chief financial correspondent, Sali Basic January nine. They're gonna do an investor's dog and pony at Golden Sacks. Mr Solomon is gonna get up and is the ft article which is the talk of Global Wall Street this morning. Laura Noonan killed it.

Mike Mayo quoted, We'll get to that in a moment. This is a Golden Sacks struggling with their future. Are they struggling with their future because of the now? Are they struggling with their future because of a past which is four point four total return per year. Both. I know that that's not satisfying, But when when the past was all trading, and that's a business that's in seeing a lot of headwinds across all of Wall Street? How

do you change? Everyone was hoping that this big consumer business, this would be the future of Goldman Sachs. But everyone setting expectations now that this is going to take another ten years to be effective. Let alone, they're not going to become a tricky Morgan a Bank of America? Is this you know, what's the gossip here on this Mr Solomon having a moment of wisdom, the clouds parting and and saying we're going back to the original thing. Or

is this his partner's rebelling? Well, remember everyone that Mr Solomon put into place was of his own making, and so those are a lot of investment bankers. I think something interesting about the strategy is, according to the ft this morning, they're going to focus on their asset manager. They're going to focus on their that's original idea. So what do they become James you know, are they going to do James Gorman light? I mean, come on, that's

that's that's their best idea. The asset manager. That there's a challenge with focusing on that, right, and it's that they have way more than a trillion under management, but they have a lot of low feed products, So how do you make that a really profitable growth story? Um, My former boss, Christine Harper once told me Goldman has been focusing on their asset management. Work for Christine. I worked for Christine Harper. How do you can guys got so smart talk work? She um? But she she had said,

she mentioned once. You know, they've been focusing on asset management since they won public. So can they make this a significant part of the story moving forward. It's interesting because you think about Goldman Sacks. I had competed against them my whole career and such formal competitors. But I mean, at their core their investment banking, they're trading their institution. Is there a sense that the consumer business is gonna be anything more than just a side show for this firm.

Here's what my sources are telling me. It's that thing about it. The consumer business helps lower their cost of capital at the end of the day, and this is why the ft story is so surprising. For them to not focus on profitability targets. That's the number. That's the only story in the business right So um for the So, what I think they're trying to say here is they're shying away from giving big proclamations on what profitability will

look like. Paul, this is in your wheelhouse. God. This is from Laura Noon and uh Patrick Jenkinson, David Crowe. Goldman is set to detail it's ambition to become an asset management powerhouse to rival the likes of black Stone for black Rock. I don't know which black but I don't know that's five times, that's four or five times, but bigger. You're telling me Golden Sex wants to do what Credit Suites, Morgan Stanley and everybody else wants to do. That's not the Goldman Sex, I know, it's it's an

interesting strategy right now. Asset management for some perspective is less than of their revenue trading that old business that you were talking about, thirty six of their revenue. So how do you change It's interesting. You know before under the Mr blank find the prior CEO, they were out there with the five billion dollars in extra revenue by next year and they set that in I guess are they going to kind of back away from that? And if so, is that saying maybe these consumer businesses aren't

as big as we thought they were going to be. Well, that's that's a big question. To what extent do you say we're abandoning it completely. If you're David Solomon, you can look back and say, wait, that was my predecessor's plan. That was a blank find Pan. But what do I do now right when a Wall Street is expecting Goldman Sachs to have two billion dollars less in revenue this year almost at the end of this year, how do you then come in next January and say we want

to make five billion more? Steven Aaron's and I'm still talking about this, folks. Bloomberg Markets magazine the single best readable concise article and Mr Saving of Deutsche Bank, if you were Mr Aaron's or Christine Harper, whatever you are, great finance team, if they wrote an article on David Solomon right now, what would it say? What would be the angle of that article? How do you create golden How do you recreate Goldman Sachs to make sense? What

is he trying to take it away from? What Mr blank findd I think so far, everything we've ever heard about Goldman Sachs, every executive tells us, listen, we lean on our heart. We lean on where our heart is, which is trading, it's investment banking, it's core institutional, it's Henry Paulson in Chicago. And you know, I talked to Secretary Pa about this once and Jeff, this was an off Mike comment about the glory of getting on the plane and going out across this great country. Is that

still the plan? Oh? Yeah, I mean, remember, investment bankers are still running. Goldman Sachs told me they want to be an asset management. That's what they want to be. But you know, if they think about it, like I said, if trading is less and less of their revenue every year, and investment banking they're already number there's still number one this year, they are still number one. I'll tell you a black Rock model would not be the worst way

to go if they can get there. But now they're talking about creating this merchant bank, putting their investment bank, their asset manager together with a zillion dollars of assets under management, if they can start maybe driving some of the returns that we see out of black Rock, then maybe you got something. But you know, again, it kind of raises the question of the consumer. And I guess, as you mentioned, the consumer is a great source of

low cost capital. And Tom, I think you know what you're saying here too, is what else right they do banking, they do trading. People want to know what the next leg is because that consumer business is not going to play out tomorrow. It's not going to play out in the next couple of years. It'll take a long time and it might still be a very small part of

the business. Looking at the SMP versus Goldman Sacks versus Blackrock, over the last uh ten years, Goldman Sacks has been the laggard, uh you know the price to book as well. They mentioned that in the FT article. I mean, yeah, I just I'm I'm not baffled. I think it was mentioned it for Mr Solomon, is how do you redefine Goldman Sacks for the next ten or fifteen years, because I guess they're suggesting it isn't just going to be

investment banking and trading bonds and currencies. So they were doing retail right and Morgan Stanley they were able to bring that big wealth manager to play here. Can you know? Will Goldman do a big deal, make them bigger? My Monday more interesting? Will they buy a b n Y Melton? Will they buy You're starting the people are scribbling down

in in in, you know, train stuffs nationwide analysis. I feel like a Rockefeller or like the wealth managers of the world that have spun out on their own, like being alone. So I can't and you know, I can see that being a harder sell for Goldman. Could they Could they buy Fidelity with a Johnson family. I'm just busting your child. Thank you so much and get out of here. It's to bask our chief financial correspondent there in Goldman, Sex. Thanks for listening to the Bloomberg Surveillance podcast.

Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.