Surveillance: The Shift To E-Commerce

Nice to have you here with Matt and myself. You know, it has been a year of extremes, even though it's a little bit quiet on this Wednesday. But whether it's Bitcoin, whether it's I p o s, whether it's SPACs, whether it's some of those big fang stocks here in the United States, and we've seen big global moves, how does that carry over or maybe set the stage for it's more of the same. And I think you're leading into

your question. The conversation between you and Matt is clearly indicating that we all right now waiting for January four and the runoff in Georgia to set the stage for what is the next level? And I think to some extent mix. McConnell is playing that card. He wants to be seen to be fiscally prudent into that sort of leadoff uh and and designing what's going to be the

next two years before the midterm election. So I think there's a very big political game going on in Washington the terms of the US market, but in terms of policy response, we know exactly what's going to happen in twenty one. Any slowdown in economy, any increase in the virus cases will be met by easier monetary policy by fit and global center banks, and the fiscal person will sit very very loose. On the politician, whatever color brand

ideas they come from. It's all about supporting a market with no looking at the actual detail and non intended consequences. So you know, most simulus but but I think for me, but deep down, the only quasition that really matters to me is where we end with ten year US interest rate in one If it's hundred and fifty two hundred, I think the rate sensitivity of the stock market will come to you really think, do you really think we'll

get to that rate on the tenure? Absolutely? Absolutely. I think two things are going on I think we have been so dependent on the digital online transformation that the physical world, the physical infrastructure no longer can actually follow the success of that. So in other words, we've been too successful in digitization and online sells going on to the extent that ups and FedEx so they cannot get

vans to do the last mild delivery. We see shipping rates across the group reaching all time highest together with the stock market, not based on loose monetary policy, but simply the fact that the infrastructure no longer is able to deal with the success of this online story. That

is inflation in itself. On top of that, we have had an un investment into the mining sector for years upon years, and the same mining sector sixth centrally into this theme of green transformation, the green Cabinet that Biden talks about that he's appointed, the EU Deal which is green,

and of course China sixty. So absolutely I think inflation is coming back in in one and and for the record, I think growth would be much higher than the very negative outlook that we have a simple link right now, So one and a half percent to two percent um. Does that mean we see more movement from the FED at the year end, seeing if we see the ten

year rate get to that level. Of course, the position of the FED right now is dovish, and with the changes of the voting members coming into the Federal Reserve Board for the new year, they're getting even more dovish. So they come into the year with a very dovish stands wanting to do more on the downside. So first they need to move to manutral, which I think it's really what's one is about for FET, but they could if they've seen a huge price on on on inflation.

They will be caught short. Don't forget the FED does not expect themselves in the dot plot to move before four. That is absolutely unrealistic in my mind. And and for the regged again, I think FED is one of the worst predictors of growth in the US, if anybody of anybody.

So I'm just wondering because exactly they said they're gonna hold pat until and if we do see the kind of inflation that you're talking about, if we do see rates creep up, if you know, assets continue, if markets continue to act as irrationally exuberant as the Airbnb I p O proved, the FED has to do something maybe beyond moving to neutral, don't they Yeah, no, no, that is my take, mat But I'm just making the case here that we first need to move to MOODU and

then we move into a hiking cycle. And when we get to the hiking cycle, I think we'll have a detrimental negative impact on the stock market because the fact is that if you look at the NaSTA two actually actually in the hundred index, they have had no earnings increases over the last two years. So all of the increase in valuation that receive in our technology mainly portfolio is from the fact that we have an interest rate

sensitivity supporting the stocks. So in other words, the worst economy gets, the more support you get from the interrates sensitivity part and inverse, when we go to a high inflational, higher steering rate, higher capacity utilization, yes, clearly the rate sensitivity will be very negative for the technology in particular. All right, Stevean, thanks so much for joining us. Really

appreciate your time. Stean Jacobson, Saxo Bank Chief Investment Officer, I wish you a happy New Year, happy socially distanced and masked New Year's Eve. We got to talk about retail Matt because of course we're wrapping up the holiday season and it was a holiday season unlike any others. Want to get right to our guest because Jerry Storch is with us a Storch Advisors UH. He's a management UH and and advisory to UM a lot of other

retail companies that are out there. CEO and founder of his own firm, former chairman ce of Toys Arrest, former CEO of Hudson's Bay Company, former vice chairman of Targets, so understands the retail industry so well. Jerry, Nice to have you with Matt and myself on Bloomberg Surveillance. You know, we've had the conversations about you know, a lot of the trends that we've been seeing in retail got sped

up this year because of the pandemic. What trends really stand out for you that you think are going to be significant drivers of retail going forward? And good morning by good morning, obviously you have to start with the shift to e commerce. I mean, this is just massive. It was happening before, but there's no doubt got tremendously accelerated. I think what happened now is people who weren't as prone to use e commerce. They had to because it was the safe way to buy things, and they found

out not so bad. So a lot of that's gonna stick, so you will you have in vaccine and acceleration towards e commerce. Another big trend is to shift away from apparel, from clothing into hard lines, electronics, other types of physical goods, and so apparel has been in long term decline and if you look at over a ten year cycle, clothing

is down not so much. People are you know, are wearing you know, going out without any clothes on, or wearing less clothes, but there's been a big casualization of the workforce, so you buy less expensive clothes, and then even for the same clothes, the average price point is declined with the advent of fast fashion and all the discounters taking huge markets. I mean, the basest clothing sellers in the US right now are Walmart targeting Amazon. So

the average price points to claim. So what are people doing with that money. They're buying hardlines, they're buying electronics, and now in the pandemic for the home, and you know, I, for one, I don't think I'm alone. You know, I started learning more about how to bake. And now that I of the pathos and the chemistry of banking, I'm gonna keep banking. So there's gonna be a lot of shift,

even more ecceler away from apparel and towards home. You have the shift away from their apartment starts and towards the discount stores. That's continuing, only accelerated by the pandemic. It's funny I as well, Jerry, have really taken up cooking over um the past few weeks and months only because of this lockdown. I will point out one retailer that one clothing retailer has done quite well, at least partially.

Clothing is l brands more than doubled this year. But that's because, of course they don't sell office closed right, Um, they sell maybe the less appropriate things you would wear the office for Victoria's secret or the things that you would use at home, like bath and body works. We had a guest on a little bit earlier, seen Jakopson, who said, one of the big problems for retailers right now, Jerry, is that, um, the logistics is so expensive shipping stuff.

You can't find a truck out there, you know, tough to get things on boats at a decent price. Do you see that kind of inflation for companies that need to shift their goods to people who now order everything

on the internet. Well, I think there's the real topic is that is that there's a negative arbitrage in the marginal profitability of an item that you sell and delivered to someone's home on the internet versus when the customer comes walking into the store and does all the transportation themselves and by it just picks it off the shelf and takes it home. And so for a lot of retailers, a lot of companies, this is the most frequent, by the way, assignment that I get its storage advisors help

people figure this out. For a lot of retailers, they have to sell twice as much on the inner twice do you get the same marginal economics the same marginal profitability is what they sell in store, because you already have the stores, all the people already there, and the customer does that last leg themselves. So that's really the biggest issue. And by the way, during the pandemic, FedEx and ups, if you know, they've had capacity constraints and they said okay, let the market clear it and they

raise their prices. They put in big search charges, so it's costs more than it normally did. Eventually that will equalize, that will come down. So I think over time, as the system gets built out, is E commerces a higher percentage of total sales, that penalty goes down, and that freight penalty goes down over a period of years, not instantly, but but and for some companies, what I like to look at as the margin pool. You know, how many dollars a margin or in that shipment you're sending someone,

you know, a pack of toilet paper. There's not a lot of margin, but it's but it's bulky, you know, is it's related to the cube more than anything else. But if it's a you know, a diamond ring, no problem, you know, because you could a thousand dollar ring, you could have fifty five margin. The thing the transportation cost doesn't matter, but it does when it's only a dollar or two. And that's why you have to look at each retailer separately and say who has best marginal economics?

So there's the best you know, margin pool to ship that product to the home, so that the shipping becomes less and for a luxury retailer. You know, it's not very important because the customers are spending a lot of money with a big margin rate. The shipping cost is trivial compared to the overall margin pool. Yeah, and listen. Want to ask you, though, Jerry, if you go up and down the avenues here in New York, even across from Bloomberg headquarters, there's multiple retail stores that were here

before the pandemic and they're not anymore. Who takes advantage of that retail property on the other side of the pandemic. Who are the retailers that you think are going to be able to snap up some of those smaller, smaller locations. Are are that really need more locations at this point that there will be demand for their goods? We have to separate New York real estate from all the rest. You know, it's very different in Manhattan than it is elsewhere in the world. For most of the United States,

the winners are clear. It's target Walmart Costco. You know, it's big discount change. They have done fantastic, not only by the way on the Internet, but a lot of times their store numbers have been up when you look at how they're because people have had fewer places to go to, and they've been consoliding that it was making big average ticket purchases when they go to those places. So those are those are are big winners. Other big winners of the home people like home Depot and Lows.

These numbers have been phenomenal that they're reporting, and I don't think that's going to you know, soften, but it's not going to change in terms of the middle long term trend as we were discussing other warreas, people like the dollar stores, I mean dollar in general, it's just hitting it out of the park day day, week after a week. So were the so his Family Dollar. Now that you know that, they've got all the trends in their direction, so I think a lot of it's gonna

go to people like people like this. The Mama Pops are getting crushed. I mean they're absolutely get in crush. I mean, if you only have a single store, you can't really you know, you have a limited line of offering. You've been killed by the pandemic, maybe you weren't declared essential. Beyond that, you have capacity restraints, constraints. Meanwhile, you can't even afford to set up a really great internet site.

Needed it could you wouldn't have to get the traffic to a because of fortune to pay Google Facebook for the ads. Thin get the traffic. I gotta jump in. I wish we had like an hour just to talk with you. We're gonna have to get you back because I love talking about retail and there's so much going on. Jerry's Stort of Storage Advisor's former CEO of Toys r

Us and Hudson's Bay. Let's bring in a guest who has a lot of experience with this kind of thing, even though it's been a while since a value rotation. Jim Paulson from luth Old Weeden Capital Management. He's the chief investment officer there. I'm not saying you're old, but let's say you're our age. Jim. You fit in the same demographic with me and Carol. You were there the last time value stocks for hip. He's seen a lot of cycles, is what you're saying. Absolutely, So are we

going to see it again? Is is it possible that we rotate out of growth and into value now that actually some of the stocks I think of his growth docks could now be value stocks. You don't um I've sort of I've sort of moved away from thinking a lot about value or growth. UM. I thought more about sectors because I think ever since the dot com boom, we have really screwed up kind of the value growth trade off. There. There's a lot of times all own parts of value and parts of growth, and I think

that's a better way to approach it. I think a lot of the value space is already starting to outperform and will uh continue to outperform UM. But I wouldn't necessarily just buy a value et F, you know, I'd still look at sectors. I think there's some sectors in there, the traditional value sectors I really like. I really like the global synchronized recovery play, which to me really hits a lot of industrials and materials UH sectors, traditional more

value plays. I like the idea that we're gonna have probably in one the fastest world growth rate in a long time, and particularly United States, maybe the fastest world. Fastest growth here UM, I think it's gonna be around six percent, so maybe uh since and to me, UM that says interest rates fields go up this year, which would favor I take the financials in the big way.

Traditional value play um so Jim, wait, wait, Jim, let me jump in, Let me jump in, because um Stean Jakobson, who we had on earlier UM talked about a tenure maybe hitting one and a half two per cent, And I do wonder if, indeed we start to see rates going higher, if we see some signs of inflation, how does that play out essentially though, when it comes to FED policy, and what does that then translate into the

financial markets, the equity markets. Do we see then ultimately a pullback as a result, even though we're seeing strong growth in the economy. Well, I I think that one of the things that's really interesting. There's a lot of unique aspects carroll about where we are today, but one of them is that this record setting low yield environment

and really inflation environment simultaneously. So when we as we lift off into this new recovery, we're not lifting off for three or four percent yields and three or four three percent inflation. We're lifting for record unprecedented levels. And I think they could go up a fairer ways before they really become problematic for the economy and for the

stock market. UM. I look back, for example, the nineteen hundred just recently, Carroll and took all the months when bond yields have been below three and looked at what's the impact on the stock market when they go up versus what they generally did if they're about three percent.

When they've been about three percent, which is about seventy at a time since nineteen the stock market actually goes down on average when on UH when rates go up, But when you're below three percent, higher rates actually lead to a better stock market by a wide margin. In fact, all the months that we've been had a tenure yield below three stock market when when they went up the stock mark and analyze almost games and I think the differences. If we take the bond yield from below one to two,

it will actually boost confidence in the future. It might stoke animal spirits in the economy, moving us away from years of negative yields in the United States and the like. So I think I think that will actually be a positive relian negative for a while. Got it, Jim, Thank you so much, Jim Paulson, Luther Oldweden Capital of course. Uh.

The ce IO over there. Dr Mercedes Carnathon is Northwestern University professor and preventive Medicine, also Vice Chair of the Department of Preventive Medicine, joining us here, Um, nice to have you here with us, Mercedes. Let's talk about what's going on here. And you know, President like Joe Biden coming out, he's worried about the distribution and logistics. You are hearing about it, seeing about at firsthand, there's hiccups. Are you concerned that it's going to take a lot

longer than everybody anticipated? You know, certainly the original projections of twenty million doses being in the arms of people by the end of was ambitious, and you know, it's it's fine to set ambitious and lofty goals. I think what we found out in the process was that it was a little more complicated than we thought, and so that's not unexpected to see that hiccup. But I am concerned about these projections that it would take ten years

at the current rate to vaccinate this many people. But you know, of course, when you start something up, it tends to be a little slower. I feel very hopeful that the pace of this will start to pick up, But as it does pick up, it's going to become more logistically complex to determine who is eligible for vaccination. You know, one of the interesting things that we've been talking about a lot here, Mercedes, is the possibility that, um, if you don't get the vac seeing, maybe your name

is going to go on a list. I think Spain is doing that if you refuse it. If you do get the vaccine, maybe you get to get on a plane or go in a restaurant, you get special privileges. Are they talking about that in the US as well? You know, there have been a lot of discussions about whether or not you can compel individuals in the US to become vaccinated. Now, they are always going to be exceptions. But my understanding is that employers can require vaccination as

a term of employment. Schools can do that, but they do have to allow for exceptions. But I think where this where this will become an interesting debate, but not a theoretical one, because it has such real implications, is that what if employees in a workplace refuse to vaccinate and then they become sick at work, whose responsibility is it going to be to pay for that sickness if they allow those individuals, and what if their illness puts the clients or the patrons of that business at risk.

I think the simple example of school systems, will school teachers that administrators be required to vaccinate since as you know right now, Uh, these vaccines are not approved for children, yet we do know they're in the US two million children have contracted Uh great nineteen. Well, it's just a reminder that we still need more testing and that testing continues. But I do wonder, Mercedes Um, that this speaks to we supposedly had months that we were working on logistics

for the distribution of a vaccine. We knew it was coming. Operation warp speed was full speed ahead. Uh, if you will, I do wonder that, uh, if things aren't going as quickly as they are right now. And I understand, you give the vaccine, you've got to wait fifteen minutes or thirty minutes to make sure that there's no reaction for

an individual. But do we need to see some kind of like we're at war against this this virus, that we need to see some kind of plan program, more coordinated coming from the FED government to make sure that we can get this out much more quickly. Because my understanding is from the pharmaceutical companies that they've distributed millions of doses, and yet we haven't seen that necessarily show

up in the actual vaccination numbers. Now that's a really good point, and Operational Warp Speed accomplished its goal of generating effective vaccines and record time. They talked about how to get them out to the states in the United States, but they didn't do any work on setting up the infrastructure to be able to deliver those vaccines. So it's sort of like getting almost to the finish line and stopping to wave and take credit without actually seeing it through.

There are a lot of details around getting the vaccine into the arms of individuals, and right now we're in the easy phase because we're just um vaccinating healthcare providers and individuals in long term care facilities. We know where those people are. We can verify who they are and what they do. What's going to happen when it's time to vaccinate in a variety of tears other essential workers. I mean, I work as a professor in a in

a university. Will I be eligible? I don't teach students face to face, so where would I be on the priority list? So all of these are really complicated things that you know somebody actually has to sit down and thinks through, Hey, listen, we've got to run, Mercedes. I mean, the virus is just one of those subjects we could go on and on. Mercedes Carnathon. She's Vice chair at the Department of Preventive Medicine at Northwestern Fineberg School of Medicine.

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