Bloomberg Wall Street Week: Greenspan, Palmisano and Johnson

Kevin Johnson sec Chairman j Clayton. Bloomberg wool Street Week with David Weston from Bloomberg Radio Science gave us some hope. The economic numbers they gave us none. This is Bloomberg Wall Street Week. I'm David Weston. Welcome back. Equity markets held up pretty well this week, although below the surface there are clearly some winners and some losers who are emerging and judging for what we saw this week, big

tech is tending to come out on top. That's something we talked with Wall Street Week contributor Sam Paulmisano about. He is the former CEO of IBM. It's interesting, Dave, if you watch what's going on. I mean, the guys that are well position into the pandemic are continuing to do well, especially those that are providing services like you were mentioning connectivity in business as well as to the individual,

and we all connect with our families that way. In this environment, issues associated with the entertainment in the home and those kinds of things facilitating that. And you see that also in the large tech companies, especially those that are have other business models, but also like YouTube with part of Google, etcetera, etcetera. Alphabet now, so fundamentally, you know,

you see a lot of that going on. I think that the broader trend long term for tech is how behavior is changing and how tech isn't facilitating that change. There's some classic examples. One I think that leaps off the charts is telemedicine. I mean telling medicine obviously uses the connectivity technology, whether that be web bacs or zoom or whatever it happens to be, but fundamentally, at the end of the day, it's a whole different web of

practicing medicine. Now, this has been around for a while, and their companies like Hell that I've known quite well, have been around, but as soon as it was approved from a payment perspective, the insurance companies in medicare, etcetera. These now approaches have lit up. Now that the point of that is that people will get used to that.

And if you have the option of not going to the doctor's office and waiting and waiting in the reception area for as you know, a very long time sometimes because things happen, uh, you'll that could be attracted to you. It doesn't mean you'll never go see a doctor again, but it could be an attractive alternative. Uh. You look at things that are going on in commerce. Of course, everybody talks about the big commerce player being Amazon, and what they've been able to do in non prescription drugs

is like a ninefold growth, if I'm not mistaken. But even small small groceries, small retailers and the stuff at least in our environment are using things like insta cart you can order and deliver everything to the home. So

all those patterns are going to continue to expand. Tele medicine touched with payments, e commerce, those sorted down to the small retailers, while grocers those kinds of things I've leave that the consumer will change and as a result of the consumer changing their consumption patterns, it creates opportunities

for big tech. Sam talk to us as the former head of a big public company as well, about the role of a public company in this In this world, we now have the government handing out a lot of money, sometimes in exchange for equity. At the same time, some companies are becoming criticized if they're not socially responsible. Is e s G more important than ever? First of all, I'll start with e s G or social responsibility. Connecting

to your society was always fundamentally important. We can argue about the extent that people did that or not did that. We could talk about the pressure of short term investment, etcetera, etcetera, But fundamentally it's it's it was strategically important to your brand because if you do things that are valuable to your individual customers or to society, your brand will be enhanced, Your value will be created that will show up in your shareholder price as well. So I think it's always

been important. I believe, quite honestly, large companies that have been extremely responsible. If you look at what people are doing, whether it's three AM or whether it's going on in biotech. You just heard about talking about Gilead, what they've been able to do in a very short period of time as well. You talk about what other guys are doing

to help in the pandemic. Even the energy companies that are constantly maligned, you know from sustainability activists and those sorts of things, turned over their chemical facilities to produce the chemicals that go into the products such as PPE and those kinds of things. So and automotive with four GM and ventilators, all those things. I mean, those guys have been phenomenally responsible. So I believe that you know that kind of behavior. When you get into a crisis,

big companies are stepping up. I mean yeah, I mean there's there's no business case to justify some of these things in this environment, which we do all do understand, but fundamentally they're doing the responsible thing. You even see some creative things in small companies. Uh there's a small little company in Connecticut in New York. It's actually created the platform and technology that allows people to get back

to work faster. I mean I won't go take it through all the details, but basically it certifies your test results in your hell and whether you're working in the work or you're going into a restaurant for that matter, or you and I in the studio again, it'll say, hey, Sam's technically healthy. He's passed all these tests, and it's on his phone, and you let him in and he goes on and we can do this again like we

used to do it live in your studio. Sam, You've had a lot of experience with supply chains and a lot of experience with China. Do you anticipate that one of the consequences of this pandemic when we come out of it, which we will at some point, will be some permanent changes in our relations are business relations with China and for that matter, and extended supply chains around the world. Supply chains should have been designed for resiliency.

By that, I mean you have multiple alternatives. So you weren't you weren't you didn't have a major component in one geography wherever it happened to be, so you could read balance. If a crisis occurred, that could have been a tsunami, it could be whether it could be lots of things, it could have been a military action, and we all designed our supply chains so if those events occurred on the global basis, you could readjust if you look at the companies that have not been as impacted

as dramatically by this. They're the ones that had a I'll called resilient balance supply chain. What's good at what's driving the changes to the supply chain, quite honestly, David, is the fact that technology more so than low cost. Uh So, therefore, which drove it up until I'd say maybe ten years ago was cost. Where do you locate for costs? And you see that over the world, Yes, a lot with the China. China became the manufacturing hub of the world, There's no doubt about it. However, that

was more of a cost driven scenario. It started with the trade negotiations, but fundamentally people were looking at this thing and say, look, I need to have flexibility in my supply chain. I also want to be close to the market so I could respond quickly. That was Wall Street Week contributor Sam Paulmisano coming up on Wall Street Week. China is two months ahead of the United States in dealing with the coronavirus, and Starbucks is seeing both sides.

We talked with CEO Kevin Johnson about what their experience in China taught them about getting back to business in the United States. That's next on Wall Street Week on Bloomberg. This is Bloomberg Will Street Week with David Weston from Bloomberg Radio. Businesses in the United States have been closed for about seven weeks now, but in China it's been closer to fifteen weeks, and China is well on its

way back in many of its businesses. Starbucks has seen it in both places, and we talked with Starbucks CEO and president Kevin Johnson about what they learned in China that might help us get back to business here in the United States. We started working on the COVID nineteam response in China in mid January, and so we're now in week fifteen in China, and we've learned some very

important things from that experience. You know. The first is that there are phases that everyone, every market around the world goes through. And the first phase, you know, we we really refer to that as sort of the mitigate and contain phase, and that's that period lasted for three weeks in China where uh people were asked to shelter at home, businesses were shut down, social distancing all with the focus on how to flatten the curve and slow

the spread of the virus. Coming out of the mitigating contained phase in China, we then transition into a phase that we call monitor and adapt. And monitor and adapt basically means we begin to reopen stores, but we reopened

them with different store protocols, you know, amplifying safety. Oftentimes it's for mobile order for pickup only UH and and we did that in China, while at the same time we monitor the number of COVID cases that that that might pop up in certain in cities around China and UH. In the US here we are now just coming out

of the mitigating contained phase. We've been in that for six weeks now in the US, and as we transition into this monitor and adapt phase, you know, we plan to open reopen over our Starbucks stores by early June. In fact, next week, the majority of those stores in the United States will reopen, and we will reopen using safety protocols that we developed in China and have adapted for the US. We'll reopen in a way that provides our customers a safe, familiar, and convenient experience. And so

we're excited for next week. Many of our Starbucks partners are referring to it as homecoming week. Because they too, like all of us, have been sheltering at home, and we're ready to to to get out and do something, but do something that's safe and responsible. And that's the balance that we work to strike in this monitor and

adapt phase. As you say, Kevin, as you came back online and you have the vast majority of your stores now in China back up and running, as I understand you have modified your hours, modified how many people can be there. I see that the same store sales, even though you have almost all the stores open, are down somewhat. Can you tell how much of that is just reluctance on the part of consumers to come back out and buy things, as opposed to just having fewer people in

the stores and shorter hours. Yeah, it's a combination of all of those things, David, and I can't I can't necessarily attribute it to anyone, although I do know that you know in our store protocols, for example, UH, in China, you know most stores are not open for seating. They're open for customer was to come in for takeaway in China, and some stores have limited seating so that we can enforce social distancing. UH. And one of the differences between

China and the US. In the US pre COVID, over of our customer occasions in the US were for takeaway or to go, and so, uh, the US consumer was much more sort of on the go, and so we think opening in the US, we're going to get a very significant result. But the positive news is every week we see continuous improvement in China as we monitor and adapt. We turned the dial up slowly and start to open

limited seating, open other services. And now as we begin that path in the US, we're very optimistic that uh, you know, by the end of the end of May, early June, you know, we're gonna have a much better

perspective on how quickly this is going to recover. Kevin, do you have any projections on how the overall state of the economy and the employment situation might affect the consumers coming back to Starbucks stories, but right here in the United States, we now know officially we are intercession. It's going to get worse. Is this something that really could put pressure downward pressure on your volume? Well, you know, certainly, Starbucks, we've we've gone through recessions in the past, and if

the past is an indicator of of of how customers behave. Uh. You know, we think we're going to be in a very very strong position. We work to have a premium experience uh and build long term loyal customers and you know what we offer as an affordable luxury and even

in times uh you know of a recession. Uh, you know, customers are looking for something to uplift the every day and if it's if it's their daily Starbucks, or maybe they cut back a little bit, but there's an affinity that customers have for Starbucks and we work hard to earn that loyalty and that trust, and and that's what

has carried us through recessions in the past. But I think competitively, we we understand that we differentiate by by the work that we do to create a great customer experience in our stores through the beverage innovation and through those digital customer relationships. And that model was working pre COVID. In fact, the first part of this UH this quarter in the United States, we were posting an eight comp

with four percent growth and transaction. And so going through COVID, being responsible, thoughtful, focusing on that safe, familiar, convenient experience, we think that's going to become the on ramp, and then as we go forward, we're going to continue to do everything we can to provide that great experience to customers. And in the past that has gotten us through recessions and I think that's gonna that's gonna play out through

this one as well. Kevin, you have any sense at this point what what might be permanent or long term changes in Starbucks business, For example, percentage of digital orders, percentage of takeouts. You said it was already high in the United States, But are we facing a world where maybe we won't have any sit down in Starbucks stores. Well, I don't think it's gonna be that extreme, but certainly right now, what customers are going to look for safe, familiar,

and convenient. And you know, we've all been sheltering in our homes for six weeks. We've got a little stir crazy. People want to get out and do something, but they want to be responsible. They don't want to, you know, create an unsafe situation or do things that create sort of reignite the spread of the virus. And so that's what we've tuned these initial experiences for. But longer term, you know, you think about you know, once we get a vaccine and treatments for this, then I think consumer

behavior can start to adapt even more. And it'll take time. You know, the effect in this experience of COVID nineteam will affect all of us for the rest of our lifetimes. But the fact is that as human beings, we have this natural gravitational pull to interact with other humans, and so the need state of community and feeling a part of the community really is what the third place is about. It's a mindset and UH and and people people have

that inherent in them as just part of humanity. And so as we focus on being safe and familiar and convenient coming out of this, we're gonna slowly open up stores and uh provide the opportunity for customers to connect with one another in a in a safe and social distance way. But I think, uh, you know, I think long term the Starbucks third Place is going to be as relevant as ever. It's just gonna take time. So as a last question, Kevin, talk about the long term

about growth for Starbucks in this new world. Where do you see growth? And let me be a very specific. You and I have talked in the past about how many stories you're opening in China. Is it gonna be fewer stories you're opening in China? I saw luck and

is really having some trouble. Can you take market share there? Well, you know, I think we've been taking market share, you know, throughout this entire period and Uh, but what's important is we've been in China for for over twenty years now, David, and throughout that twenty year period, we have worked to establish an admired and trusted brand UH in a way that resonates with our with our Chinese customers. And and

that's by showing respect to the Chinese culture. It's it's it's designing stores that are that are that are appropriate, that that have you know, artwork and built by local craftsmen. And our our partners in China are fantastic. They create that magical Starbucks experience. That was Starbucks President CEO Kevin Johnson. Coming up, We've talked with our Wall Street contributor and senior executive editor for Economic It's at Bloomberg, Stephanie Flanders,

about just how bad those European numbers are. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Western from Bloomberg Radio. The economic numbers kept coming in worse this week, and the central bankers, well, they were listening. We talked with our Wall Street Week contributor and Senior executive editor for Economics at Bloomberg, Stephanie Flanders,

about just how bad those European numbers are. I am a little bit assured in the funny kind of way by these numbers, which obviously relate to the first quarter, so not even before we had some of the biggest lockdown measures in some of the economies, because it suggests that we have a handle on how this is affecting

the economy. It's not much of a silver lining, but actually, our economist at Bloomberg Economics we have been looking at more high frequency data and looking at some data that the French Ship School together on the impact of lockdown, and our numbers were a bit bigger than the consensus,

and they've been kind of borne out by this. So not not to gloat, but at least it suggests that we have a handle on what the second quarter is going to look like, what the impact of these broader lockdowns is going to be, and we might also start to take some heart from the high frequency numbers. We're looking, for example at Germany where electricity usage is starting to

pick back up. You know, we are starting to see some benefits from that slow move away from total lockdown, but of course the big picture is still a historic decline Stefinitely. You have a handle perhaps on the numbers and how bad they're like to get. Do we have a handle on what needs to be done about it. We had the e c V come out and make some changes today to try to help things. At the same time, Animal Guard said we really need a coordinated

fiscal stimulus. I think it's fair to say that both the United States ever in Europe, the first responses we have to supply a fact I have to really protect the supply side. But how do we get the demand and going in well, all the consumers having sat home

for so long and frankly being concerned about their health. Yeah, and we've seen that as you know, and Mohan, some of the places that have had, you know, a removal of the supply side shock if you're like, you know, people are going to work there in the factories, but

the demands not coming back. People are not going back to restaurants and not going out suspense of course that is a worry, and I think the fiscal programs so far, the national policies have been all about keeping the economy and suspended animation, keeping jobs in place, and they've been quite successful at that, I think, probably more successful than the stakes. But where they may be missing, and where certainly Leguard the European Central Bank will be looking for

more for governments than from the European Commission. Is that piece you're talking about, the spiny list. Once we start to see economy slowly moving out of lockdown as we now are, what's going to be there to actually stimulate economies as opposed to just keeping them keeping them on hold, which is effectively what they've been doing for this seriod

of lockdown. But so many, so much uncertainty about the path of that lockdown from here, because we know Germany, for example, is starting to see a push back up an infection, so other countries are looking and saying, maybe we can't follow some Germany's footsteps. So Stephanie to bring it back to the United States for a moment and compare and contrast. We heard from the FED and the FED chair j Pal yesterday, and one of the things he said was over the medium term, not just the

short term. The medium term, we really health challenges, and he's suggested even there might be longer turn damage. We have had the fiscal stimulus, at least a lot of it here in the United States. How can we learn from the US experience as it applies to Europe? You know, I think it's took me. I mean, I think we have seen a thing. If you'd like to have more people learning out employment soles and then increase that support for people who aren't employed, so we have more double

acclaimed numbers today from the US. You know, that's been if you like the US way, that they've been less protective of employment but pushing a lot more money to the economy and perhaps getting into businesses as well, though we know not some states more than others, So I guess there is a lesson there. But the worry that said is stating is putting all these people out of work. You know, it would be nice to think that a

lot of this work will immediately spring back. You know, big workers, younger workers may be able to be flexible, but we know historically once you lose your job, even especially if perhaps if you're at the beginning of your career. You can have a permanent hit in terms of wages, and you can find it permanently harder to get jobs. So that's the kind of longer term hits that the FED is talking about, and thankfully why they're seeing maybe unemployment not getting back in the four or five range

for several years. And it's a hit that is not necessarily evenly distributed. We're seeing dispersion. For example, let's just take big tech in the United States. It's doing really, really well. We've had earnings out this week are very very good. Are you seeing that in Europe as well as the United States? In effect, you're seeing some parts of the economy that are likely to come back faster and better, others are really much more challenged. Yeah, I mean,

it's one of those things. Of course, we've also had that of a story of the sort of market performance of the lab few years, like one of the reasons why Europe has consistently lagged because it was the tech sector that was doing so well, and you have just

had a smaller tech sector. So that's definitely a concern if you think that that one that sector is the one that's also coming out of the strongest I think in Europe's favor was the point and made earlier, that you are they have perhaps done a better job of preserving work in places like Germany and face that you can get the demand back, you possibly don't have quite such a health decline in terms of getting people back

into work. But I think that sexual breakdown is going to be a concern in the US as well, because we know that for example, you know women and lower paid workers who had actually been doing a bit better the last four or five years in the US after a long time of problems. But that certainly to the low wage sector. It's that bit of the labor market that has now been really hit and of course you have to worry about that on both sides of the Atlantis.

That was words Stephanie Flanders coming up the Central Banks got to work. This week. We talked with former FED chairman Alan Greenspan about how different it is this time. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. One thing that the FED confirmed for us this week is that the old rules, well they've sort of gone away at least for the time being, including things like

concern or a fiscal discipline. We talked with former FED Chairman Alan Greenspan about whether this pandemic crisis maybe fundamentally altering the way the government regulates the economy. Well, I think it's going to be longer ways expect, largely because the defining characteristic of the next century will be an inexorable aging of the population. More than of the population of the industrialized countries of the world are age sixty five and older, and until the last century, the vast

proportion of the population worked until they died. Retirement was a rare outcome. As a consequence of this, the US retirement benefits, especially social security and health care, have escalated significantly and are projected to expand materially further in the decades has it And that is an issue which I can explain in some considerable details for you after what I think is going to happen. But I think it's going to be a dominant force in slowing down the

rate of growth. And it's unclear at this stage whether we are going to be looking at the type of Gotturn that Sweden looked out for a number of years and cured were we're going to be in trouble. But but but Mr Chairman, what is the solution to that or the answer to that? Because if anything, this pandemic I think will push countries, the United States and other countries perhaps in the direction of greater social support, of greater social benefit programs because so many people are being

hurt so badly. I absolutely agree with that. I think that uh um. The bottom line as a retirement benefits and essentially social security and medicare in the life are going to be major forces in the years ahead and in government programs. At the same time, as the Federal Reserve meets today, should they be more concerned about deflation?

At this point in inflation we've had as you, oil futures contracts actually trade well into the negative numbers, commodities are weak around the world, and the go forward inflation numbers are quite disturbing. Is there a real risk of deflation right now in the United States and globally? Let me just say, I'll answer it generically, but uh Since I was left office, I've been very scrupulous and not

commenting specifically on what my successors we're doing. But as a general question, there's no doubt that the problems involved was. The difficulties of recent weeks are having a profound effect, and you can judge them as well as any are there. Glenn Hubbard, whom you know the economists now at Columbia, has warn't warned about demand destruction and the possibility what

he calls a doom loop. Do we face even the procect of possible depression, not just recession, and not that that's a little bit that presumes that we don't do take the type of actions that Sweden did and resolved the problems which are very similar to those in which

we have been confronted with. And what that would be fundamentally entail is solving the whole question of how you go from us socialist society and which Sweden was and it finally came collapsed in the ratees h and made major visions of the type that were we to make, would make our social security medicure and other problems are resolved.

But we have nowhere near that as yet. And it's a lot of issues which I'm not sure we wanted get into, but the problems are aren't there, and right I hope we come to grips certain sooner rather than later.

But I wonder Dr Greensman, whether we haven't taken a step, and maybe it was the right step, but a step in the direction of what you call socialized economy, uh, starting with the two thousand eight, two and nine, but certainly now with the extent in which the federal government, through fiscal means, is really intervening into the economy very regularly, and for that matter, the central banks, not just the Federal Reserve but others, have grown their balance sheet to

increasing degree. Investment decisions even depend as much on what we think the government's going to do, is on what we think the economy is doing or the consumer. Well we've been I would say the investment process of of all the companies with whom I doubt I could not get around the fact that what the government is doing is having a very significant impact on financial world. And the financial world is where the bottom line and this

profits and which you're working at. So our fully can concur what you're saying, and we we are moving in directions which are quite surprising, and obviously the virus issue coming up has made us a very much more difficult problem to deal with. But how we come out of this thing, it's going to depend very much on fundamental

issues with dispect the government. And it seems ironic, but I'm saying we ought to be looking at Sweden, which used to be the crintessential socialist society, as a measure which we are to direct ourselves to get our system and more balanced. And I speak to a lot of people, pres people listen. Well, so we're listening and we want to hear what you have to suggest, because any crisis, from from what I've read in history, can give opportunities

as well as real perils. If we were to forgive the expression, use this crisis to move the economy, move the government in the direction you think would be more constructive, how would we do that? Well, I think the first thing is to recognize that, uh, what the data are arkably show is that for the last fifty years, AH social benefits have been crowding out gross domestic savings in

the United States, uh, dollar for dollar. And that is meant effectively that if gross domestic savings is being reduced, that's being the major source of gross domestic investment. Then we are dealing with the situation where productivity growth slows down, which is precisely what has been happening, and if what

we need to do. We're now at a one percent annual rate productivity growth that's intolerably low and unlessen until we can turn it up, and the only way we can do that is by structuring our investment towards capital goods, and we're not doing that and then does not earth

At the moment. There are some who are very concerned about what's going on in the government right now because of what is called moral hazard that in the effort to bail out companies that we are bailing out some who have been profligate, not just those who have been prudent, uh, including investing in things like high yield bonds and things like that. Is this a time to be concerned about moral hazard or should we put that to one side and deal with the much bigger hazard of the coronavirus.

I think that's it's not. I mean, I agree it's an issue, but there are lots of issues which we can deal with without really being concerned about. And Dr Greenspan, how do you assess the situation with unemployment? Obviously, we've lost twenty six million jobs or so in five weeks and projections it will get worse, some people saying it may even get to an unemployment level that beats what

was going on during the Great Depression. What do you project in terms of unemployment through the rest of the years. The problem basically is, uh, we we actually are looking at the terrible first quarter. Obviously second quarters pretty awful. But if the issue of the virus works, it's way we the way we expect. We probably have a very strong third quarter. But my concern is going is the fourth quarter and beyond Uh, it's it's the years they

had where the changes have got to be made. Uh. And I would be less concerned about many of the issues which confront us today, although I dude say importantly the Irish issue has got to be resolved in a rational and sensible matter and change, for examples, social security benefits and the way they are paid so that we don't run in to the crisis that's reading right into as a consequence that was former FED chair Alan Greensband.

This has been another edition of Wall Street Week. See you next week.