Ted Audio Collective Hi everyone, you're listening to After Hours, this is Yang Mi Moon and I'm here with my buddies, Meher Desai and Felix Oberholt -Sachib.
Hey, how are you guys doing?
Very well. It's autumn in New England, which is my favourite season.
It's pretty spectacular.
It is amazing. I find that really crisp air is just fantastic.
And you get to wear sweaters and scarves, it's so nice to have all the nice winter clothes.
Pull all the Harvard merch to good use.
Exactly. Actually, I should ask you, how much Harvard merch do you own?
I think I'm getting these fleece jackets.
You get a fleece jacket every week.
Programs, yeah. And then the bag.
Oh, the bags are great.
Yeah, well they are reusable.
Okay, all right, so our closets are full of what we need.
So did you bring topics for us to talk about this week?
I brought a topic. I would love to talk about the tax cut.
Ah, okay. The tax cut.
You mean this last year's fix -up.
The tax cut, last year's fix -up.
Oh yeah. Big change in tax cut.
Biggest tax cut ever.
As always, biggest ever, yes.
Not true, but you know, still an interesting claim.
And I wanted to talk about retail.
So there's all this discussion about the death of retail or the retail apocalypse.
And I wanted to get your sense of why it's happening and then also talk a little bit about what you think is exciting in retail.
Great, okay. Okay, you hear, you wanted to talk about shopping.
Indeed, shopping. Are they going to take us shopping?
I'm not going to talk.
Have you been shopping recently?
I'm going to take you virtually shopping.
So there's these amazing claims about the death of retail and the retail apocalypse.
And indeed as you walk around, you will see empty storefronts.
And at the same time, there's some dynamism in the retail sector.
So first question is, is retail dying?
And obviously there are some prominent examples of that.
So we see the big box stores and Sears now teetering on bankruptcy as it has been for a long time.
And then we see other players perhaps prospering.
So first off, is retail dying?
If it is, why? And then second question is, what do you see that's really exciting in retail?
So let's start with the first piece, which is, do you perceive retail to be in a deep funk?
And if so, why do you think it's happened?
Go ahead, Yungmi, what do you think?
So I think this is one of the most exciting times in retail.
And I think the collapse of some of these legacy players is part of the reason for the excitement.
And I think you're seeing a culling of retail players.
And so you mentioned big box retailers.
Sears is dying. Best Buy is doing just fine.
Costco is doing just fine.
Walmart is really a phenomenal story right now.
And what I find exciting about the legacy players that are managing to turn the corner is that they have done it by doing what you're supposed to do.
They've invested. They've paid the cost associated with this.
So if you look at the evolution of these companies over time, they're quarters where their profitability has suffered as they have made the necessary investments.
Target's a great example of a company that's been up and down and up and down, but has kept moving forward.
And as a result, when you look at these retail players today, these older ones, Walmart being an example, the Walmart of today is so different than the Walmart of 10 years ago.
What I do think you see dying is companies with business models that are just no longer valid.
So recently a company called Mattress Firm declared bankruptcy.
And if you think about Mattress Firm, it's like the worst of all old school retailers where you walk in and they have a bunch of mattresses that are way overpriced.
And everything about their business model is based on them hoping that you don't know how much that mattress actually costs.
That's a company that should go out of business.
And so the turnover you're seeing in the space I think is ultimately really healthy.
What do you say, Felix?
I like to start conversations about retail today always with the number.
91 % of retail sales are brick and mortar.
So it's just yes, there's a lot of excitement, online's growing very quickly, but basically the vast majority of purchases happen in brick and mortar environments.
And in that context, the rhetoric around the death of retail is just plain wrong.
So you can basically make out three segments.
You can make out the segment that is mostly price focused and you see very fast growth there.
In fact, for every one store that dies in sort of a middle segment, we get three new stores in the low price segment.
And then we have a luxury segment that is doing very well.
For every one store that dies somewhere in the middle of the spectrum, you get one extra luxury store.
So in a situation where the US has far more retail than any other advanced economy.
Like a stunningly more.
A stunningly more. In that situation, we're adding net capacity, we're opening more stores than we're closing.
And so it's exactly what you described, young me.
It's like sort of in the middle of the price spectrum where many of these companies used to play.
That has become much less tenable.
In part because people are more price sensitive or segments of shoppers are more price sensitive.
And then we have a booming luxury sector because guess what?
It looks a little bit like the distribution of income.
So implicitly what you're saying is that the explanations that are all about e -commerce killing retail are wrong.
I mean, if you have competition in the form of 10 % of sales that you used to have are now going through some other channels.
Of course that has a big effect on every business.
I'm not saying the 10 % is nothing.
But I'm saying that the whole story about retail as a sector dying is just plain wrong.
But so just to be clear, the implication is fears about Amazon are overblown.
Are completely overblown.
Wow. Well, okay. So what I would say is that I think online has transformed retail.
It hasn't destroyed retail.
It's transformed retail.
You don't go to a Best Buy unless you've already looked at their website, for example.
And maybe you've actually even made the purchase and you're going just to pick it up.
In other words, what a lot of these companies have done is they have really leaned into the notion of being on the channel.
And so they have begun to digitize their operations in ways that I think that the distinction between online and offline has become almost beside the point.
And so I think Amazon, I think, is absolutely the shadow that looms over all of retail in part because it is pushing the sector forward, perhaps at a pace that the sector is not quite comfortable with.
But I also don't think it's quite the case that it's just the low end and the high end that's succeeding in retail.
There's kind of this burgeoning middle of the market retail that's also doing well.
But again, it's companies that really understand that the market is different than it was 10.
And who are you thinking of there?
You know, the players that are most interesting to me are companies that were actually born as e -commerce companies and have begun to add brick and mortar as a complement to their online offerings.
And what's powerful about these companies, and among them I would include companies like Warby Parker.
I notice you're wearing all bird shoes and they've started to open open stores, Everlane fashion, you know, away luggage.
What's interesting to me about these companies is because they were born as e -commerce companies, their infrastructure is very modern.
It's a modern digital infrastructure.
And then they're understanding now that really to have sustainability, they need a brick and mortar presence.
And so they're viewing these as complements as opposed to substitutes.
And they're building them as complements, right?
So the idea is, oh, what can we do in brick and mortar that would then actually make the online shopping experience even better?
I think the only thing I wanted to add is, first, I think the retail apocalypse, you're right, is about seeing so much space being unoccupied.
And that makes you think it's terrible.
In fact, it's massively overbuilt, you know, so much, so much retail space.
So it leads to this impression that I think is just wrong.
The second thing is a number of those traditional retailers were highly levered up.
Yeah. And, you know, you put, young me, the point, I think very well, which is some evolved and some didn't.
Yeah. And that begs the question, why?
And I think there's a non -trivial argument to be made that the folks who were bearing significant debt burdens.
Remember Toys R Us?
Toys R Us would be one.
Sears is another. I mean, there's a whole set of them.
And so it is a cautionary tale about the financialization of retail and how it became something that you could lever up.
Right? And then guess what?
Industry changes. You can't make the investments to actually transform yourself.
One thing that I find really interesting, and it's particularly true for those companies that you mentioned earlier, that are born digital.
And then typically they get funding.
What's the first thing that they're going to do?
They're going brick and mortar.
And they have now an exceptional ability to create a brand image, a brand awareness the moment you enter that store.
And in my personal experience, I think it's actually stronger in brick and mortar than it is even online.
You walk into some of the stores that have opened recently and it just strikes you that you have a sense of who this company is the moment you enter the store.
And that I think is super exciting.
And I think is part of the reason why you look at a Sears store.
It's really sad. I think if you go to a Barnes and Noble, it's often quite a sad experience.
And so in contrast to these newer formats, that's - These sharp identities.
These sharp, sharp identities.
That's a very good way of putting it.
And by the way, then there are these fascinating outliers, these companies that you think should have died, but they haven't.
So a good example of that would be TJX.
So TJX is a company that has really done very little in e -commerce.
It's low -cost fashion.
It's kind of a big warehouse.
But because they do it so well, they have managed their debt load.
They haven't made some of the mistakes that you were referring to earlier.
As a result, just year after year, they keep chugging along.
Same -source sales are up.
It's really pretty - Costos like this too.
I think they are just so good.
It's just Ikea is like this.
Again, under -invested in e -commerce, but they just kind of keep chugging along.
So there are these outliers that are just doing the fundamentals right year in and year out and displaying a kind of remarkable longevity.
So before we end, I'm curious about if you've seen any particular new retail concepts or stores that you think are particularly exciting.
One application that really impressed me that I recently came across is by Rebecca Minkoff, the fashion store.
What they did, what I thought was really fascinating and interesting is they have smart mirrors in their stores so you can see what you would look like in different clothing and so on and so on.
But then what they do is they record that entire history and they feed it into your app.
So even though you didn't buy that red sweater when you were in -store, then next time you open the app, you can see, oh, remember I tried on this red sweater and this is what I look like.
And then of course you can change it from red to blue.
So it's one of the more interesting attempts to not think so much.
How do we enrich the brick and mortar experience by offline elements?
But how do we actually inspire online experience by what happened in the store?
What about you over here?
So I don't know if you ever had this experience where you like a product or a store a lot, but you just worry that they're never going to succeed.
Because you don't understand them all at all.
But you feel it works for you.
You could imagine how it would work for anyone else, which is there's a specialized gnocchi store called Pavatini.
That's all they sell?
All they sell is gnocchi.
And they sell like 30 different types of gnocchi.
It's crazy. Why do you need 30 different types of gnocchi?
So we went there. Why do you worry about the future of gnocchi?
I worry about them because the gnocchi is really, really good and it's all different types.
And then you look at yourself and you think to yourself, how could this survive?
Like, I'm going to come here maybe once every whatever.
But it's really well executed.
It's one of those things which is it's so niche, right?
It's like so, so niche that it feels totally unsustainable.
On the other hand, I walked in and I was like, I love this place.
Here, is it gnocchi or gnocchi?
You know, I have no idea.
Felix. You're a European.
Come on. I say gnocchi.
Gnocchi? Just gnocchi?
Like Nokia? Gnocchi?
Not like Nokia at all.
Because that would be closer to almost complete failure.
Okay, Felix. So you remember end of last year in December, right before everyone went on break, Congress passed a sizable tax cut, changing provisions for individuals, but also changing provisions for so -called pass through businesses and then for the corporate sector as well.
And I would love to get your take on what happened in the corporate sector.
And just as a quick reminder, there are really three novel, interesting things.
The first is this pretty radical cut in the statutory tax rate from 35 to 21%.
This ability to expense capital expenditures the moment you spend the money.
And then this tax on the stockpiles of cash that American corporations had accumulated abroad.
If you listen to the conversation and the reasons why the tax code was changed in this particular manner, it's all about investment.
Essentially, we want stronger incentives for companies to invest.
And then I saw sometime in the spring, they did this big survey among executives, and more than three -quarters of executives said, this is not going to change our investment behavior at all.
And I was just puzzled.
We're changing the tax code dramatically.
And the first corporate response that we get is like, this is not going to matter.
What do you make of this?
So I mean, I confess it's a little bit of a puzzle.
So let's first think about the cash offshore, because that's one of the big expectations people have.
Yeah, this wave of cash that will come back.
Yeah. Why might we not see a massive amount of investment coming from that?
So the way to think about that is you have to ask yourself, were firms constrained financially previously?
Do you think Amazon is constrained financially?
Do you think Merck is constrained financially?
And they need their offshore cash to somehow fund investment opportunities.
So if you don't really believe that, then you should necessarily expect this all this kind of like, if they're not financially constrained, there's no reason for them to be freed up in some sense.
That doesn't mean it was a bad reform.
Actually, it was really smart because we had firms leaving the country because of the system.
So I don't think we should have been so expectant of increased investment.
The key thing is, we did do some smart things, and it's going to be better than it was, because you won't have firms leaving and you won't have US firms being uncompetitive all around the world.
I think that's actually the larger story.
So I think the conversation about investment that you refer to as justification for the tax cuts never held much water for me, at least in the short term, perhaps in the long term, but not in the short term.
And the reason for that is, number one, companies don't make large investment decisions that quickly.
You don't suddenly get a windfall and say, oh, so now I'm going to invest an additional $400 million over here.
It takes time. Some planning, presumably.
Yes, some planning.
Exactly. So if the impact is going to be there, it's certainly not going to show up in the first couple of years.
The second is to your appointment here, which is, particularly with the larger company, the S &P 500, they're not constrained in their ability to invest.
If they want to invest, they have access to capital.
And so they're able to make investment decisions independent of whether or not this tax cut happens.
When I look at what's happened since the tax cut, in the simplest terms, what it's done is increased the profitability of companies.
Well, it has definitely done that.
And so then the question is, well, what do you do with those increased profits?
You could invest, which for the reasons we just described, you don't really see much happening.
You can use it to fund M &A activity.
And you do see an uptick in M &A activity.
You can use it to pay down debt.
You see companies paying down debt.
And you can give it back to your shareholders.
And you see a lot of that happening in the form of share buybacks.
And so in many ways, companies are behaving exactly the way you would expect.
Oh, I should add one more thing that they could do, which we talked about last episode.
They could increase wages.
So anyway, but we won't really - It's a little bit of evidence.
So let me ask about these share buybacks.
Obviously, people are completely split when it comes to thinking about whether it's desirable, thinking whether it's desirable at this level.
Where do you come out?
Youngmi, what do you think?
So my thoughts on it are complicated.
Here's what I don't think they are.
I don't think they are a form of stock manipulation.
I don't. I don't think they're an enrichment scheme for executives and shareholders, in part because it makes no sense to me how you can steal from yourself.
I mean, the reason investors invest is with the promise of profits.
And so when you earn profits, if you have no better use for those funds, you're obligated to return those profits to shareholders.
They own the company.
Now, the reason I say that my thoughts on it are a little more complicated is that it has been stunning to me the extent to which share back activity has started to supersede all other activity with respect to what happens to profits.
But I think we're going to hit a trillion dollars in buybacks.
According to Goldman Sachs, I think we're going to hit a trillion dollars in buybacks this year, which is just a stunning, stunning...
Now, on the one hand, I think to myself, we've basically just got this windfall because of the tax cut.
They have them very quickly.
And if companies really didn't have plans for what to do with those funds, it sort of maybe makes sense to just say, okay, let's engage in some buybacks.
But still, it does make me think that companies are overusing this particular instrument.
Well, I think you just framed it perfectly right, which is, there are people who think we should ban buybacks.
There's an op -ed in the New York Times, we should ban buybacks.
And then there are people who think they're the greatest things ever.
And the answer is, that's ridiculous.
You know, in the sense that it's not about they're good or bad.
It's about whether they're being overused or underused.
And so one way to think about that is we have never seen higher buyback activity level.
And so that may be concerning for some purposes.
But the truth is the central question about all of this should be framed the following.
Who should recycle all the profits in the economy?
There are a lot of corporate profits.
And the central question is, who gets to recycle it?
So if you think managers are really good at recycling profits, and by that I mean finding new investment opportunities inside firms, then actually the pressure for buybacks from investors is problematic because managers have good ideas and you're making them under -invest.
The other way to think about this though is, well, wait a second, maybe the people who should recycle the profits are me and you and hedge funds and investors and those people.
And if you think like that, then you like buybacks, because all the profits are going to get reallocated by us in our investment decisions.
So fundamentally, that's what it's about.
I happen to think they are overused.
What's the evidence for that?
What would you even look at to know?
Well, so one thing you would want to look at is just as one example, which is, what is the time trend?
The second thing you would worry about is, if there is some level of under -investment.
And there are these poster children, so it's controversial, but there are some examples like this.
So IBM is a good example of this, where over the last 12, 15 years, they've bought back something like 40 % of their company.
It's like a slow -motion LBO.
Now, on the one hand you might say, well, that's great, they gave out all these profits to their shareholders.
On the other hand, you might say, well, wait a second.
Do they miss out on cloud, or are they playing catch -up now?
Because they did all that stuff.
And there's a reasonable case to be made for that.
But there are also these counter examples as well.
So for many years, Apple was criticized for sitting on all this cash.
Now they're in the middle of one of the, I think, the biggest...
It's amazing. By back in history, $100 billion this year they've announced?
Yeah. And you could never make the argument that they've under -invested.
I mean, this is a company that's constantly investing.
But in a way, that is the reason why, as a general phenomenon, this is really concerning.
Let's take two observations.
We have these super high share buybacks.
And then we have productivity figures that basically go nowhere.
Both of which seem to suggest we're just fresh out of ideas what to do with the cash that we get.
And then the argument that, oh, actually investors know better than managers, that makes no sense to me.
What are you going to do?
You're going to reallocate it to some other managers that have better ideas.
But if it's such a broad phenomenon that essentially every company that is doing well is now having extraordinary share buybacks, if that is read as a sign of, well, we're now in a phase in the economy where people are not so sure whether they have ideas where the expected returns exceed the cost of capital,
that's really concerning.
But I don't think it's so inconceivable.
Imagine a bifurcated economy where you have mature tech firms that are throwing off mountains of cash, mountains and mountains of cash.
And the question is, how do you recycle those?
And then you have other segments of the economy, high growth sectors, Silicon Valley, all kinds of things, where you're diverting that cash.
That's what investors do.
But I think in one sense the question is, who gets to make the decisions?
I'll give you one quick comparison, which I think is fun, which is Apple and Google.
So Apple has been distributing cash like crazy since the shareholder revolt in 2013.
They've distributed like $200 billion.
At that time, Alphabet changed their shareholding structure and gave 10x votes to the three main people.
Yeah. And so it was interesting.
And their motivation was they saw what happened at Apple and they didn't want pressure.
So I think there's a really interesting comparison, financially speaking, between these two companies, which is who's recycling all of Alphabet's profits?
It's like three people or three people with a lot of votes.
And who's going to recycle all of Apple's profits?
Answer investors everywhere.
And I'm not sure which is better.
Yeah, I'm not sure.
You can make an argument either way.
You can make an argument either way.
Okay. Before we run out of time on this segment, I have to ask you this question.
To what extent do you think our president deserves credit for, quote -unquote, the best economy we've ever seen?
Those are his words.
This is the best economy ever as a result of the biggest tax cut ever.
I mean, just as a factual matter, we just have to dismiss that statement kind of out of hand, both in terms of best economy ever and this biggest tax cut ever.
They're just ridiculous statements.
You know, having said that, and this is what I struggle with this administration, especially on economic things, is they just vastly exaggerate things.
You know, was the tax reformer a good idea?
There are pieces of it that were smart.
There are parts of it that were good.
They screwed it up in other ways, but there's just massive overclaiming.
And also, I think, to me, maybe the most important aspect is, even though I like some of the structural elements of the reform, the tax cut coupled with fiscal policy that is super expensive at a moment in time when no one can believe that the cycle has lasted as long as it has, that is just insanity.
And the part that strikes me as most interesting about this is it sets up the problem with the Fed.
So they stimulated the economy at a point in time that is going to haunt politicians running for reelection in the next presidential cycle.
And so we're seeing the early battles between...
And you can already see him begin to distance himself from...
His own Fed. His own Fed.
Yes. And lay the foundation to blame the Fed.
Yeah. No, there's so many little seeds that are being planted that his successor is going to have to clean up.
I was thinking about this old literature, which I remember thinking about.
It was so amazing, which is there's really good evidence that there are these kind of political cycles in the economy.
Political business cycles, yes.
Political business cycles, sorry.
And there's a person in Tabolini, those guys.
And it's so right. It's so obvious and everybody knows.
But, of course, no consultant was able to get through.
Yeah, all right. Thanks, guys.
Okay, guys, I have a pick for you this week.
Fantastic. Okay, I'm reading this really fascinating book by Michael Lewis, the author of Moneyball and many other phenomenal books.
He's got a new book out and it's called The Fifth Risk.
Have you guys read it?
No, I've heard an interview with him.
It sounds great. So what this guy does is he goes deep into the Department of Energy, the Department of Agriculture, and the Department of Commerce.
So basically the most boring parts of the government?
The most boring parts of the government.
And he unpacks the lives and the purpose of these, what we would think of as federal bureaucrats.
And more importantly, what he does is he kind of deconstruct what happens when you have an administration in place that is fundamentally disengaged with the work of these agencies.
It is utterly, utterly fascinating.
First of all, because you develop this deep appreciation for what happens in these agencies and the work they do every day that we take for granted.
But secondly, the sort of degradation in the operations of our government that happens when you have an administration that suddenly just sort of stops caring, stops even engaging.
One final reason I really am enjoying the book is the way he writes it, it's completely apolitical.
He doesn't get into ideology.
There are so many books about the current administration that just spend paragraphs on the president's personality characteristics and so on.
He does none of that.
This is just about what happens to the inner workings of government when you have an administration that doesn't engage.
It's absolutely fascinating, recommend it.
Fabulous. Yeah, Felix, what about you?
So I have a product recommendation or a class of products.
So for the first time, at least in my experience, we have now a number of products that can not only measure your heartbeat but that can also measure heart rate variability, which tells you a lot about people's engagement, how the body responds to the environment.
So how well do you sleep?
How often do you wake up?
The REM phase at night?
How long does it last?
You can imagine doing this thing in a corporate meeting.
Who's engaged? Who's not engaged?
When are you engaged?
When are you not? So I think we're at the beginning of putting technology in everybody's hands.
The product that I'm using is a Boston -based company.
It's called whoop, W -H -O -O -P.
I have a whoop strap.
Yes, so what's your experience?
I need a whoop strap.
You need a whoop strap.
It's rather transformative.
It really is the amount of insight and detail it gives, for example, just on your sleep.
And it's scary accurate.
I find it to be scary accurate.
This sounds vaguely Big Brother -esque.
I'm going to be in a meeting and I have no ability to have interior emotions now because everyone's going to be reading what's happening through my whoop strap.
Doesn't it sound vaguely scary?
I think there are two responses here.
The first one is the way the technology is set up today is completely private.
No one else will know any sharing that you might do.
You opt into sharing.
Very common in the case of college athletes.
So now being part of teams often involves sharing your data with the coaches.
One of the effects that I think whoop has tracked very carefully is that you have far fewer instances of athletes hurting themselves.
Why? Because you actually know who's recovered, who's not recovered.
The second thing that I think is really interesting and a big advance of physiological data relative to everything else we have, you can't fake it.
You have zero ability to influence heart rate variability.
As a result, you know how we sometimes like you wake up, you don't feel so well and then you go, okay, this is going to be a great day and I will do amazing things.
And you try to talk yourself into it.
If your body doesn't follow you, your body doesn't follow you and you'll know.
It sounds fast. Yeah, whoop strap.
So I have a recommendation.
It's a little bit different.
It's an activity. So I have a friend Allen who always shames me at this time of year because he has a son who's the same age as my daughters and he makes costumes with his son for his son that are like spectacular.
And we have costumes for Halloween.
Oh, okay. Sorry, so he makes costumes for Halloween with his son that are like crazy good.
And we have been a costume buying family.
Wow. And so this year for the first time, because I need to show up Allen, we are making costumes and it is fantastic.
You're making costumes?
Yeah, for the girls.
But that's three costumes.
It's not that hard.
And you just have to come up with a reasonable idea.
So what are the ideas?
So we are emphasizing candy.
We have a candy theme.
So we have a Skittles bag, we have a Hershey Kiss and we have a Jolly Rancher.
Oh my God. But it's not that hard.
It's like the greatest activity in the world to do with your children.
And I think, I'll report back, but I think I'm going to recommend this highly to anyone who has kids of that age.
Before you, you know, click.
Just think about doing something simple, not hard, and trying to make it.
Your girls have you wrapped around their face.
That's one of the things I love about you.
OK, thanks for listening, everyone.
This is After Hours.
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