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- [00:10]
A
Hello, welcome to the All Policies Are Economic Policies episode of Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon of Axios. I'm here with Emily Peck of HuffPost. Hello, I'm here with Anna Shymansky of Breakingviews.
- [00:30]
B
Hello.
- [00:31]
A
We had a massive GDP report out this week. We're going to talk about that and more generally whether and how presidents can have an effect on the economy. Presidents being on our mind, of course, Right now, since everyone's going out and voting, we are going to talk about the other side of economic policy, which is monetary policy, and whether central banks have any extra firepower they can draw upon. We are going to talk about PetSmart and Chewy and whether they belong together or not. And I really urge you to become a Slate plus member if you're not one already, because in our Slate plus segment, we are going to do a little dive into the redesign of the Gmail logo, which I know you have opinions on. So please let us know what your opinions are. Slate money@slate.com you will find out what I think if you listen to Slate Plus. All of this and more coming up on Slate Money. So let's talk about the economy. We had a GDP report for the ages this week, 33.1% annualized growth rate, which is a 7.4% actual growth rate, just quarter to quarter, which is huge. And it's also a statistical artifact because we fell even more than that the previous quarter. And there's a lot to be said about the GDP report, which I guess you can read some of it in my newsletter. I want to talk about something kind of bigger, though, which is as we all go off to the polls and cast our votes, how important are they just purely economically, There's a million different reasons why you would want to vote for one candidate or the but the thing we're always told is that people wind up voting on the economy. And I am wondering, did presidents actually make a difference when it comes to the economy?
- [02:32]
B
Anna, I think that the combination of the president and the Congress can make a difference.
- [02:41]
A
Can make a difference, yes. How often does it make a difference? Is it like every administration or is it just some?
- [02:46]
B
I think it depends on what you mean by make a difference because you're always obviously working at a counterfactual if something else had happened. I mean, I think if you're considering, okay, well, if I have a president and a Congress in the same party, they're probably going to be able to put through certain policies and in this particular period, the ability to potentially put through a lot more stimulus probably could have an impact on the economy.
- [03:09]
A
But I'm just saying, like, generally speaking, if Mitt Romney had won instead of Barack Obama, would that have been particularly different for the economy?
- [03:20]
B
I'd probably imagine. No. I think that the impact that a president and a Congress can have definitely varies depending on what the other effects are. There are always these larger economic forces that are going to be bigger than any president or any Congress. Globalization, what has happened with rates, global monetary policy. No one president's gonna be able to change all those things. But that doesn't mean presidents at certain times haven't had a massive impact. I mean, look at Lyndon Johnson in terms of all of the spending in the Great Society and the Vietnam War and how that affected policy in general. FDR obviously another example. So it's not that presidents can never have an impact, but there are still obviously these larger forces that they're always acting kind of in concert with.
- [04:08]
C
Yeah, I think presidents and the economy, the relationship depends a lot on just sort of luck and timing. Also, like someone like George H.W. bush comes in sort of at a peak and then there's a cycle down and it looks bad for him. Or, you know, Barack Obama comes in during the depths of the Great Recession, so, you know, he brings things up. So that looks good for him. Like, there is some of just like the timing of the business cycle and the president that may be a little bit out of the President's control. And then like Anna was saying, if the president and the Congress are on the same team, then they can have control, more control over the economy. But like, again, to go to Obama, if they're on different teams, then Congress can work against the president's like, plan for the economy and in the case of Obama and kind of like hold back stimulus or go for austerity when the president wants to do more stimulus. But I think in this election, the tie between the president and the economy is actually really clear because the key to the economy right now is really getting the pandemic under control. And we've seen how Trump does that, and we know he doesn't. So it's sort of to the economy's advantage, I would think, to switch out the president and try someone who might be better at controlling the virus.
- [05:30]
A
So I'm fascinated by this question of Trump and the economy because it's the one area, weirdly, where he's polling ahead of Biden. We are in a huge economic downturn. We are down further from. Even after that last Q3 GDP growth figure, we are still down further from the peak than we were at the depths of the Great Recession in 2009. We have, you know, 25 million people collecting unemployment every week. It's objectively terrible economy. And yet in the face of this objectively terrible economy, the population as a whole trusts Trump on the economy more than Biden, and they trust him despite the fact that the reason that the economy is so bad is because of the pandemic, which Trump handled so atrociously. I don't entirely understand that, but one thing I will point to is if you look at other countries which have handled the pandemic better, they're still having massive economic problems. And really, the effect of Trump on the economy is entirely really, I think, down to the way that he reacted to the pandemic and the effect he had on the economy. Yeah, he had an effect on the US Economy, but he had an effect on the global economy, because the pandemic is a global thing. And if America had stepped up and taken the leadership role that everyone always expected it to in the event of a global pandemic, then that would have not only worked out very well for the US in comparison to what actually happened, but would have worked out very well for the rest of the planet, too.
- [07:08]
C
Yeah, that's the bigger counterfactual. Like at the very, very beginning of this, if the US had acted, if we had had a different, more competent administration, the scope of the pandemic might look different right now, and the scope of the economic kind of collapse wouldn't be as bad.
- [07:24]
B
Yeah, I mean, I think you're completely correct. It is interesting because Trump pulls so poorly on the pandemic, but for whatever reason, a lot of people are able to separate those two and kind of assume that there's aspects of the economy that weren't really caused by what Trump did. And I agree with you. I think that while we can't know 100%, it seems fairly likely that if we had at least had someone who took this seriously from the very beginning and put in policies to limit the spread, especially at the very beginning, to prepare all of the states, at the very beginning, we, one would imagine, not be in the place we are right now, we obviously would have taken an economic hit, but just probably not to the extent that we did.
- [08:06]
C
I was looking back at articles from when Trump was first elected, and everyone, not everyone, but there were a lot of pieces that were like, donald Trump's gonna crash the economy from like Larry Summers, and there are a few of these pieces, and that Justin Wolfers was.
- [08:20]
A
Convinced that the stock market would fall off a cliff. It didn't. And, yeah, everyone kind of thought, like, you know, the intelligentsia all thought that Hillary Clinton would be much better for both the economy and the markets than Trump would be. And with hindsight, at least, if you look at the first three years of the Trump administration, I'm not sure that was true. The economy did fine under Trump. I think it would have done fine under Clinton. I don't think there's that much to choose between them. I do think that Trump is better at taking credit for that kind of thing than Clinton would have been. But I think the interesting aspect of all this is that it's not actually the President's economic policy that determined that really influences the most important effect that the President has on the economy. This is the really crazy thing. If you look at the big important effects that presidents have on the economy. Like, look at, for instance, the end of the Cold war in, like, 1989, the Berlin Wall comes down. You get this massive peace dividend and you get this huge boom throughout 1990s. Look at the creation of the League of Nations in the European Community after the Second World War, which brings peace to Europe and allows a massive similar peace dividend and huge growth and wealth creation in Europe. Look at the way that the international community allowed China into the World Trade Organization and increased trade with China, which had enormous effects on inflation and growth around the world. These are not really at heart, what people think of as economic policy. A lot of them are foreign policy. And as we've just seen, you know, it comes down to, you know, the Centers for Disease Control and parts of the government which you don't think of as being economic policy wind up having much more effect in terms of the influence of presidents on the economy than, you know, the choice of the Treasury Secretary.
- [10:13]
C
Yeah. I mean, the President runs the biggest company in the country and the world and has this massive bureaucracy to sort of run and shape and keep not only the United States kind of running smoothly, but the world running smoothly. And I feel like you have to have a competent steward of the bureaucracy and the machinery of government baseline to have a stable economy at all.
- [10:40]
A
And I think that's ultimately the main argument, economic argument, to vote for Biden in this election. Right. Is that you have stability and predictability and known quantity, and you don't have a chaos monkey in the White House. Right. And so when, when you take the chaos, when you Take the chaos out of the equation, then you can have. That's a decent precondition for, for global growth. Right.
- [11:07]
C
But it doesn't mean the economy is going to be amazing. If you have a decent captain at the helm of the ship or whatever. It just gives you absolutely. It just sets the table. Like we don't know what the food's going to be like.
- [11:17]
A
As you said, if you look at Bush Sr. No one's saying that he was a terrible steward. He was a perfectly decent ship captain, but he got unlucky with the economy. That happens.
- [11:31]
B
Fundamentally, all policies are economic policies to a certain extent. Because. No, because I mean, you just blew.
- [11:40]
A
Our mind there, Andy.
- [11:40]
C
Blew your mind.
- [11:42]
B
But I mean, the economy is made up of everything everybody is doing. So the fact that Trump engaged in the type of trade wars or just the foreign policy that he had with China was obviously a weight on the economy. Some of those are more specifically economic policy, some of them aren't. And so as you said, moving forward, almost anything the President does can have an impact on the economy. But as the world becomes increasingly global and increasingly connected, those policies that have a more global international range probably are more apt to have a bigger impact.
- [12:17]
C
Also, I'd been thinking about rising inequality in the United States. And you can have a good economy with big inequality, wide inequality.
- [12:26]
A
Right.
- [12:26]
C
I mean, the GDP numbers look pretty good, but we know that a lot of people are really suffering still right now.
- [12:32]
A
Up to a certain level. I think perhaps. I think once you reach a level of wealth that we have in the United States, it becomes harder and harder to drive growth through increasing inflation inequality. And at some point you need to start bringing up the bottom 90% in order to see actual, like broad based or even just actual overall aggregate growth. You know, there's just a limit to how much economic activity the top 10% of people can actually do.
- [13:02]
C
Then I think the President can have an effect on that. You know what I mean? I think that's when we really need the political aspect to come in and foster more equality in the system. Right.
- [13:13]
B
The President can have some. I mean, I think right now because of the power of central banks. That's also another factor there. But I do agree with Felix that while any capitalist system, you're going to have some inequality, that's kind of by definition, once you start to have extraordinary wealth concentration, it means that those at the lower income deciles who spend all of their money, they aren't going to be spending it, they're going to be spending the money. They have if they don't have enough. So you actually want to be getting more money to the lower income deciles because they will spend and spur more economic growth. A lot of the policies we've had over the past 15 years have just, they've inflated asset prices, but they haven't done a lot for underlying growth.
- [13:52]
A
And I think to answer my own question about why does Donald Trump get better grades on the economy than Joe Biden even though the Obama years were perfectly healthy economic wise as well? It's just basically because he shouts very loudly about the stock market. And he came in too foolishly as it was. And I said it was foolish at the time. He came in on day one and said, judge me by the stock market. And everyone was like, that's ridiculous. The economy is not the stock market. You don't control the stock market. Why are you saying something so stupid? As it happened, that was one of the ways he got very lucky because the stock market did great. And so he now gets to turn around and say, look, the stock market did great.
- [14:35]
B
The other thing I would say is that he really benefited by coming in after you'd already had many years of expansion. And he was kind of at the end of that expansion. And that's the period of time where the job market gets so tight that those people who are at the lowest part of the job market are apt to actually get hired to see wages increase. And that wasn't going to happen earlier on just because it was closer to the beginning of the recovery. So Trump's going to benefit from people kind of probably remembering that as well and associating that with him, whether or not that's fair.
- [15:03]
C
Does Trump also get, I hate to say it, credit for pushing the Fed to keep interest rates low and pressuring?
- [15:12]
A
No, no, no, no. But that, but that is an incredibly good segue to the next segment where we're going to talk about the Fed. Okay, so let's talk about the Fed. Anna, you mentioned in the last segment about how central banks and central bankers have a huge amount of influence over the economy. A lot of people say, quote, this is a phrase now in the economosphere, which is the only game in town. The only thing you need to know is the Fed just care about what the Fed does, care about what the ECB does. It doesn't even matter what anyone else does. It's the Fed, the Fed, the Fed. And we just had Bill Dudley come out, he's the head of the New York Fed, and he said, okay, Folks, this is true. We're the only game in town, pretty much because Congress isn't stepping up to do much in terms of fiscal policy. But there's a problem because we are out of firepower. We've done whatever we can. We've brought down interest rates to zero. We've announced all of these QE programs and all the rest of it. There's nothing else we can do. So if you want further expansion and further stimulus and you're looking to us, you're shit out of luck. That was the message from Bill Dudley. I want to talk about what my former colleague Megan Green and her co author and Eric Lonergan have been writing about for a little while, which is basically this idea that he is completely wrong about that and that central banks have the ability to really bring out a massive bazooka that they haven't even thought about using yet. Emily, you want to sort of come in on this idea of dual interest rates. I know that you are a monetary policy wonk, but this is why I'm asking you, do you understand this idea of dual interest rates?
- [17:01]
C
I think I believe, Felix, that I do understand. I think I can explain it thusly. It basically means that the central bank gives banks money at negative interest rates. So essentially pays them to take the money, but then they also the banks. There's another interest rate for depositors who hold the money in the banks and they still have a positive interest rate. So it's negative interest rates for banks and then positive interest rates for savers.
- [17:34]
A
And the banks are savers. The central bank can't really control the savings rates, but it does pay interest on bank reserves. When the banks hold money at the central bank, which they are doing in their trillions right now. The way that the central bank sets interest rates is by paying interest on those reserves. And the idea is that you can continue to pay positive interest on those reserves even if you cut the rate you lend to banks to a negative number. And it's very counterintuitive because it's like, isn't that just giving free money to the banks? They'll borrow money from you at a negative rate, deposit it back with you at a positive rate, and they'll just make free money. And what's the point of that? But Europe has actually been trying this with this thing called Teltros, which like, we're not even going to go there, but it can be done. If you really enforce a rule saying that the banks can't just turn around and put it back on deposit, they have to really lend that money into the economy, then the money does wind up going into the economy and it is basically stimulus.
- [18:37]
B
I think that there are a number of problems with this. I would say the biggest problem is that it continues to keep the focus in the wrong set of tools that we have seen in Japan, we have seen in Europe, we've seen in the United States that when you get to near the zero, lower bound monetary policy does not work particularly well to stimulate growth in the economy for the reason that there isn't demand for loans. So you can throw all the money you want at banks, and they can throw all the money if they want in the economy. But the problem is, if no one really wants that money, the problem is not that they can't access the capital, it's that there's no demand for them to invest in anything so that they would need those loans. And this policy doesn't really do anything to address that. And what we've seen in Europe when they've used this in a limited fashion for the tiltrose, is that mostly what it's done is prop up Spanish and Italian banks. It's made them look slightly less insolvent, but it really hasn't done a tremendous amount for the very reason that there just isn't quite the demand for the loans in the real economy.
- [19:42]
A
So explain to me why cutting interest rates from 5% to 2% increases demand for loans, but cutting interest rates from 0% to minus 3% does not increase demand for loans.
- [19:55]
B
So what we've seen is that when you're in a more normalized rate environment, and if you're in a more normalized rate environment, that also means that other things are happening in the economy. It means that there has to be some inflation. It means that there is reasonable aggregate demand. It means that the reason that companies aren't investing is often because their cost of capital is a little bit too expensive. So when you change that cost of capital, that affects their behavior. Once you start to get really, really low, that means that these other factors are happening in the economy. And a lot of those factors have to do with this lack of aggregate demand, which is part of the reason you're not seeing inflation. So when you start to change the cost of capital at those very, very low levels, it's not addressing the underlying problem. So it doesn't have the same impact.
- [20:41]
A
So my response to that is, well, maybe we don't know, we haven't tried. But also what you seem to be saying would apply almost the same to fiscal policy, which Everyone seems to agree is a good idea, like, let's have some fiscal stimulus as it does to monetary policy. Because in many ways, what I'm proposing here, or what Megan and Eric are proposing here is fiscal policy. It's basically moving fiscal policy a little bit across the line from lawmakers to central banks. And that has its own potential problems, and I'm happy to admit that. But you're injecting money into the economy in much the same way that Congress would if it passed a big stimulus bill. So if it doesn't work, if you do it from the central bank, does that mean it also wouldn't work if you did it from Congress?
- [21:26]
B
No. When you're doing it with the Congress, especially if you're doing it by giving people money, either through services or through actual cash transfers, that is putting money into the hands of consumers who then will have larger demand, which will then mean the companies will have more incentive to want loans from the bank. If you're putting money through monetary policy, that's not putting money into the hands of individuals. That's potentially having companies have slightly less cost of capital. Again, it will affect asset prices, but it's not injecting it into the real economy in the way that policies. That fiscal policies can do. Now, if you have the type of fiscal policies that the Republicans tend to support, which are more cutting taxes, I would argue that that similarly probably is not going to have an enormous impact because it's the lack of aggregate demand that's the problem. It's not the supply of capital.
- [22:16]
C
Yeah, I mean, you need to do. In this crisis, specifically, you need to do the fiscal stimulus to get money into the hands of people who will spend it immediately. And we know we have lots of those people at the lowest income levels, either unemployed people or people who are making a lot less money now because the service sector has been decimated. And we saw what happened with the CARES act, which put all this money in those specific people's hands. They spent it, their spending levels increased, actually increased over the past few months. It seems like giving free money to banks to make loans is so, like, many levels removed from what's actually necessary to improve the economy. It seems just pathetic. Not pathetic.
- [22:55]
B
It's.
- [22:56]
C
It's a signifier of how dysfunctional Congress and how dysfunctional the fiscal stimulus side of things has become that we need to turn to the central banks and say, like, okay, I guess just pay banks to lend. Lend out money, and let's hope it, like, trickles down to the people who actually need it rather than just like, let's give the people who actually need it the money to spend into the system to stimulate the economy, which would be so much more effective.
- [23:24]
A
It does seem to be pathetic. And if you look at the unemployment rate in countries like Germany or, you know, the UK where, you know, if the government comes out and says you have to close down your bar, then at the same time they say, well, we'll continue to pay you the amount of money you would have earned if you'd had your bar open. Because it's our fault that you're closing down the bar because we are forcing you to close it down. And then that keeps the income flowing and it keeps the money moving. And it's people, you know, it's bartenders who wind up in, you know, keeping the economy going. And I do believe that it's much more efficient to just give money to bartenders than it is to try and, you know, lend money to banks and hope that eventually that money will find its way to bartenders. Because bartenders are not borrowing millions of dollars.
- [24:07]
C
Right. No one's going to borrow money to start a bar right now and hire a bartender. You know what I mean? Like, that's not happening. You just have to. Everything's all messed up. People are spending money in weird different ways now. And it's just easier to let people decide where to put the money than to let a bank decide who to give the money to to help their business or start a business. It doesn't make sense to me. It just seems so removed from reality.
- [24:32]
B
Yeah, and in Europe too, the banking sector is much more directly involved in funding companies as opposed to in the US which capital markets and kind of non bank lenders play a much larger role. Which is another reason why I just don't necessarily think it would be as effective in the US as even bank any effectiveness it has had in Europe.
- [24:51]
A
Okay, so since we're talking about obscure economic actors, let's talk about private equity funds. BC Partners is a private equity fund which bought petsmart, which is the pet store that you probably have on a corner or shopping mall near you, did the classic private equity play and levered it up with lots of debt to, you know, blah, blah, try and dividend out, you know, that kind of thing, make lots of money even if it wasn't growing. And then in 2017, they did something which was not the classic private equity play, which was that they bought chewy.com and I believe we talked about this on the show at the time, in 2017, they bought Chewy.com for the ridonculous amount sum of three and a half billion dollars. And we all sat here and said, that's crazy. How on Earth is Chewy.com worth three and a half billion dollars? It's never made a penny in its life. And in hindsight, that was a stroke of genius because as we now know, BT Partners decided to IPO chewy.com with a little bit of equity is now freely traded on the stock market. And if you look at what the stock market says Chewy is worth, it is now worth about $30 billion. Thank you, pandemic. So this should be great for PetSmart, right? Because PetSmart bought Chewy, Chewy is now worth $30 billion. PetSmart is in the clear. It's making lots of money. But that's not what's happening. And this is why I think this Chewy story is so interesting. Or rather the BC Partners petsmart Chewy story is so interesting. Somehow you can make a bet which turns out really well. Petsmart can be in this position of owning a really white hot on fire e commerce business and still be stuck with billions of dollars in debt and a junk bond credit rating and not really be out of the woods at all.
- [26:43]
B
At this point, it doesn't make any sense to keep those companies together because what Chewy.com is doing is basically cannibalizing business from Petsmart. Part of the reason that BC Partners initially acquired Chewy was because they had their original investment thesis, which was kind of based on the idea of like, look, Petsmart throws off cash, but it's not growing, its sales have declined, we want to rationalize its prices, blah, blah, blah. And they did that. But then consumers started to shift to buying things online and they could either try to build something or they could buy it. And so they took on debt to buy it. The problem was you never integrated those companies, so there isn't really any benefit to having them together. All it does for petsmart is again, you have this company that's essentially taking business away from them. And on top of that, it makes their leverage ratios worse. And because Chewy doesn't make money, petsmart has not been fantastic, but it does make money. So it will actually be in a better position leverage wise when you separate the companies. And this enables that company to kind of refocus on services and like pet doggy daycare and prescriptions and then let Chewy deal with the business of selling people goods.
- [27:58]
A
Okay, I feel like you're contradicting yourself a little bit here because on the one side you say, and let's just like talk about the news here, which is that BC Partners is ripping Chewy out of petsmart entirely and leaving petsmart with no E commerce basically at all. You're saying, well, what this does is allow PetSmart to concentrate on doggy daycare and real world stuff, which is fine. But you're also saying that they never really integrated it. So how were they not able to concentrate on doggy daycare all along?
- [28:27]
B
Well, yes, in theory, if they really wanted to, they, they could have focused on doggy daycare. But it doesn't make any sense to do this while you have this other company attached to you that is making it more expensive for you to borrow money. So when you have two businesses connected to each other that need to do very, very, very different things, it doesn't really help either of them to be connected. If you're a company like petsmart, you can continue to be connected with Chewy. And what's going to happen? Well, you're probably going to eventually just go out of business. If you're separating them, you at least can have a focus and again, slightly better metrics to move forward. I still think they're probably going to end up going out of business at some point, but there's still a possibility. And then similarly with Chewy, it doesn't make any sense to have this bricks and mortar company connected to you. That doesn't really add anything. So I think that there's probably more value having these as two separate companies.
- [29:24]
C
Look, I thought when we were going to talk about Chewy and petsmart, it was going to be like kind of a cute story about, you know, puppies and like selling pet food and stuff. And then you read about the history of petsmart and Chewy and this BC Partners that owns both of these things. And it's just like financial shenanigans. It seems like to me, like no one was thinking like when petsmart bought Chewy, if it was doing something interesting in the space of cute puppies and selling pet food and services. I feel like there was a good, like Anna was saying, a good integration play where Petsmart could have like become a more 2020 kind of pet retailer and there could have been nice integration between the two companies and a strategic plan. But it seems like all VC partners wanted to do was kind of like acquire a competitor, suck all the value out of it, suck all the value out of petsmart and separate them. Again, like it doesn't seem like anything was done in the best interests of the actual companies here.
- [30:34]
A
I totally agree. If you look at petsmart as a company rather than as like portfolio holding.
- [30:47]
C
Yeah.
- [30:47]
A
What's happened to PetSmart here is not good. The, you know, BC Partners has been very good at financial engineering and extracting value and making plays and all the rest of it. But if you're an employee of petsmart, if you're like a stakeholder of petsmart who's not the shareholder, then you are looking at all of these shenanigans and you're saying, well, hey, you know, my owners have just made $11 billion from this, you know, financial engineering. I'm still making minimum wage. There was. Petsmart still pays minimum wage in a lot of different states. You know, there's a bunch of complaints about how they haven't been providing enough, like masks and stuff like that for employees. And, you know, BC Partners, as far as they're concerned, hey, they're making money. That's their job, right? They make that. They exist to make money for their limited partners and they've made money. So congratulations, BC Partners, you've done a good job in that. But for petsmart itself, as a business, as a part of the community, as a place which employs people, none of this seems to have been good for them. And I feel like that's been a criticism of private equity since before Mitt Romney ran for president. But then it was a big point of discussion when Mitt Romney ran, which is that private equity is just not good at creating real value in the community as opposed to making money for billionaires.
- [32:07]
B
I would say that, number one part of the reason that PetSmart was originally bought by a private equity firm was because it was not seeing growth, it was seeing revenue declines. It almost certainly did not have a very healthy future ahead of it, which is part of the reason it was purchased by private equity. I think you can argue that now at this stage, is petsmart going to survive and thrive? I'm not sure, but I don't think that private equity coming in is what is going to be the determining factor. Yes, they still do have a decent amount of leverage, although actually their leverage ratios has come down significantly. Partly because when they ipo chewy, they put like a billion dollars from that IPO into taking down the debt of petsmart. And then the other thing I'll say about BC Partners is they did just inject over a billion dollars of equity back into petsmart, which actually technically didn't have to do based on their contracts. They could have ripped out Chewy and just been like, petsmart, well, okay, we're not doing anything. And they did. So I don't think this is necessarily just a story of, oh, private equity comes and this company was doing so well and they killed it. Sometimes that is the private equity story. I don't think that's the story.
- [33:16]
A
So I want to just push back a little bit on this idea that by ripping out Chewy from petsmart, they're deleveraging it. And it's something I've heard a lot, that there's a lot of numbers with X's in them and ratios and they're like, well, if you look at the debt coverage ratio and the income, blah, blah, blah. And yeah, I can see that argument. But on some level, my idea of leverage is just how much of the value of the company is debt and how much of it is equity. And if you just take that very basic idea of how much is the company worth in terms of enterprise value and then split that up between debt and equity. Clearly petsmart has become a lot more leveraged as a result of this move by BC partners, because, you know, Petsmart has $20 billion worth of equity in Chewy, and that's part of the business right now, which is being ripped out. And then it's losing all of that equity in Chewy and all it's getting back is like, you know, $1 billion of re injection or something. It's worse for it overall, the enterprise value has come down significantly. There's still lots of debt. You know, there's more than enough money in Chewy valuation to pay off that debt entirely. But BC Partners has no intention to do that because they can play around in the deb and keep Petsmart going even with $2.3 billion of debt needing to be serviced. And it just seems to me that a founder of, say, petsmart, someone who had built it up, who cared about it, who cared about the employees, who cared about the communities, if they'd managed to make this great bet of buying Chewy, which was suddenly worth lots of money, they would have taken some of the profits from that bet and said, hey, this is awesome. We can become this bricks and mortar online combined company that can actually compete with Amazon. Amazon just doesn't manage to compete with Chewy amazingly. And we can be a great success story. And instead, that's not how private equity thinks.
- [35:24]
C
And you can kind of see that with Whole Foods and Amazon, the tie up there, right? I mean, there's this night you can have nice integration between a bricks and mortar store and an online retailer. I think, like they're probably there could was room for innovation between PetSmart and Chewy. Like there was a lost opportunity here, I would think, to cross promote cross brand, you know.
- [35:47]
A
Yeah, I mean it's all about Omnichannel, right? Like literally every single retailer in the world is trying to use the real world locations to drive online sales and trying to use online sales to be picked up at real world locations. This is huge in pet food, which costs a fortune to ship. If you can just drive down to your local petsmart and pick it up in person, you save a lot of money. There's so many obvious synergies there. The idea that ripping it apart is the obvious thing to do seems insane.
- [36:19]
C
Something private equity would do.
- [36:21]
B
You can make an argument that this probably was never going to work from the beginning for the fact that Chewy was very clear that they wanted to remain a very separate entity from petsmart. They made that very clear when they were purchased. And I imagine that the assumption was, well, okay, fine, but I'm sure we'll still be able to do a lot of the integration plans we want. And I think that that just never panned out. And I think hindsight looking back, you can say, did this really make a lot of sense? Now granted, at that point petsmart didn't have a lot of options because they simply had no ability to compete by building out their own competition to Chewy. That was never going to happen. Now granted, you could make the argument at that moment they should have said, well then let's just get out of that business and shift into services. Honestly, frankly, that would have probably been the better option as opposed to buying Chewy to begin with. That's a fair argument. Now at the point we are though, I don't think either company benefits significantly from having the other attached to it. And you can say, well, there are these other concepts of leverage that I like, but the leverage concepts that matter are the ones that affect the amount of money, how much it costs for you to take on debt. So those leverage metrics really do matter. And this does actually put petsmart in a better position in that way.
- [37:34]
A
Maybe a slightly less terrible position, but it's still deep into junk bond territory. You know, I don't like this idea that like Petsmart is better off as a result of losing $20 billion of value. I just don't think that's an easy case to make.
- [37:51]
C
Are they pet dumb now?
- [37:54]
A
They're pet dumb. Let's have a numbers round. Anna, do you Have a number?
- [37:58]
B
I do. My number is 142,000 Korean won. So do you remember a few weeks ago we talked about how big hit entertainment went public and it had this amazing one day pop? Well, unfortunately, that hasn't worked out too well and it's essentially lost half its value. And I think the first day it was trading, it got as high as 351,000 won, ended up closing at 258,000. It's now down to 142,000. So sadly, Korean boy bands may not be quite as lucrative as we thought.
- [38:34]
A
I knew that the big trade of the past few weeks with shorting BTs, I just. I don't know how I. How did I fail to short bts? Emily, what's your number?
- [38:44]
C
My number is two. That is the number of documentary series that are currently going on right now about the cult nxivm. And the leader of that cult, Keith Ranieri, this week was sentenced to 120 years in prison. And if you want to find out what happened, there are these two separate documentary series, one on Starz and one on HBO called the Vow. And they really dig into the story of what happened with this quote, which was actually a multi level marketing company that didn't sell a product. They sold like self help, essentially. So it was like an icky MLM to begin with. And then lots of really, really bad things happened. And I don't know what's going on with me, but I am obsessed, obsessed with both of the documentary series right now because I think they say a lot about all the things I'm interested in, like misogyny and, you know, scams in general. And I feel like there's parallels to Trump, if you feel like going down that road. And it kind of it all, all this news. This guy was scamming people for a long time, but no one cared until 2017 because of the MeToo era. There are all these like C list actors involved. Katherine Oxenberg is involved. She was in dynasty in the 80s. Like, it's just. There are a lot of levels to this and I'm down a rabbit hole. So I recommend either series. You know, if you have less time, go with the Starz series because there's only four episodes, whereas the HBO series has many, many more episodes. Felix and Anna would not let me talk about this, but I.
- [40:16]
B
You're not allowed to talk about this story.
- [40:20]
A
I have not watched any of the episodes, but I have it on good authority that the Starz series is better than the HBO series, not least because The HBO series is way too long. But am I also have it on good authority that HBO has managed to commission a season two of that series which you're like, what?
- [40:42]
C
There are levels, Felix, Because I am almost through the HBO series now and they're not even up to like the trial of this guy, his downfall. We've seen the rise and not really the fall. So you can see how they could milk it for a second season. I might even watch that. It depends what happens on Tuesday.
- [41:01]
A
Honestly, my number is 10, which is the number of miles per gallon that UPS trucks get. Apparently UPS pays $1 billion a year just for gasoline because it's trucks are so unbelievably fuel inefficient. They were all made in like the late 80s and early 90s with this incredibly long lasting but also incredibly inefficient engine and they really haven't been replaced for 30 years. And yeah, it strikes me that if I was say a president wanting to come in with a big green stimulus program coming in and replacing all of the UPS trucks with electric trucks would be a bit of a no brainer really. 10 miles a gallon, that's terrible.
- [41:58]
B
Which actually I only know this because I had to listen to Ford's earnings this week and Ford is actually in the business of creating commercial electric vehicles. So maybe there's a future here.
- [42:10]
A
Maybe Ford can get that contract. I mean get Ford to compete with GM and Tesla and see who can renew the entire USPS fleet the lowest possible cost.
- [42:20]
B
Nikola. Don't forget Nikola.
- [42:22]
A
Don't forget Nikola.
- [42:23]
C
If their fleet was more fuel efficient, they could presumably deliver packages more quickly. Right? They wouldn't have to refuel as much. Could be amazing. Could get my pet food faster.
- [42:33]
A
On that note, we will wrap it up for Slate Money this week. Thank you so much for listening. Thank you so much for sending us emails. The email address is slatemoneylate.com if you are a US citizen and you haven't voted yet, go out and vote. The election apparently is coming out quite soon and we will, I guess, if there is a result of the election, talk about the result of the election next week. If there isn't, we'll probably talk about that too. So stay tuned. Next week on Slate Money, produced as ever by the fabulous Jessamine Molly.