Morning Brew Daily - Can Cooling Inflation Withstand Tariffs? & Prada Buys Versace for $1.4B

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Starting point is 00:00:29 Good morning, Brew, Daily Show. I'm Neil Fryman. And I'm Toby Howell. Today, the U.S. and China have begun divorce proceedings, and it's getting really gnarly. Then inflation actually eased up last month, but there's a major speed bump. Tariffs still looming. It's Friday, April 11th. Let's ride.

Starting point is 00:00:52 Fans of Twilight, I have some cool news for you. This week, a national tour of the first ever Twilight in concert was announced, where the film will be shown alongside live musicians on stage who will perform. the film score synchronized to the original movie. If that's not romantic enough, there will be 1,000 candles twinkling on the stage. The tour will hit 60 cities and ticket sales begin today. Toby, I know you are a huge Twilight guy. This feels like your heiress tour. It is my heirs tour.

Starting point is 00:01:23 I'm not too proud to admit that I did put in some time to try and learn Bella's lullaby on the piano growing up. It ended up being a little above my pay grade. But also this announcement got me thinking about other movies. go on tour for their soundtracks. Obviously, anything my boy Hans Zimmer touches is a must, but I'm glad the goat already basically has a worldwide concert tour going. Lord of the Rings solid, Harry Potter solid. I think it's just any character where the movie, or where the soundtrack feels like a character in the movie. So, I mean, Star Wars is another good one. I'm just going through the

Starting point is 00:01:56 basics right now. I don't have any very niche movie soundtracks that, you know, are worth listening to. but do you have any that you would love to see on tour? No, but at Tanglewood in Western Massachusetts, near where I grew up, John Williams, who did Star Wars, E.T, Jurassic Park, does every single year. He does a concert of his movie soundtracks, and they play it on the screen,

Starting point is 00:02:19 not the entire movie, but that was just like a core memory from childhood where we would go watch John Williams. It's just kind of a fantastic experience. Now a word from our sponsor, Tax Act. Neil, do you remember that feeling in school when you'd realize a huge paper was due, tomorrow. Oh, for sure. There would be a full body panic, an Ivy line filled with coffee,

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Starting point is 00:03:55 After Wednesday's history-making market rally sparked by Trump's reversal on tariffs, stocks resumed tanking on Thursday, the S&P 500 lost 3.5 percent, the NASDAQ fell even more, 4.3%, and the Dow dropped over 1,000 points. Some big tech names took a bruising. Tesla lost 7%, meta lost nearly 7%. And Nvidia dropped 6%. Plus, the dollar had its worst day since 2022, and those closely watched long-dated bond yields continued their worrying rise. And that's because after the euphoria of the 90-day delay for most countries wore off, investors realized we still have a monumental trade war on our hands between the world's two largest economies, the United States. United States and China who are locked in rapidly escalating economic warfare that will have

Starting point is 00:04:39 ginormous ripple effects across the globe. President Trump said yesterday that he had raised tariffs on Chinese goods to 145 percent since taking office, which he blamed on China's unfair trade practices and its retaliation for his initial tariffs. China has retaliated in a big way, nearly matching the U.S. with 125 percent tariffs on American goods bounds for its shores. Neither side is backing down. The rhetoric has only escalated. and millions of consumers and businesses will likely confront higher prices and lower growth. Toby, with your permission, I'm going to go ahead and use the U word here unprecedented. We are watching a nasty divorce unfold between the world's two major powers

Starting point is 00:05:19 whose deep trading relationship has defined the global economy in the 21st century. And this high stakes poker match, both have plenty of cards to play. And if one thing is clear, neither is planning on folding. You do not have my permission, by the way. So bring back that precedent, please. You are right. This affects pretty much everything. I'm just going to go down the list of all the industries, all the bargaining chips that these two countries have on the table. First up is Hollywood, actually. China is letting fewer U.S. films into their market. Hollywood's share of the Chinese market has dropped from 9% to 5%. So that is one thing. One of our big exports from America is entertainment. So China is saying that we're not going to let as many films into our domestic box office. Obviously, Apple is just getting wrecked by this whole thing. We've talked about how these tariffs could tack on $350 to the price of the next iPhone. The bike industry and the e-bike industry is super exposed as well.

Starting point is 00:06:14 Tariffs could spike prices on those input costs up to 50% because a lot of bike parts are made over in China. And then clothes is a pretty obvious one. Tariffs is over 60% on clothes from China means that back-to-school spending and just your Zara halls are going to get more expensive car prices than another one. I mean, I could literally keep going down the list, but the reason why these two countries divorcing, as you put it, is so big. It's just how many specific industries are going to have to reckon with a new price calculus to deal with. Yeah, so let's go over the top line numbers. The U.S. last year imported $438 billion worth of goods from China. We exported $144 billion to China.

Starting point is 00:06:59 It's that big trade deficit of more than $200 billion. It's been this way since 2005. It's really irked a lot of U.S. administrations, not just Trump. Biden has also placed tariffs on China, but we haven't seen anything like this. 145% U.S. on China, 125% on China back to the U.S. that essentially freezes trade. You are not going to be competitive in the marketplace, or you have to more than double your price to compete with competitors, and we're already seeing this freezing in action.

Starting point is 00:07:32 It was reported by Bloomberg that five below asked its vendors to just stop sending stuff from China. Just saying don't even let it leave the port because we are not going to pay 145% on it. You might like five below is a discount retailer. Probably a large majority of what you go and see in their stores is made in China. The ripple effects are this are going to be huge across so many different industries. And some reporters went over to China and started talking to vendors over there. One specific industry that is massively impact. by this is actually the plastic Christmas tree industry and the Christmas ornament industry because

Starting point is 00:08:06 85% of Christmas decorations that come into the U.S. do come in from China. And it was actually like relatively sad to listen to these reporters speaking to these factory owners saying, we have zero orders coming in with no one has ordered anything. So it's not, it's not trickling to a stop. It is like basically fully stopping right now because 100 plus tariffs are basically trade embargoes. Like there's no one who can, you know, no one's business can really survive margins that just get absolutely gobbled up by these trade barriers. So I think you are seeing basically a trade freeze, at least for now, obviously things change. We've talked about bargaining chips, this and that. So there is maybe some thawing that will be to come. But right

Starting point is 00:08:51 now, it is just totally frozen the relationship between these two countries. And we know that tariffs from the U.S. on China will likely raise prices for consumers across electronics, bikes, artificial Christmas trees, et cetera. But what about trade from the U.S. to China, right? It's not as in terms of goods. It's not as big as what we import from China. But we did export $143 billion worth of goods. And those are American jobs here in the United States.

Starting point is 00:09:17 More than 930,000 jobs were supported by U.S. exports to China in 2022. That's from the U.S. China Business Council. They are our third largest export market. So they do buy a ton of stuff from us. Those top exports are mostly soybeans, other agricultural products, aircraft parts, and planes, and also crude petroleum. So those are the industries to watch that could be affected from those retaliatory tariffs back on the United States. Inflation figures are in, and they're looking like the migration patterns of Arctic turns heading south before the summer. Consumer prices eased downward month over month for the first time in nearly five years.

Starting point is 00:09:55 The CPI fell 0.1% in March. year-over-year inflation also dropped to 2.4% below the 2.6% economists were expecting. If you're looking for the MVP of falling prices, look no further than your local Chevron station. Gas prices dropped steeply last month due to supply cuts from OPEC and pulled the whole index down with them. But even the so-called core inflation measure economists watch that excludes volatile energy prices came in below forecast and notched its smallest increase since March 2021. But also like the migration patterns of the Arctic turns, prices likely aren't going to stay south for long.

Starting point is 00:10:35 Economists warn that new tariffs could juice inflation in the coming months, even with the pause Trump announced late on Wednesday. Based on how stocks traded yesterday, with all three major indexes finishing deep in the red, its assigned investors are still nervy when it comes to how tariffs might weigh on inflation progress. So, Neil, a good report, but maybe a little bit of a little. little backwards looking. I will never get bored of you getting hype about inflation. But you're right. I mean, if only investors were as hype as you, I think absent of tariffs, if we saw this

Starting point is 00:11:07 report come through, stocks would be through the roof. But as I mentioned, they were in the dumps yesterday. And that's because this tariff threat, this huge trade war between the U.S. and China is just overshadowing everything else. And it does directly tie into this inflation report, too, because We saw cooling inflation for the first time in five years from this report, but it looks like going forward over the next few months, those price hikes from the trade war with China will be filtering through the economy. And you have pretty much every economist saying that this is the column before the inflation storm. We're going to get higher inflation out of these tariffs and prices will go back up. So this is essentially a baseline from which we can measure how much tariffs do impact inflation. But still, that 0.1% drop that I celebrated came from somewhere, and I mentioned gas prices,

Starting point is 00:11:56 but a lot of the downward price pressure looked like it came from travel-related things. Gas at a 6.3% month-over-month drop. There was a 5.3% decline in airline fares. Hotel prices also fell sharply last month. So the vibes that I were getting from this report is that a lot of people were choosing to do staycations, maybe postponing that travel because of the uncertainty on the, horizon. So one final thing that we should add to this whole like inflation cocktail is that government data continues to come in very solid. Employers out of 228,000 jobs in month. We just saw

Starting point is 00:12:34 inflation ticked downward. So if you, you are right. If absent of this trade war, everything looks like it's heading in the very, the correct direction. But obviously, there's just that massive question mark, that massive uncertainty that this trade war does introduce into everything. And I can't believe we've talked for five minutes about inflation without mentioning egg prices. So we got to go there. They rose to a fresh record up 5.6% in March from February. And that's despite wholesale prices plunging, actually. They went from $8 a dozen in February to $3 a dozen in March. But that just hasn't shown up in the retail aisle yet. These supermarkets, these grocery stores are just very wary of lowering, like, changing the sticker

Starting point is 00:13:15 out and putting a lower sticker in because there just been so much whiplash. They've been behind the eight ball for so long. So, yes, wholesale price, wholesale egg prices coming way down retail prices, not so much. There was a big merger yesterday among Italian fashion brands you can't afford to buy. Prada announced it was buying Versace for $1.4 billion in the biggest luxury deal of the year. It's an agreement cloaked with symbolism because it shows that Prada is dead set on building a made-in-Italy luxury house that can compete with the French giants like LVMH and Caring. In fact, that's exactly what the current owner of Versace Capri was trying to do, but in America. The New York-based company bought Versace in 2018 for $2.1 billion in an attempt to create a global luxury fashion group alongside brands Michael Coors and Jimmy Chu. That purchase did not work out as intended.

Starting point is 00:14:08 When touting the Versace deal back in 2018, Capri's CEO John Idol said his goal was to double the brand's revenue. It's actually gone negative from $843 million in sales. in fiscal year 2020 to $813 million last year. So we dumped it for a $700 million loss, and those dreams of rivaling LVMH have been significantly deferred. Could Prada have a better shot? Potentially, because it's kind of on a hot streak right now. The group grew revenue 17% last year,

Starting point is 00:14:36 even as the luxury sector overall has hit a downturn. Toby, is it Italy's time to finally challenge France's luxury dominance? I mean, if anyone could do it, it is Prada, because Prada has just cracked the code in recent times. Most of their success, and it has been a very good success because they're going in one direction while the rest of luxury market looks to be going in the other direction. And you can attribute it to some of its sub-brands like Mu-Mu is just massive right now. Retail sales of that brand grew in 93% last year.

Starting point is 00:15:07 So that is clearly bucking this overall trend of luxury spending slowing down. That being said, though, Prada has tried to do this before back in the, the turn of the century, they were trying to become an Italian fashion house. They bought brands Jill Sanders, Helmut Lang, that they thought they could share their approach to it and just bring kind of their winning alchemy to it. That did not work whatsoever. They sold Lang in 2005. They divested from Sander the following year. So this is not necessarily an easy thing to do. You can't just say, oh, like let's just apply the same approach to the Prada brand and the Mium band to these other brands like Versace. So good luck, Prada. If anyone,

Starting point is 00:15:46 can do it as you, but you haven't done it very well in the past. There might be a surge of, you know, fashion or luxury nationalism in Italy right now after this deal because, so Italy accounts for 50% to 55% of global personal luxury goods production. They have all of these such iconic brands. But what happens to these brands like Versace is they get gobbled up by US, France, Switzerland, these huge luxury companies, and they don't stay in Italy. So Italy does such a good job of having these like big family-owned massive brands. but then they just go elsewhere to be scooped up by LVMH. And now Prada is saying, come back to Milan.

Starting point is 00:16:21 We want you back to Milan. I mean, these two companies, Malon, or Prada and Versace, are literally four kilometers apart in Milan. So maybe this homecoming from Italy will be good for Versace because Capri did not do a good job with it. This John Idol absolutely tank this brand. So, you know, I'll be watching and I won't be wearing.

Starting point is 00:16:40 You won't be wearing. I will be watching. But I am interested in this Miumu brand because that seems to be exploding. It's the new thing. All right, let's take a quick break. Stock the Week, Dog of the Week is up next. Today we helped a... Latte for Sam.

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Starting point is 00:17:16 Get a quote or find an agent today at thehartford.com slash small business. It's time to refresh your yard during spring backyard days at the Home Depot. Get low prices guaranteed on propane grills starting at $179 like the next grill three burner gas grill. Or get $50 off a select Weber Spirit grill and bring big flavor to your backyard. Then set the scene with Hampton Bay string lights that bring it all together. Shop spring backyard days for seven days at the home deep. Now through May 6th. Exclusion supplies, see Home Depot.com slash price match for details. Welcome to Stock of the Week, Dog of the Week, where Neil and I take you through one stock,

Starting point is 00:17:57 that's the equivalent of Rory McElroy's front nine on Thursday, and one stock that is the equivalent of his back nine. Neil, you won the pre-show game of who can name the most types of salad dressings, great pole with chimmy-cherry vinaigrette, so you're up first. And since this has been a rocky week in the market to say the least, let's start with our dog of the week. My dog of the week is pharma stocks. Eli Lilly, Novartis, Merck, AstraZeneca, basically any company you associate with waiting in line at CVS took a beating this week after President Trump pledged to slap heavy tariffs on imported drugs very shortly.

Starting point is 00:18:29 The pharma industry has been a bit of an outsider watching this tariff chaos unfold. Pharmaceutical products were not included in the list of goods that would have been hit with those massive reciprocal tariffs that were later pulled back, which means their stocks weren't crushed alongside everyone else, but they also did. didn't rally on Wednesday, like everyone else. Still, Judgment Day could be coming soon. This week, Trump vowed tariffs at a, quote, level that you haven't really seen before in order to compel companies to bring drug manufacturing back to the U.S., where it has been dwindling. That could do major damage to companies like Eli Lilly, who depend on foreign production for the active ingredients in their blockbuster drugs. The pharmaceutical supply chain is a hyper-complex interconnected web that crisscrosses the globe, one that cannot be easily untangled, and companies are

Starting point is 00:19:14 are warning that it won't be so easy to simply flip a switch and start making medicines entirely in the U.S. so they weren't of higher drug prices for Americans and a hit to R&D budgets should these tariffs go into effect. I mean, this definitely was a roller coaster week for farmer stocks, Neil. First, there was the down. Trump said at a dinner that he would soon levy major tariffs on drug imports. But then there was this brief moment of celebration on Wednesday when the 90-day pause announcement came in. That was quickly dashed, though, because that celebration basically had to be cut short. Scott has sent clarified that the pause on tariffs only applied to country-specific reciprocal tariffs, while then White House Press Secretary Caroline Levitt

Starting point is 00:19:52 confirmed that the administration is still planning to announce pharmaceutical tariffs in the near term. And then a lot of analysts said specifically that they're anticipating high tariffs on, quote, pharma tax haven countries like Ireland, where these companies set up headquarters in order to try to, you know, evade some taxes coming out of the United States. So those haven countries are not going to be spared. and analysts are saying that they're possibly expecting higher than the April 2nd figures to be applied to these industry of pharma. My stock of the week is fake proposals because there's a new Ringpop factory popping up in Musick, Pennsylvania.

Starting point is 00:20:29 Ringpop is owned by Bazooka Brands, which is owned by a private equity firm, which helped fund the new factory that replaces the OG Ringpack factory in nearby Scranton. Why the second factory? Well, mainly because the old factory in Scranton was unconstitutional. unexpectedly shuttered last year after the literal floor shifted due to there being a lot of mine shafts located beneath the buildings foundation. But also an upgrade was probably in order. Bazooka, which also makes baby bottle pops and bazooka gum, is forecasting $100 million in sales this year. And the new factory is roughly four times larger than the old one, capable of producing

Starting point is 00:21:07 1.5 million candies per day. Neil, lots of people suck, but it seems like they're sucking on on ring pops. Ring pop is blowing up. I mean, year-over-year sales are up 7% at the end of last year. It's grown consistently over the last decade. This is the most important brand in the entire bazooka band's portfolio. It is the closest thing. This factory is the closest thing we have to Willy Wonka in real life. They're leaning into this concept of edible entertainment, where there's play value, there's viral value. We know that younger kids are moving away from chocolate and more into sour gummies and chewable candies. So, ring pop it's been around for 48 years it may never be as popular as it is right now we are definitely

Starting point is 00:21:50 seeing candy makers who make kind of traditional and or old school candy having their moment right now i mean below pop owner uh just expanded their factory in tennessee they invested 100 million dollars in that so you're seeing these classic candy makers kind of saying why are we so popular right now there is like this kind of backwards-looking vibe to it, but you are right. There is edible entertainment. It sounds like a funny thing, but the Bazooka CEO says we're not just a hand-to-mouth candy. There's stuff that happens in betwixt that moment of just putting it in your mouth, like sliding it on your ring, you know, pretending that you're getting engaged. That whole aspect to it is something that a lot of people are still resonating with to this day. This also reminds me of

Starting point is 00:22:33 we talked about this, I think it was last year at this point, the viral TikTok candy of mango peelable candies, which is you took the skin off and you ate the skin and also the fleshy inside of the mango. Those went viral and it's a similar thing. It's like an active approach to eating candy. You're not just popping them in their mouth. You're doing something else along the way before, you know, the sugar rush hits you. Now let's sprint to the finish with our final headlines and a move straight out of Seinfeld. President Trump signed an executive order to give showerheads, yes, showerheads, a serious boost in water pressure. I like to take a nice shower to take care of my beautiful hair, President Trump said earlier this week in the Oval Office,

Starting point is 00:23:11 and went on to rail against the current state of showers. I stand under the shower for 15 minutes until it gets wet. It comes out drip, drip, drip. It's ridiculous. Trump's crusade against weak showerheads has been a longstanding battle that dates back to an Obama-era definition of a showerhead. And his first term, Trump, increased the amount of water that showers with multiple nozzles could utilize. Biden later reversed that change, but now Trump has played another Uno reverse card. Neal, if you can't boost tariff rates any further, you might as well boost water pressure. I mean, I am a single issue voter. I'm not going to lie. And my one issue that I vote on is shower pressure. It's that important. But yes, this does seem to have a lot

Starting point is 00:23:51 of a lot wrapped up in just the basic definition of what a showerhead is. Previously, it had been defined in regulations as any plumbing fitting designed to direct water onto a bather. Trump administration came in and then changed that to find it as an accessory. to a supply fitting for spraying water into a bath. You got the difference there. And then Biden changed that. And then Trump changed it back. So we have the definitions of water pressure.

Starting point is 00:24:18 But honestly, at the end of the day, it probably doesn't make any difference. Appliances Standard Awareness Project says that if your water pressure is weak, it's just because of your home plumbing or there's been limestone buildup in the showerhead. And also, thank you for showing me the Seinfeld episode about water pressure in it.

Starting point is 00:24:35 Yeah, low flow. you cannot deal with low flow. A number of movies have been spun off from Saturday Night Live. Now, Saturday Night Live is getting its own spinoff in England. A British version of NBC's 50-year-old late-night juggernaut is coming to London, and it'll look a lot like the SNL of the USA, just five hours in the future. Lauren Michaels will be the executive producer, and the show will feature a British cast of comedians performing sketches,

Starting point is 00:24:59 as well as rotating hosts and musical guests. It will premiere next year on Sky, the broadcaster owned by Comcast, which is also the parent of NBC. Toby, what do you think? Live from Piccadilly Circus, it's Saturday night? I just think it's a good idea and one that Lord Michael's and SNL has been trying for decades now.

Starting point is 00:25:19 SNL has actually franchised itself numerous times. The longest running global adaptation of SNL is actually in South Korea. It's been going on for 15 seasons. Germany has an SNL offshoot that's been going for five seasons. Egypt and Italy have one that's been ruby, for four seasons. Maybe the funniest attempt, though, came from France, where it only lasted

Starting point is 00:25:41 one, a single episode aired, and guess what they called it? Lay Saturday Night Live, which sounds like exactly what the real SNL would call it if they had a French parody version SNL pop up. So clearly this is something that has been on Lauren's mind. He's like, why don't we just take this approach and apply it to other countries? But I just wonder if the different comedy cultures are going to accept, you know, a sketch comedy show like America has. So I am curious, though. I do want to see it in because the British version of the office is maybe funnier than the American version. So they've got their comedy chop for sure. Let's wrap it up there. Thanks for starting your morning with us. Have a wonderful Friday and an even better weekend. For any questions, comments,

Starting point is 00:26:23 or feedback, send an email to Morningbrewdaily at Morningbrew.com. Let's roll the credits. Emily Milliron is our executive producer. Raymond Lute is our producer. Our associate producers are Olivia Graham and Olivia Lake. Garrett Peck is on audio, hair and makeup, wears Prada. Devin Emery is our president and our show is a production of Born and Drew. Great show today, Neil. I wish you all well.

Morning Brew Daily - Can Cooling Inflation Withstand Tariffs? & Prada Buys Versace for $1.4B

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