WEBVTT - After Selling Patron, John Paul DeJoria Turns To Rok Mobile 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg P and L 0:00:20.840 --> 0:00:33.880 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. But Cardi, 0:00:33.920 --> 0:00:37.959 they have acquired the shares of Patron Tequila that they 0:00:38.000 --> 0:00:40.879 already didn't own. But this is a deal that values 0:00:40.920 --> 0:00:44.240 Patron at about five billion dollars. It's expected to close 0:00:44.240 --> 0:00:46.440 in the first half of the year. Joining us now 0:00:46.479 --> 0:00:49.440 in a studio is a co founder and chairman of 0:00:49.440 --> 0:00:52.760 the board of John Paul Mitchell Systems and co founder 0:00:52.840 --> 0:00:56.600 of Patron Tequila. John Paul Or thanks very much for 0:00:56.640 --> 0:00:59.120 being in the studio. Oh, my friend, always always a 0:00:59.200 --> 0:01:01.520 joy interviewing with. All Right, let's just I want to 0:01:01.560 --> 0:01:04.839 get to set this stage because let's go back to nine. 0:01:05.480 --> 0:01:08.640 You are interested in having a friend of yours bring 0:01:08.640 --> 0:01:12.840 back a bottle of tequila from Mexico and he brings 0:01:12.880 --> 0:01:18.000 back a hand blown bottle and you and Martin Crowley, Yes, 0:01:18.080 --> 0:01:21.400 that's correct. You guys decide, oh, we'll make twelve thousand 0:01:21.480 --> 0:01:24.600 bottles and priced him at thirty seven bucks a bottle, 0:01:25.480 --> 0:01:27.640 very very close. He came back with a couple of 0:01:27.680 --> 0:01:29.920 bottles of what I said, Martin, when you go down there, 0:01:30.040 --> 0:01:33.680 bring back whatever the aristocrats drink. So he found these bottles, 0:01:33.760 --> 0:01:36.200 very slim, good bottles, and it was the smoothest I 0:01:36.240 --> 0:01:38.720 ever drink. He said, But JP, I met this guy 0:01:38.800 --> 0:01:42.120 named Francisco Alcarez and he could make it even smoother. 0:01:42.360 --> 0:01:44.000 And then he had this bottle he showed me that 0:01:44.120 --> 0:01:46.160 was out of blown glass he got in some uh 0:01:46.600 --> 0:01:48.960 uh you know, gift shop. He says, we could do this, 0:01:49.080 --> 0:01:51.040 and I said, can we do it out of recycled glass? 0:01:51.040 --> 0:01:53.160 He goes yeah. I said, well what that, Let's make 0:01:53.160 --> 0:01:55.680 twelve tho bottles and uh, you know it's gonna be 0:01:55.840 --> 0:01:58.280 very expensive. Well, it was very expensive. We had to 0:01:58.280 --> 0:02:02.160 sell it for thirty seven ninety five in nine when 0:02:02.160 --> 0:02:04.360 the average tequila I think was four or five dollars 0:02:04.360 --> 0:02:07.120 and the best one around was fourteen. So we actually 0:02:07.160 --> 0:02:10.680 started in the United States altar premium tequila. But we thought, 0:02:10.680 --> 0:02:12.679 you know what a great thing like tequila you could 0:02:12.720 --> 0:02:15.840 sip and not have to put into Margarita of that quality, 0:02:15.919 --> 0:02:18.960 you don't get that big hangover the next day. Not bad. 0:02:19.400 --> 0:02:21.120 So we want to come out with quality. We be 0:02:21.160 --> 0:02:24.520 in reorder business. It started out very slowly, by the way, 0:02:24.600 --> 0:02:27.320 but then people realized, wow, I want to treat myself. 0:02:27.360 --> 0:02:29.760 This is really good. And with a lot of friends 0:02:29.800 --> 0:02:31.720 that kind of pitched in to lend a helping hand, 0:02:32.120 --> 0:02:33.880 is started to take off and off and off, and 0:02:33.919 --> 0:02:37.919 then zoom. And then unfortunately, uh oh beckon about two 0:02:37.960 --> 0:02:40.680 thousand and three, my partner had a little bout at 0:02:40.720 --> 0:02:43.799 heart attack. Uh and Ed Brown took over as our president. 0:02:43.880 --> 0:02:45.680 He was in sales at the time. It should have 0:02:45.680 --> 0:02:48.280 been the president. Great guy, and it went just straight 0:02:48.360 --> 0:02:50.120 up in the air. It's really a phenomena. But it 0:02:50.200 --> 0:02:52.760 shows you that America still works. And if you go 0:02:52.880 --> 0:02:55.640 for a high quality in any product and you don't 0:02:55.720 --> 0:02:58.920 lessen that quality and give people what they really would like, 0:02:59.320 --> 0:03:01.239 you've got one of a chance of making it well 0:03:01.280 --> 0:03:03.600 and you keep that quality going. And that's gonna happen, 0:03:03.639 --> 0:03:06.440 by the way, even with the sale to Bacardi. Uh 0:03:06.480 --> 0:03:09.000 that's it's gonna happen because they've agreed to keep everything 0:03:09.040 --> 0:03:11.240 exactly the way it is keep our staff in place 0:03:11.560 --> 0:03:14.720 and work with me on philanthropy and the good conditions 0:03:14.800 --> 0:03:16.760 and the high quality that we have and not step 0:03:16.800 --> 0:03:19.960 away from it. And you self funded, patron, Yeah, self 0:03:19.960 --> 0:03:24.280 fund it, totally self funded. So why did you decide 0:03:24.280 --> 0:03:28.320 to sell now? A couple of reasons. One, we've taken 0:03:28.320 --> 0:03:31.120 it where no one's ever gone before with any tequila, 0:03:31.200 --> 0:03:34.160 let alone Altar Premium tequila were there and it was 0:03:34.200 --> 0:03:36.360 a lot of fun. Well, I'd like to take it 0:03:36.400 --> 0:03:39.160 to the next stage right now. And someone like Baccardi 0:03:39.320 --> 0:03:41.040 that has their own and they've been our distributed in 0:03:41.040 --> 0:03:43.120 many parts of the world, but now that they have 0:03:43.160 --> 0:03:45.520 a piece of it, they could double what we're doing 0:03:45.600 --> 0:03:47.520 right now. And I know that because the product is 0:03:47.640 --> 0:03:50.560 that good. So I'm excited to see this product that 0:03:50.600 --> 0:03:53.280 I was the father of continue to grow and grow 0:03:53.320 --> 0:03:55.840 and grow. Uh. And it's just the ideal time to 0:03:55.880 --> 0:03:58.400 do it. I get more involved in my philanthropic work, 0:03:58.600 --> 0:04:01.560 which I love. And I'm also working on another major, 0:04:01.640 --> 0:04:03.760 major thing, which will announce with you guys another two 0:04:03.840 --> 0:04:06.400 or three months through through rock r Okay Mobile that 0:04:06.520 --> 0:04:08.640 is going to change the whole world for the better 0:04:08.680 --> 0:04:12.040 for all people. So involvement. So I'm just wondering, do 0:04:12.080 --> 0:04:15.320 you think that it would be harder for an entrepreneur 0:04:15.560 --> 0:04:19.960 to start a business today than it was back in No, 0:04:20.160 --> 0:04:22.760 not at all. I think it's so much easier today 0:04:22.800 --> 0:04:27.040 because when I started Paul Mitchell in night seven, inflation 0:04:27.080 --> 0:04:29.040 in the United States was twelve and a half percent, 0:04:29.400 --> 0:04:32.479 unemployment ten and a half percent. If you could get alone, 0:04:32.600 --> 0:04:35.120 if you could get a loan, prime rate in one 0:04:35.160 --> 0:04:38.359 was seventeen percent. I mean, it was very difficult, and 0:04:38.360 --> 0:04:40.800 we have computers. In those days, we were to set 0:04:40.839 --> 0:04:43.440 time to make a business card. So today you can 0:04:43.480 --> 0:04:45.160 make it, I believe a lot easier. But the two 0:04:45.240 --> 0:04:47.200 things you've got to do if you start a business 0:04:47.720 --> 0:04:51.000 is make sure that your product or your service is 0:04:51.040 --> 0:04:54.080 so darn good. You're not in the selling business. During 0:04:54.120 --> 0:04:56.680 the reorder business. When they get it, they would like 0:04:56.720 --> 0:04:58.880 it so much they want to reorder it. Make sure 0:04:58.920 --> 0:05:01.479 that quality is the and at the same time, be 0:05:01.560 --> 0:05:03.760 sure that you could overcome rejection. You're gonna get a 0:05:03.800 --> 0:05:06.000 lot of rejection, and if you know you're gonna get it, 0:05:06.000 --> 0:05:08.039 it's not gonna hurt you so much. You're not gonna 0:05:08.040 --> 0:05:10.239 give up after a hundred doors are slamming your face 0:05:10.560 --> 0:05:13.159 like I did when I sold Encyclomphedias door to door. 0:05:13.320 --> 0:05:15.560 You just keep on going to vet. You're gonna get it. 0:05:16.279 --> 0:05:18.599 One of the things you do have, though, is competition. 0:05:18.760 --> 0:05:22.920 I note that just acquired George Clooney's a high end 0:05:22.960 --> 0:05:26.120 Casa Amigos tequila brand. I guess that deal was reported 0:05:26.160 --> 0:05:30.840 to be worth about a billion dollars. Valuing Patron at 0:05:30.839 --> 0:05:33.760 five point one billion, that's pretty high. Well, if you 0:05:33.960 --> 0:05:37.279 valued Patron the same way, uh, the group with their 0:05:37.560 --> 0:05:39.520 one of them, a couple of friends find that they 0:05:39.520 --> 0:05:41.880 were part of the owners with them. If I did 0:05:41.880 --> 0:05:45.480 it that way, Patron would be twenty four billion dollars 0:05:45.560 --> 0:05:47.880 right now. So if you go on what you do 0:05:47.920 --> 0:05:50.640 the abada and how many cases you sell. But that's 0:05:50.680 --> 0:05:53.200 just crazy, you know. But because Clooney was involved, and 0:05:53.360 --> 0:05:54.599 I'm sure they could use it for a lot of 0:05:54.600 --> 0:05:57.640 publicity to them, it made sense. I would love to 0:05:57.680 --> 0:06:00.360 get that, but you know, and but you know, no 0:06:00.360 --> 0:06:02.800 one's gonna pay that kind of big money. However, I 0:06:02.880 --> 0:06:06.560 think at five billion, one million, we did extremely well. 0:06:06.800 --> 0:06:08.960 I'm very very happy and as you know and have 0:06:09.000 --> 0:06:11.800 said many times, for seventy of a cumpany top that's 0:06:11.800 --> 0:06:14.840 a home run. Congratulations. Think I could do a whole 0:06:14.880 --> 0:06:17.320 lot more to help change your world with us. Thank 0:06:17.320 --> 0:06:19.760 you so much for being with us. It really is fascinating, 0:06:19.760 --> 0:06:22.359 and I want to care about selling Encyclopedia's door to 0:06:22.440 --> 0:06:27.080 door and we'll start sometime because you're fascinating and maybe 0:06:27.080 --> 0:06:30.880 perhaps can be an inspiration for my two little sons. First, 0:06:30.920 --> 0:06:33.080 you have to first have to explain to them what 0:06:33.120 --> 0:06:37.240 our encyclopedias, Yeah, they don't actually true. It is that 0:06:37.279 --> 0:06:39.840 we are not around anymore. And tell them to watch 0:06:39.920 --> 0:06:42.600 Good Fortune the movie. It was just reallyas you get 0:06:42.640 --> 0:06:44.840 it on you know, Amazon iTunes. What a good Fortunately 0:06:44.839 --> 0:06:46.680 the movie. Let your kids watch it shows you how 0:06:46.680 --> 0:06:49.159 to go from homeless and no money, no influence, being 0:06:49.160 --> 0:06:51.800 fired many times, and make it in America and you 0:06:51.800 --> 0:06:54.680 can still do in other countries too. John Paul Gagoria, 0:06:54.760 --> 0:06:56.760 thank you so much for being with us. John Paul 0:06:56.760 --> 0:07:00.280 Gagoria as billionaire, co founder and chief executive officer Pau 0:07:00.400 --> 0:07:03.839 Mitcher and the owner of Patron Spirits, which was just 0:07:03.880 --> 0:07:22.960 sold to stocks. Gold and oil are up, bonds in 0:07:23.000 --> 0:07:26.320 the US dollar are down. Jim Bianco is the president 0:07:26.360 --> 0:07:30.000 and founder of Bianco Research. He joins us from Chicago. Jim, 0:07:30.000 --> 0:07:33.000 always a pleasure. Do you think that the dollar weakness 0:07:33.000 --> 0:07:36.920 will continue? I think over the very short term it 0:07:36.920 --> 0:07:40.960 will continue because it's got momentum, it's got the Treasury Secretary, 0:07:41.760 --> 0:07:44.480 it's got a lot of that going. But I do 0:07:44.560 --> 0:07:46.880 think we're in the late stages of this move. The 0:07:46.960 --> 0:07:51.160 dollars at uh significant highs. Speculation, you know, what we 0:07:51.240 --> 0:07:54.560 call the crowded trade is getting pretty frothy right now. 0:07:55.200 --> 0:07:57.840 Everybody's in this trade. There's not a lot of people 0:07:57.840 --> 0:08:00.320 that are actually still long the dollar, and among the 0:08:00.360 --> 0:08:03.840 speculative categories in words, they're they're long. There's a crowded 0:08:03.840 --> 0:08:07.200 trade to short sell the dollar, correct, right the crowded 0:08:07.200 --> 0:08:10.040 trade is there short to dollar or long currencies? Right now? 0:08:10.120 --> 0:08:14.240 If you dial up your favorite billionaire at Davos or 0:08:14.400 --> 0:08:16.680 your favorite hedge fund manager, they're all going to sound 0:08:16.680 --> 0:08:18.240 the same when it comes to the dollar. It's just 0:08:18.240 --> 0:08:20.560 gonna keep going down. That's why I think it's at 0:08:20.560 --> 0:08:23.640 the late stages. Doesn't mean that today or tomorrow, this 0:08:23.680 --> 0:08:26.240 week is the high, because it's got the momentum going, 0:08:26.280 --> 0:08:30.200 but it is getting old. This rally speak currency rally 0:08:30.240 --> 0:08:33.840 dollar weakness, what's gonna make it strengthen? What's the catalyst 0:08:34.360 --> 0:08:36.640 and when strengthened against which currency? And which is an 0:08:36.679 --> 0:08:39.280 important sort of cross to look at. Isn't the US 0:08:39.360 --> 0:08:46.120 euro the dollar euro? Or is it dollar again? Dollar? Bitcoin? Yeah, 0:08:46.200 --> 0:08:48.000 it's all our bitcoin, the key indicator that you watch 0:08:48.040 --> 0:08:51.400 every morning. I watch it, but it's not yet to 0:08:51.480 --> 0:08:55.679 a key indicator yet. Uh No. But I think one 0:08:55.679 --> 0:08:58.480 of the things is to your question, you're right that 0:08:58.720 --> 0:09:02.400 what what crush you'll be looking at right now? Because 0:09:02.880 --> 0:09:05.520 the currency should have their own cycles. Some of them 0:09:05.559 --> 0:09:07.480 should be going up against the dollars, some of them 0:09:07.520 --> 0:09:10.120 should be sideways, some of them should be down. But 0:09:10.400 --> 0:09:12.680 right now, as a sign of the speculative frost, the 0:09:12.720 --> 0:09:16.400 dollar is going down against pretty much everything. Um for 0:09:16.520 --> 0:09:19.360 now you can so I look at the d X, Y, 0:09:19.480 --> 0:09:22.920 the the index or the euro understanding that this is 0:09:22.960 --> 0:09:25.640 a dollar trade. What's gonna change it? I think when 0:09:25.640 --> 0:09:28.120 we get off of focusing on the dollar, remember with 0:09:28.200 --> 0:09:31.640 the currency, there's two sides of the trade. There's what 0:09:31.840 --> 0:09:34.600 is U s policy? What are US rates? Oh? Yeah, 0:09:34.640 --> 0:09:37.280 but then there's also what are European policies? What are 0:09:37.360 --> 0:09:42.360 European rates, and that those are being largely ignored and 0:09:42.440 --> 0:09:45.160 everything has been focused to US centric. When I think 0:09:45.200 --> 0:09:48.240 we start focusing on what our Japanese policies and rates, 0:09:48.240 --> 0:09:50.200 and what are European policies of rates, and what are 0:09:50.200 --> 0:09:53.000 British policies and rates, I then think that this dollar 0:09:53.040 --> 0:09:55.240 weakness will start to peter out. But we're not doing 0:09:55.280 --> 0:09:58.120 that right now. Well, the rally in stocks peter out. 0:09:59.720 --> 0:10:03.640 The only in stocks is a little different animal altogether. UM. 0:10:03.800 --> 0:10:07.760 Following the tax hike or excuse me, following the tax cut, 0:10:08.520 --> 0:10:13.160 analysts have aggressively hiked their earnings forecast. So for all 0:10:13.200 --> 0:10:17.640 of seventeen, they're expecting about twelve to fourteen percent gained 0:10:17.760 --> 0:10:20.760 year over year in earnings. For all of eighteen, they're 0:10:20.760 --> 0:10:23.760 expecting another eighteen percent. If you had to two together, 0:10:23.800 --> 0:10:26.360 that's thirty six percent between last year and this year, 0:10:27.040 --> 0:10:30.520 justin earnings. The stock markets up twenty eight percent. Maybe 0:10:31.400 --> 0:10:35.360 with today's rally, UM, it hasn't even caught up to earnings. 0:10:35.360 --> 0:10:39.240 There has been no multiple expansion at this point. That 0:10:39.280 --> 0:10:41.520 will come once we get beyond the thirty six percent 0:10:41.600 --> 0:10:44.160 rally from the beginning of last year. We're up twenty 0:10:44.240 --> 0:10:47.120 nine right now, if and this is a critical list, 0:10:47.360 --> 0:10:50.240 the analysts expectations are right. But I think what's got 0:10:50.240 --> 0:10:54.840 the market going right now is these aggressive um increases 0:10:54.840 --> 0:10:57.760 in earnings estimates. All of the companies that have been 0:10:57.760 --> 0:11:01.520 giving very positive guidance. Right now, you could actually make 0:11:01.559 --> 0:11:05.760 the case that after rally that we've had, evaluations are 0:11:05.800 --> 0:11:09.360 really not much different than they were eighteen months ago 0:11:09.960 --> 0:11:14.120 because there's been such an aggressive uptick in earnings. It's 0:11:14.160 --> 0:11:17.280 all about that right now. The earning story seems to 0:11:17.320 --> 0:11:19.440 be working, So I think the stock market is going 0:11:19.480 --> 0:11:21.719 to continue to work for a while. All right, So 0:11:21.880 --> 0:11:25.280 let's turn to bonds. Uh. There is a lot of 0:11:25.320 --> 0:11:31.080 talk that yields are heading higher, potentially much higher. And uh. 0:11:31.200 --> 0:11:35.160 We saw Ray Dalio, the founder and the head of Bridgewater, 0:11:35.559 --> 0:11:39.400 come out and say that if the tenure treasury yield 0:11:39.480 --> 0:11:41.640 moves up by another hundred basis points, by another one 0:11:41.640 --> 0:11:45.280 percentage point, Uh, this will be the biggest bond bear 0:11:45.400 --> 0:11:49.040 market since the early eighties, and it will sort of 0:11:49.040 --> 0:11:54.000 affect markets accordingly. What's your take on this? Um. What 0:11:54.080 --> 0:11:56.920 he's explaining there is the simple math of the bond market, 0:11:57.960 --> 0:12:00.360 a phrase that will make everybody fall asleep as positive 0:12:00.360 --> 0:12:04.760 convexity that as yields get very very low, the sensitivity 0:12:04.800 --> 0:12:07.880 that a bond has to interest rate movements sensitivey bond 0:12:07.880 --> 0:12:10.560 price has to interestrate movements. Is that a record high. 0:12:10.640 --> 0:12:13.800 So when you get a one percent move in bonds 0:12:13.920 --> 0:12:17.080 right now, you get an enormous move in price. Different 0:12:17.080 --> 0:12:18.880 than when you had a one percent move in interest 0:12:18.960 --> 0:12:21.199 rates when we were at ten percent thirty years ago, 0:12:21.400 --> 0:12:25.320 you got a very smaller price. Uh. He's mechanically correct 0:12:25.600 --> 0:12:28.960 on that. But now that that said, there's only one 0:12:29.120 --> 0:12:32.680 reason that we would have a hundred basis point rise 0:12:32.760 --> 0:12:35.000 on the long end of the yield curve. And I 0:12:35.040 --> 0:12:39.400 think that that's if we had solid evidence of inflation returning. Now. 0:12:39.400 --> 0:12:43.080 The problem with that is everybody's got models and indicators 0:12:43.120 --> 0:12:46.360 and they all say inflation is gonna return. They also 0:12:46.400 --> 0:12:48.720 said that last year. They also said that three years ago, 0:12:48.720 --> 0:12:50.199 they said that five years ago, and they said that 0:12:50.320 --> 0:12:54.480 seven years ago. Uh. The models that inflation should have 0:12:54.640 --> 0:12:58.559 returned five years ago, it has not. The Federal Reserve 0:12:58.720 --> 0:13:01.640 Janet Yelling herself has even thrown her hands in the 0:13:01.640 --> 0:13:04.600 air and said they're not sure why inflation has it returned, 0:13:04.800 --> 0:13:07.240 and the data dependent FET is now using words like 0:13:07.559 --> 0:13:10.280 guess when it comes to where inflation is going to 0:13:10.360 --> 0:13:13.280 go next, because their models don't work anymore on this. 0:13:13.840 --> 0:13:17.160 If we get inflation, then yes, we could see a 0:13:17.200 --> 0:13:20.560 bond route. I'm fully in that camp. The problem is 0:13:21.000 --> 0:13:24.160 the indicators that say that it will return are there, 0:13:24.600 --> 0:13:27.440 but they've been there for five years and it's still 0:13:27.480 --> 0:13:30.360 has it returned, So maybe this is the year it's right, 0:13:30.480 --> 0:13:33.360 or maybe this isn't just yet another false start, So 0:13:33.640 --> 0:13:36.480 we're all back to guessing on inflation, and I don't 0:13:36.520 --> 0:13:40.000 like guessing. I'll stick. If I had to push your pull, 0:13:40.160 --> 0:13:42.920 I think, yeah, you're gonna probably see yields creep up 0:13:42.920 --> 0:13:44.880 a little bit more in the next month or two 0:13:45.240 --> 0:13:47.200 on the fear of inflation. But I think by the 0:13:47.240 --> 0:13:51.000 time you get into the later half of this will 0:13:51.040 --> 0:13:54.719 probably be another false start. Maybe those inflation measures are 0:13:54.800 --> 0:13:57.560 just playing wrong. Maybe they need a new inflation measure. 0:13:58.440 --> 0:14:01.320 I think they need. I think they need a new understanding. 0:14:01.360 --> 0:14:04.000 I think the effect of Amazon and the Internet on 0:14:04.160 --> 0:14:07.920 inflation is profound. The problem is the FED wants to 0:14:07.960 --> 0:14:10.319 know when it's going to go up forty basis points. 0:14:10.320 --> 0:14:12.720 We know that that the internet in Amazon is holding 0:14:12.760 --> 0:14:15.080 it down. We just don't know by how much and 0:14:15.120 --> 0:14:17.240 how to model that yet. Maybe they need to include 0:14:17.240 --> 0:14:21.000 food and energy in their inflation estimates. But let me 0:14:21.000 --> 0:14:23.360 ask you about the tenure treasury right where at two 0:14:23.440 --> 0:14:27.400 six how much uh further does the yield have to 0:14:27.480 --> 0:14:30.480 move in order for Jim Bianco to say I'm done 0:14:30.520 --> 0:14:33.080 with stocks. I'm buying ten years, Thank you very much. 0:14:33.120 --> 0:14:38.000 I'll take my two point uh. I think that you know, 0:14:38.840 --> 0:14:42.760 it actually doesn't one of two things. Either, it moves 0:14:42.800 --> 0:14:46.480 to near three percent thirty the ten year. Excuse me. 0:14:46.640 --> 0:14:49.080 If we get a three percent yield on that, I 0:14:49.120 --> 0:14:52.480 think that that could be damaging for the stock market 0:14:52.520 --> 0:14:54.520 in the economy if we were to get that. But 0:14:54.640 --> 0:14:57.600 I think to get that we would need inflation. If 0:14:57.600 --> 0:15:01.640 we don't get inflation, then I think what happens is 0:15:01.680 --> 0:15:05.320 we're gonna be at Defet's going to raise rates. The 0:15:05.480 --> 0:15:08.920 yield curve is going to flatten quite a bit. Uh. 0:15:09.040 --> 0:15:15.280 The yield curve has forecasted correctly every recession since nineteen sixty. 0:15:15.800 --> 0:15:18.840 We get that flatten yield curve, it's gonna freak everybody 0:15:18.840 --> 0:15:21.240 out that a recession is coming. That could be damaging 0:15:21.320 --> 0:15:23.360 for the market. To Jim Bianco, thank you so much 0:15:23.360 --> 0:15:26.120 for joining us, President and founder of Bianco Research, also 0:15:26.400 --> 0:15:43.520 a Bloomberg profit. The shares are General Electric are down 0:15:43.520 --> 0:15:46.280 three tenths of a percent right now, and the company 0:15:46.360 --> 0:15:49.880 has revealed that the Securities and Exchange Commission is looking 0:15:49.920 --> 0:15:51.720 into the way that it has accounted for some of 0:15:51.760 --> 0:15:57.080 its past insurance businesses as well as its revenue recognition program. 0:15:57.080 --> 0:15:59.200 Here to tell us more, Brooks Sutherland our m and 0:15:59.280 --> 0:16:02.000 a columnist and Bloomberg gad fly when it comes to 0:16:02.040 --> 0:16:05.120 all things g E and Brooke can be followed on 0:16:05.120 --> 0:16:10.360 Twitter at b L Seth s U t h Alright, 0:16:10.480 --> 0:16:15.720 b L Suth, g E and the SEC. What does 0:16:15.720 --> 0:16:19.480 the SEC want to know about? So they're reviewing two 0:16:19.520 --> 0:16:21.720 things is what we learned today. So they're looking into 0:16:21.760 --> 0:16:25.600 the process leading up to UM. You know gees announcement 0:16:26.000 --> 0:16:28.200 last week that it's taking a six point two billion 0:16:28.240 --> 0:16:31.120 after tax charger and its insurance business is paying fifteen 0:16:31.120 --> 0:16:34.200 billion over seven years to shore up reserves there. Now, 0:16:34.240 --> 0:16:37.000 that is a business that you know, g E largely 0:16:37.120 --> 0:16:39.640 divested between two thousand and four and two thousand and six, 0:16:39.960 --> 0:16:42.480 so it's been in runoff, they haven't been issuing new businesses, 0:16:42.520 --> 0:16:46.080 and they've done this review annually ever since. So then 0:16:46.080 --> 0:16:48.560 to all of a sudden see this need to you know, 0:16:48.640 --> 0:16:51.040 put fifteen billion to shore up their reserves. I think 0:16:51.160 --> 0:16:53.840 obviously raises a lot of questions. So to me, it 0:16:53.840 --> 0:16:56.720 would be more surprising if the SEC wasn't looking into this. 0:16:56.840 --> 0:16:58.920 But the interesting thing is the second part of this 0:16:58.960 --> 0:17:01.960 that they're also looking at gees revenue recognition practice and 0:17:02.000 --> 0:17:05.359 its controls around its long term service agreements. Now this 0:17:05.400 --> 0:17:07.879 has been it's a little complicated, but it's been a 0:17:07.920 --> 0:17:11.480 big sort of watch item for analysts because gees contract 0:17:11.520 --> 0:17:14.919 assets have searched over the past couple of years. And 0:17:14.960 --> 0:17:17.760 what those are are, you know, agreements that ge signs 0:17:17.760 --> 0:17:20.200 with clients and it goes ahead and books the earnings 0:17:20.520 --> 0:17:22.920 but not the cash, which then you know is delivered 0:17:22.920 --> 0:17:25.840 when these service agreements are sort of completed. Now, the 0:17:25.920 --> 0:17:30.480 concern is that when those agreements were signed, the underlying 0:17:30.560 --> 0:17:34.720 sort of profitability assumptions may not have been conservative enough. 0:17:34.760 --> 0:17:37.040 When you look specifically at the power market and how 0:17:37.119 --> 0:17:40.919 significantly that's deteriorated. I think you have to wonder, you 0:17:40.960 --> 0:17:44.360 know what we're sort of the baseline assumptions when those 0:17:44.359 --> 0:17:46.639 agreements were made and those earnings were booked, and so 0:17:46.680 --> 0:17:49.760 I think that was something analysts were very concerned about. 0:17:49.760 --> 0:17:53.400 Now the SEC is looking into it again, not totally surprising, 0:17:53.400 --> 0:17:55.520 but I think, you know, that's certainly going to be 0:17:55.640 --> 0:17:59.199 important to watch. So frankly, it's sort of shocking that 0:17:59.240 --> 0:18:02.160 the shares aren't own more because if you start talking 0:18:02.240 --> 0:18:07.159 about potential accounting I don't want to say fraud, but 0:18:07.240 --> 0:18:10.200 malfeasance over years or at least, you know, some kind 0:18:10.200 --> 0:18:13.720 of fudging of the numbers over years and years that 0:18:13.760 --> 0:18:17.280 calls into question a lot of things about this company. Sure, 0:18:17.280 --> 0:18:18.520 and I want to be clear, I mean, I don't 0:18:18.600 --> 0:18:21.200 think we're talking necessarily about fraud here, but if the 0:18:21.200 --> 0:18:24.960 baseline assumptions were too optimistic, then they have to be rethought. 0:18:25.000 --> 0:18:26.920 I mean it, we still have a lot to learn 0:18:26.920 --> 0:18:29.960 about this, the SEC investigators in still very early days. 0:18:30.280 --> 0:18:32.240 But yes, I mean it certainly does raise a lot 0:18:32.240 --> 0:18:34.439 of questions. I think the reason why the stock is 0:18:34.480 --> 0:18:37.600 not down more is that people have been worried about 0:18:37.640 --> 0:18:40.040 this for a while, that this issue, you know, is 0:18:40.040 --> 0:18:42.600 now sort of playing out because we have this sec headline, 0:18:42.680 --> 0:18:45.080 but the contract bassets have been something that have been, 0:18:45.440 --> 0:18:47.280 you know, sort of on analyst radar for a very 0:18:47.280 --> 0:18:49.320 long time, and it's a big reason why g had 0:18:49.320 --> 0:18:52.479 the cash shortfall that it did because again it's you know, 0:18:52.680 --> 0:18:55.320 it's sort of booking these as earnings but not getting 0:18:55.320 --> 0:18:57.320 the cash, and that's why you've seen the divergence and 0:18:57.359 --> 0:18:59.960 its actual earnings and free cash flow. So one thing 0:19:00.000 --> 0:19:02.960 I'm struggling with, so General Electric has a hundred and 0:19:02.960 --> 0:19:07.200 twenty six billion dollars of debt outstanding. They're at investment 0:19:07.200 --> 0:19:13.040 grade rated company in the A rating sphere. I'm trying 0:19:13.040 --> 0:19:15.199 to understand at what point do they get downgraded and 0:19:15.200 --> 0:19:18.040 all of a sudden, those borrowing costs just surge, piling 0:19:18.080 --> 0:19:21.640 on yet another concern, another big worry for investors right now. 0:19:21.640 --> 0:19:23.520 And the rating agencies came out and they did affirm 0:19:23.640 --> 0:19:26.439 ges credit ratings after it took that charge and insurance. Now, 0:19:26.480 --> 0:19:28.479 I don't know if they're going to be reevaluating that 0:19:28.840 --> 0:19:31.359 as we get more information, but that is certainly something 0:19:31.400 --> 0:19:34.720 that investors and analysts are worried about, and you know, 0:19:34.760 --> 0:19:37.119 I think they're concerned because a lot of times when 0:19:37.160 --> 0:19:40.000 you see companies take these charges to to shore a preserve. 0:19:40.520 --> 0:19:43.159 Usually the first number is not the last number. And 0:19:43.200 --> 0:19:45.879 if you start talking about maybe g E Capital needing 0:19:45.880 --> 0:19:48.920 more reserves for the insurance business as well as other 0:19:49.000 --> 0:19:51.919 liabilities that they have. They have this subprime mortgage business 0:19:52.040 --> 0:19:55.080 that's still laying around and some other potential issues, then 0:19:55.119 --> 0:19:57.920 you start to get into a question of cane Capital 0:19:57.920 --> 0:19:59.920 pay all those bills on its own, does it start 0:20:00.000 --> 0:20:02.760 eating money from the parent company, and then that becomes 0:20:02.760 --> 0:20:05.359 a really serious concern for the credit rating. You also 0:20:05.400 --> 0:20:08.000 have to worry about, you know, goodwill on the Alston 0:20:08.040 --> 0:20:11.320 acquisition that they did in fifteen is very high. That 0:20:11.359 --> 0:20:15.440 acquisition is obviously disappointed. Could there be a good will impairment, 0:20:15.480 --> 0:20:17.240 which you know that's a non cash charge, but that 0:20:17.240 --> 0:20:21.040 would play into credit rating concerns. Alright, Just to go 0:20:21.160 --> 0:20:22.959 back for a second, because I want to understand this 0:20:23.000 --> 0:20:27.159 in detail. G E Power signed a recently signed a 0:20:27.200 --> 0:20:31.080 twenty five year, three and thirty million dollar maintenance service 0:20:31.200 --> 0:20:35.800 contract with the owners of a new power plant in Mexico. 0:20:35.920 --> 0:20:40.760 It's just south of El Paso at Cirez. How would 0:20:40.840 --> 0:20:46.280 this contract relate to this investigation if indeed that was 0:20:46.359 --> 0:20:48.120 part of it. What would be an example of how 0:20:48.160 --> 0:20:50.920 that would work. Well, if it's a new contract, that's 0:20:50.960 --> 0:20:54.199 probably less of a concern because the underlying assumptions for 0:20:54.240 --> 0:20:57.399 that probably stuck a better relative to the current dynamics 0:20:57.400 --> 0:20:59.240 in the market. I think the concern is some of 0:20:59.280 --> 0:21:02.679 these contracts. But all right, so a legacy contracts. So 0:21:02.720 --> 0:21:05.280 let's say you had a legacy contract and you're in 0:21:05.400 --> 0:21:09.240 year ten of a twenty five year contract. You then 0:21:09.280 --> 0:21:11.919 you made certain assumptions about how much that was worth, 0:21:12.560 --> 0:21:14.760 and now it turns out that contract is not worth 0:21:14.800 --> 0:21:19.439 that much because power markets have deteriorated. What is deteriorated, 0:21:19.600 --> 0:21:24.479