WEBVTT - Musk’s Proposal Creates Liquidity, Uncertainty, For Tesla Bonds 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Abramowitz. 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 m L 0:00:20.840 --> 0:00:34.040 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Tesla. 0:00:34.240 --> 0:00:38.640 Tesla is more than a manufacturer of electric vehicles. It 0:00:38.760 --> 0:00:40.920 is more than a stock which is currently down about 0:00:40.920 --> 0:00:43.760 eight tens of percent, trading at three hundred and seventy 0:00:43.800 --> 0:00:46.000 seven dollars. It is more than a company that was 0:00:46.040 --> 0:00:52.120 founded by Elon Muskoo holds nearly of the shares. Tesla 0:00:52.240 --> 0:00:55.000 is also a company that has eight point six billion 0:00:55.080 --> 0:00:58.120 dollars worth of debt. And here to tell us about 0:00:58.600 --> 0:01:01.600 that debt and the very as bonds that the company 0:01:01.720 --> 0:01:05.200 has issued is Joe Levington, our senior credit analyst for 0:01:05.280 --> 0:01:08.839 Bloomberg Intelligence, and he joins me here in our eleven 0:01:08.880 --> 0:01:11.720 three oh studios. Joel, it is always a pleasure. I 0:01:11.760 --> 0:01:13.240 was gonna say, the best way for me to do 0:01:13.280 --> 0:01:15.840 this is just to say tell us everything we need 0:01:15.920 --> 0:01:20.600 to know about what is going on with Tesla bonds 0:01:20.720 --> 0:01:24.000 because they run the gamut of maturities. There are some 0:01:24.080 --> 0:01:26.759 that are maturing this year, and there are a lot 0:01:26.880 --> 0:01:32.480 of interesting details in the bond covenants which actually were 0:01:32.520 --> 0:01:38.640 affected by yesterday's tweet. Yes um I would say three things. One, 0:01:39.160 --> 0:01:43.120 the immediate effect is that three point three billion dollars 0:01:43.120 --> 0:01:47.240 worth of their convertible debt went into the money yesterday 0:01:47.480 --> 0:01:50.160 off the news, with the stock rose above the three 0:01:50.400 --> 0:01:53.800 D fifty eight dollar threshold where where those bonds trade. 0:01:54.040 --> 0:01:58.040 And that includes nine million dollars that comes due next March. 0:01:58.400 --> 0:02:02.840 So from the liquidity stamp point, the immediate impact is positive. 0:02:04.240 --> 0:02:06.800 Just explain that for people, So this nine hundred and 0:02:06.840 --> 0:02:10.880 twenty million dollars it's no longer debt, doesn't have to 0:02:10.880 --> 0:02:13.799 be right, it can be converted into equity. And that 0:02:13.800 --> 0:02:17.840 that's true for all all of it, mainly in twenty 0:02:17.880 --> 0:02:21.600 two issues as well as the slug next March, and 0:02:21.639 --> 0:02:24.480 so that would be number one. Number two, to your 0:02:24.520 --> 0:02:27.600 point about the covenants in the bonds which are in 0:02:27.639 --> 0:02:30.640 the Bloomberg Barkleys in disease, they have a change of 0:02:30.639 --> 0:02:35.600 control provision and that provision says that a change of 0:02:35.639 --> 0:02:42.560 control must include a controlling investor owning fifty which initially 0:02:43.000 --> 0:02:45.360 I think people thought that that is what was going 0:02:45.400 --> 0:02:48.280 to happen. When Mr must said that I am going 0:02:48.320 --> 0:02:51.640 to take Tesla private or I'm considering taking Tesla private, 0:02:51.880 --> 0:02:56.360 the pronoun I being important there, yes, and then he 0:02:56.520 --> 0:02:59.760 changed he changed his language slightly to there will be 0:02:59.800 --> 0:03:03.760 no controlling investors, so that would keep the unsecured bonds 0:03:03.800 --> 0:03:06.960 that they have outstanding, or theoretically that would keep it 0:03:07.639 --> 0:03:11.280 outstanding and a privatization. And so then it becomes well, 0:03:11.280 --> 0:03:14.920 what does that mean for those bond holders? And for 0:03:15.080 --> 0:03:17.800 that I would go to point three to say, look, 0:03:17.840 --> 0:03:21.280 the issue here would be structural subordination. If they issue 0:03:21.720 --> 0:03:26.120 secured debt that will get the unsecured notes will get primed, 0:03:26.240 --> 0:03:28.960 meaning that the secured debt will be on top on 0:03:28.960 --> 0:03:32.440 the capital structure. Then these blump bonds in the Bloomberg 0:03:32.480 --> 0:03:37.360 Barclays indocy and then the equity owners. And when you 0:03:37.400 --> 0:03:40.160 look at that relative to what rading agencies have done 0:03:40.200 --> 0:03:43.800 in the past with structural subordination, it could mean one 0:03:43.880 --> 0:03:47.240 to notch is worth of downgrade. So that would be 0:03:47.280 --> 0:03:50.560 step one. What does that mean in terms of value 0:03:50.720 --> 0:03:53.840 for the bonds. The value would be if I look 0:03:53.840 --> 0:03:56.200 at triple C bonds, which is where that might head, 0:03:57.120 --> 0:04:00.600 would mean about an eight percent yield for five in 0:04:00.600 --> 0:04:03.360 the triple C zone. That is about a hundred and 0:04:03.440 --> 0:04:06.560 thirty basis points wider than where we are today, which 0:04:06.560 --> 0:04:08.960 is equal to about five or six points. That would 0:04:08.960 --> 0:04:11.440 be a worst case scenario, or how I would frame 0:04:11.480 --> 0:04:14.400 a worst case scenario. Now, it's true that nothing can 0:04:14.440 --> 0:04:17.040 happen because nobody has seen any of the financing or 0:04:17.080 --> 0:04:19.960 if any, if any debt will be issued at all. 0:04:19.960 --> 0:04:22.320 It could be all equity for all I know. UM. 0:04:22.360 --> 0:04:24.360 And of course there's always a case where he might 0:04:24.400 --> 0:04:28.240 decide to call these bonds back anyway. UM. And the 0:04:28.279 --> 0:04:31.359 way that my math looks at it would indicate that 0:04:31.360 --> 0:04:33.600 there's about a fifteen percent chance that he would call 0:04:33.640 --> 0:04:36.240 the bonds in, about forty five percent that would go 0:04:36.279 --> 0:04:39.679 to triple C, and about forty uh that nothing will happen. 0:04:39.720 --> 0:04:42.960 That seems to be where the bond yields are today. 0:04:43.200 --> 0:04:49.680 Are the covenants that you've just described unusual? They're not unusual, 0:04:49.760 --> 0:04:52.640 but it is very unusual. Uh. You know, as we 0:04:52.720 --> 0:04:56.000 come up on the anniversary of these bonds. Uh. For 0:04:56.120 --> 0:05:00.120 a issuer of such weak credit quality to issue unsecure 0:05:00.160 --> 0:05:04.599 debt and issue with um you know, almost investment grade 0:05:04.680 --> 0:05:08.800 type covenants, very very limited covenance. But is it usual 0:05:09.520 --> 0:05:15.320 to have a actual stock price for the convertible bonds? 0:05:15.839 --> 0:05:19.000 What did you say, three fifty eight dollars a share, 0:05:19.960 --> 0:05:24.600 and have the CEO of the company do something that 0:05:24.640 --> 0:05:28.479 would indicate a price for the stock that is higher 0:05:28.640 --> 0:05:34.839 in order to actually trigger that potential convert and then 0:05:35.120 --> 0:05:38.320 remove that as debt from the balance sheet so that 0:05:38.400 --> 0:05:40.400 you can then go out and issue more bonds. Well, 0:05:40.440 --> 0:05:43.680 Elon Musk is definitely not usual. I have never seen 0:05:43.720 --> 0:05:47.960 that before in my twenty years of of doing credit research. 0:05:48.040 --> 0:05:51.400 But you know, twenty years ago there was no Twitter. No, no, 0:05:51.480 --> 0:05:53.560 clearly I understand that. But I mean, twenty years ago, 0:05:53.600 --> 0:05:56.159 there were bonds, and there were bond covenants. This is true. 0:05:56.520 --> 0:06:01.360 But I've never seen anybody take such a monumental offering 0:06:01.480 --> 0:06:04.040 or potential action and just throw it out there on 0:06:04.040 --> 0:06:07.520 Twitter as if it's you know, like, uh, just a 0:06:07.680 --> 0:06:12.520 general thought in his mind. Based on your experience, what 0:06:12.600 --> 0:06:16.600 would be the normal pattern of trying to take a 0:06:16.640 --> 0:06:20.640 company of this size private? Sure, Well, typically what I 0:06:20.680 --> 0:06:23.200 would expect is that the company would be issuing a 0:06:23.240 --> 0:06:27.159 press release uh and through an eight K filing with 0:06:27.279 --> 0:06:31.280 the SEC, and that would outline you know that they 0:06:31.320 --> 0:06:34.839 are investigating strategic alternatives. I think Mylan said something like 0:06:34.880 --> 0:06:38.800 that today as a very recent example, ticker m y L. 0:06:39.440 --> 0:06:41.560 And you take it from there. You explain here's the 0:06:41.560 --> 0:06:44.200 reasoning or here's the logic, and it will take this 0:06:44.240 --> 0:06:47.400 amount of time. It usually doesn't come out in you know, 0:06:47.440 --> 0:06:51.000 a sixty one character tweet. Thanks very much, Joe Levington. 0:06:51.160 --> 0:06:54.240 We always learned a lot. Senior credit analyst for Bloomberg 0:06:54.279 --> 0:07:12.800 Intelligence talking about Tesla and Tesla bonds. The topic right 0:07:12.800 --> 0:07:16.240 now is Tesla and the shares of Tesla are down 0:07:16.280 --> 0:07:19.640 about three quarters of a per cent is coming after 0:07:19.720 --> 0:07:23.200 Chief executive Elon Musk tweeted yesterday that he was planning 0:07:23.280 --> 0:07:27.360 and looking forward to bringing the company private at a 0:07:27.360 --> 0:07:31.320 price of a share. Here to help us understand this 0:07:31.360 --> 0:07:33.560 more and get his reaction is Gordon Johnson. He is 0:07:33.600 --> 0:07:36.880 managing director Alternative Energy, Metals and Mining as well as 0:07:36.920 --> 0:07:42.080 equipment analysts for Vertical Group and Gordon just to underscore, 0:07:42.120 --> 0:07:44.720 he has already a cell recommendation on Tesla with a 0:07:44.760 --> 0:07:48.080 price target of ninety three dollars. Shares of Tesla currently 0:07:48.080 --> 0:07:51.560 traded three hundred and seventies six dollars. Gordon, always a 0:07:51.560 --> 0:07:54.320 pleasure to hear what you've got to say. What what 0:07:54.400 --> 0:07:58.080 was your reaction when you saw or learned about the 0:07:58.200 --> 0:08:02.840 tweet from elon Us? Well, I gotta tell you, Keim 0:08:02.880 --> 0:08:04.480 and thanks for having me on. I mean, initially it 0:08:04.520 --> 0:08:06.640 was sure excitement because it seemed to me like this 0:08:06.720 --> 0:08:09.280 was Thennell and the coffin. Um. I mean, you gotta 0:08:09.320 --> 0:08:11.240 think about this, right, let's just take a step back 0:08:11.520 --> 0:08:14.120 just a few days ago. Emon must promise that they're 0:08:14.120 --> 0:08:18.320 gonna be profitable forever um starting in three UM. So 0:08:18.400 --> 0:08:20.720 why would he need to go private to end negative 0:08:20.760 --> 0:08:23.120 propaganda from the shorts? I mean, if they're gonna be 0:08:23.120 --> 0:08:25.520 profitable forever and he's saying he's gonna go private at 0:08:26.280 --> 0:08:28.920 I mean the short covering alone, we drive the stock 0:08:28.960 --> 0:08:31.600 to five dollars. I mean, you gotta think about all 0:08:31.640 --> 0:08:35.400 the dynamics regarding an LBL. First and foremost, average biout. 0:08:35.400 --> 0:08:38.120 If you're a leverage biout investors, what you're looking for 0:08:38.280 --> 0:08:41.080 most is keep it or money generation for the cup 0:08:41.160 --> 0:08:43.560 from the company to pay the interest on your debt 0:08:43.559 --> 0:08:45.560 and ultimately the debt. And we know that's not what 0:08:45.640 --> 0:08:48.480 this company does. And we know that these um you know, 0:08:48.960 --> 0:08:52.040 they they rebuffed an investment offer from Saudi Eurabia. So 0:08:52.040 --> 0:08:54.840 if you're passing the hat uh for the largest lb 0:08:55.000 --> 0:08:57.640 OH syndicate in history, why would you say no to 0:08:57.720 --> 0:09:00.400 a big check? I mean, it just doesn't make sense. 0:09:00.440 --> 0:09:02.360 And when you think about the fact this would be 0:09:02.400 --> 0:09:06.720 a seventy or eighty plus billion dollars deal, um uh, 0:09:06.760 --> 0:09:09.520 you know, and and then it's my newly choreograph. I mean, 0:09:09.559 --> 0:09:12.840 the local legal risk for any party involved would be significant. 0:09:13.240 --> 0:09:16.920 So you know you're talking about you know, uh multiple 0:09:17.400 --> 0:09:20.400 and uh lawyers that would need to be involved, multiple 0:09:20.640 --> 0:09:23.600 investments would need to be involved. And we've heard nothing 0:09:23.679 --> 0:09:27.920 from any of these Tesla financiers or lawyers regarding a 0:09:27.960 --> 0:09:31.000 potential LBO. And just today we learned that you know, uh, 0:09:31.200 --> 0:09:33.480 the board members are saying they just started talking about 0:09:33.480 --> 0:09:37.000 this last week. Listen, here's the thing. The question is 0:09:37.040 --> 0:09:40.000 if the STC does their investigation, or if they investigate 0:09:40.040 --> 0:09:42.840 and they decide there's wrong doing here, well, Tesla investors care, 0:09:43.240 --> 0:09:45.640 you know, if Elon must broke offs here, well they care, 0:09:45.800 --> 0:09:48.960 probably not. But I think the bigger problem is if 0:09:49.000 --> 0:09:52.320 there's no real offer out there. If Elon Musk can't 0:09:52.320 --> 0:09:54.440 over the next few weeks show that there's a real 0:09:54.520 --> 0:09:57.280 offer out there, I think he has serious problems with 0:09:57.320 --> 0:10:01.360 respect to his current investors and credibility. I think that's 0:10:01.360 --> 0:10:03.920 the real problem. And when you're thinking about you know, 0:10:03.960 --> 0:10:06.160 even if Elon Musk rolls the shares, and you know 0:10:06.240 --> 0:10:08.559 the share, you know the the employees roll there shares, 0:10:08.800 --> 0:10:11.360 you're still talking about sixty plus billion and capital that 0:10:11.400 --> 0:10:14.959 needs to be raised. You have two current investigations alleging 0:10:15.000 --> 0:10:17.559 frauds with both with Solar City and with the amount 0:10:17.559 --> 0:10:19.480 of Model three is produced. You have a number of 0:10:19.520 --> 0:10:23.200 other potential issues um underpinning this company. With respect to 0:10:23.200 --> 0:10:26.640 a potential sec Wells noticed that maybe out there. I 0:10:26.679 --> 0:10:28.280 know that people have said that's not the case. But 0:10:28.320 --> 0:10:30.280 if you listen to the question on the call, the 0:10:30.320 --> 0:10:32.560 analysts asked the question and not ask Tesla, do they 0:10:32.559 --> 0:10:34.240 have a Wells nonese that do you have something that 0:10:34.320 --> 0:10:37.160 procludes you from raising capital, which is not the definition 0:10:37.160 --> 0:10:39.920 of a Wells. Notice this just seems, I mean, quite 0:10:39.920 --> 0:10:44.839 frankly ludicrous and uh, you know that was our reaction yesterday. Okay, 0:10:45.120 --> 0:10:48.360 is there a way that you can see Elon Musk 0:10:48.559 --> 0:10:51.839 actually completing a deal like this? Would it be? Is there? 0:10:52.080 --> 0:10:55.800 I mean, set aside for just a minute your skepticism 0:10:56.200 --> 0:10:59.520 on a technical basis. Is this a deal that is 0:10:59.600 --> 0:11:01.920 just too big to get done? Or is it possible? 0:11:03.880 --> 0:11:05.840 That's a great question, Pim, But I don't even think 0:11:05.840 --> 0:11:08.760 it's about the size of the deal. Again, think about this. 0:11:08.840 --> 0:11:13.559 A leverage buyout is based on a company generating cash. 0:11:13.880 --> 0:11:16.640 So if you're an LBO investors, you effectively take debt 0:11:16.640 --> 0:11:19.120 in a company to take the company over. What the 0:11:19.200 --> 0:11:22.760 prospect being they're going to generate cash to pay you 0:11:22.800 --> 0:11:25.040 back for that debt or pay you back your interests 0:11:25.080 --> 0:11:27.320 and then pay you back for that debt. When has 0:11:27.360 --> 0:11:32.120 Tesla generated never? So why as an LBO investor would 0:11:32.160 --> 0:11:34.559 you be willing to go out on a limb and 0:11:34.760 --> 0:11:38.319 risk potentially uh, you know, a huge default and wasting 0:11:38.360 --> 0:11:42.679 your money. I mean, it just doesn't make any logical sense. 0:11:42.880 --> 0:11:46.520 And I think that investors in the public, and you know, 0:11:46.760 --> 0:11:50.640 quite frankly, sec needs to see this actual money that 0:11:50.679 --> 0:11:53.720 he says he has secured. Those two words money secured 0:11:53.800 --> 0:11:56.280 that he said, I think need to be proven out 0:11:56.320 --> 0:11:59.959 over the next day's, last weeks, and we're highly skeptical 0:12:00.120 --> 0:12:02.040 that's going to be able to be the case. You know. 0:12:03.000 --> 0:12:05.240 It's like a very general question, is there enough money 0:12:05.240 --> 0:12:07.360 out there to do this? Yes? But doesn't make sense 0:12:07.400 --> 0:12:12.240 absolutely not. Well, let's let LBO investors scrutinized bills much 0:12:12.280 --> 0:12:14.920 more than equity short sellers do. And I think that's 0:12:14.960 --> 0:12:17.880 what's gotten lost in a lot of this, you know, uh, 0:12:18.000 --> 0:12:20.720 you know story. I want to thank you very much 0:12:20.760 --> 0:12:25.319 for joining us. Gordon Johnson, Managing director Alternative Energy, Metals 0:12:25.400 --> 0:12:29.360 and Mining and Equipment Analysts for Vertical Group, talking about 0:12:29.520 --> 0:12:34.559 Elon Musk's Twitter proposal to take Tesla private at four 0:12:34.679 --> 0:12:55.200 hundred and twenty dollars a share. Stocks have gained this year. 0:12:55.360 --> 0:12:58.840 The SMP five hundred is currently up nearly seven percent, 0:12:59.040 --> 0:13:02.520 NASDAC stopped SIR stocks are up nearly fourteen percent, and 0:13:02.679 --> 0:13:05.480 the Dow Jones Industrial average up just three and a 0:13:05.520 --> 0:13:08.240 half percent. Here to tell us what to do with 0:13:08.400 --> 0:13:11.240 money is Chuck Lieberman. He is the chief investment officer 0:13:11.360 --> 0:13:16.160 at Adviser's Capital Management. He is also a Bloomberg opinion columnist. 0:13:16.480 --> 0:13:19.360 He helps to manage more than one point three billion 0:13:19.440 --> 0:13:23.720 dollars of customer assets based in Ridgewood, New Jersey. Chuck Lieberman, 0:13:23.800 --> 0:13:27.280 thank you very much for being with me. Maybe, and 0:13:27.320 --> 0:13:29.520 I promise I'm not gonna ask you about Tesla, so 0:13:29.600 --> 0:13:31.520 you can put that one to the side, right. I 0:13:31.520 --> 0:13:35.000 mean that you know there are other things in the world. Uh, 0:13:35.280 --> 0:13:37.959 tell us what you take away from all of the 0:13:38.000 --> 0:13:42.439 information regarding jobs and the health of the US economy 0:13:42.679 --> 0:13:48.320 and how that translates into a strategy for investing money. Sure, well, 0:13:48.840 --> 0:13:53.600 I think everyone agrees that fest labor market is fairly tight. Uh. 0:13:53.679 --> 0:13:57.280 Some people think there's uh there are some people on 0:13:57.320 --> 0:14:00.480 the sidelines who could still be sucked into the job market. 0:14:01.320 --> 0:14:03.960 But the data, no matter how you look at it, 0:14:04.000 --> 0:14:07.840 in the case pretty clearly that labor is scarce. We 0:14:07.920 --> 0:14:13.200 have more job openings than unemployed. The unemployment rate is 0:14:13.240 --> 0:14:18.880 down at very low levels, historically cyclically low levels. Um. 0:14:19.240 --> 0:14:24.480 We're seeing uh, fifty year lows in unemployment claims. So 0:14:24.600 --> 0:14:28.360 by every measure, labor is scarce. That's beginning to drive 0:14:28.440 --> 0:14:31.560 up labor costs. Uh. Some people make the argument that 0:14:31.680 --> 0:14:35.080 labor costs are not rising that quickly. But if you 0:14:35.120 --> 0:14:39.280 look at the last five six years, you can see 0:14:39.320 --> 0:14:41.720 the labor costs started to rise when the unemployment rate 0:14:41.760 --> 0:14:45.240 hit about five So with the unemployment rate now below 0:14:45.280 --> 0:14:48.680 four percent, there's every reason to expect more upward pressure 0:14:48.960 --> 0:14:52.360 on labor costs, and ultimately that will flow into inflation. 0:14:52.480 --> 0:14:55.440 So that gets to the things to avoid in the 0:14:55.520 --> 0:14:58.520 things to play for. With a little bit higher inflation 0:14:58.600 --> 0:15:01.120 and solid economic growth, you want to be in the 0:15:01.160 --> 0:15:05.160 cyclicals or companies that will benefit from higher inflation or 0:15:05.240 --> 0:15:08.040 higher interest rates or accommodation, and you want to avoid 0:15:08.040 --> 0:15:11.520 the ones that are susceptible to those factors. So the 0:15:11.600 --> 0:15:15.160 susceptible areas are at the bond market, especially long term bonds, 0:15:15.240 --> 0:15:19.200 and especially high quality long term bonds that include utilities, 0:15:19.320 --> 0:15:23.560 real estate, investment, trust, consumer stables. Those are royal areas 0:15:23.560 --> 0:15:26.360 that we see as relatively vulnerable. And the areas that 0:15:26.520 --> 0:15:33.200 benefit are financials which benefit from rising interest rates. UH, 0:15:33.400 --> 0:15:37.920 energy and pipelines in particular because they'll benefit from rising 0:15:38.040 --> 0:15:43.840 prices for crude oil and more volume passing through pipes um, 0:15:44.160 --> 0:15:47.000 so those are roll attractive areas. Let's talk a little 0:15:47.000 --> 0:15:50.440 bit about energy. What kinds of energy companies if you 0:15:50.480 --> 0:15:54.520 can specifically, we're talking master limited partnerships. Are you talking 0:15:54.560 --> 0:15:59.560 about pure play energy companies, exploration and production, upstream, downstream? 0:15:59.560 --> 0:16:02.200 Where would you like to be, Well, it depends on 0:16:02.240 --> 0:16:04.880 the risk appetite and what the client needs. So if 0:16:04.920 --> 0:16:09.120 they need income, then midstream and downstream are great places 0:16:09.160 --> 0:16:11.920 to be because they generate a lot of income. The 0:16:11.960 --> 0:16:18.680 industry is still transitioned from UH partnerships and incentive distribution 0:16:18.840 --> 0:16:23.280 rights to corporations, and so that's creating a little bit 0:16:23.280 --> 0:16:26.880 of turmoil and uncertainty in the market. Uh, just explain 0:16:26.920 --> 0:16:28.760 if you can. I hate to break in, but just 0:16:28.880 --> 0:16:31.760 explain what is going on, because this is an important point. 0:16:31.800 --> 0:16:35.480 It's it's a way in which master limited partnerships have 0:16:35.560 --> 0:16:38.320 typically operated in the energy sector. And as you say, 0:16:38.360 --> 0:16:43.080 that's changing, yeah, well that's exactly right. So companies used 0:16:43.120 --> 0:16:47.440 to have these UH sort of operations, daughter companies, spinoffs, 0:16:47.560 --> 0:16:50.600 however you want to describe them, and those companies would 0:16:50.600 --> 0:16:55.400 be structured as partnerships with the ownership either in the 0:16:55.480 --> 0:16:59.600 hands of the public or the parent, and the parents 0:16:59.640 --> 0:17:04.600 with quickly UH reap some benefits every time the dividend 0:17:04.720 --> 0:17:08.399 paid to the limited partners increased, so they were motivated 0:17:08.440 --> 0:17:13.320 to increased dividends for UH, for the investors, but it 0:17:13.440 --> 0:17:17.119 also meant that the company had relatively little cash flow 0:17:17.440 --> 0:17:21.399 to finance investments, so the company would be required, really 0:17:21.440 --> 0:17:24.639 forced to use the capital markets to raise capital and 0:17:24.720 --> 0:17:29.280 pay for capital investment. UH. That became untenable when oil 0:17:29.280 --> 0:17:32.119 prices fell and stock prices fell and the cost of 0:17:32.160 --> 0:17:36.199 capital went up very dramatically. And so these companies are 0:17:36.240 --> 0:17:42.159 now being converted into corporations and the entire partnership structures 0:17:42.800 --> 0:17:47.400 is basically being thrown away or gotten rid of. UH. 0:17:47.440 --> 0:17:49.640 Some more of these companies who are going to operate 0:17:49.680 --> 0:17:53.160 like traditional companies, where they're going to retact and retain 0:17:53.280 --> 0:17:58.120 more cash flow, more profits in order to finance their investments. Okay, 0:17:58.320 --> 0:18:02.000 great description. Tell us now about financial stocks. Do you 0:18:02.000 --> 0:18:03.919 want to be in banks? Do you want to be 0:18:03.960 --> 0:18:07.280 in regional banks? What kind of banking stocks are? Financial 0:18:07.359 --> 0:18:11.320 entities are important? Well? I think the regionals and the 0:18:11.359 --> 0:18:15.119 money centers are both attractive. UM. I happen to like 0:18:16.080 --> 0:18:18.720 some of the money centers because they are so cheap. 0:18:18.880 --> 0:18:23.000 We're talking what JP Morgan Chase Bank of America. Well, 0:18:23.119 --> 0:18:25.760 JP Morgan Chase is sort of the criminal a crime 0:18:25.840 --> 0:18:28.480 of the industry, and so it's the most expensive, but 0:18:28.520 --> 0:18:32.520 it's also the safest investment. UH. City is the cheapest 0:18:32.680 --> 0:18:36.119 of the group. Uh, it's the least expensive. It's the 0:18:36.160 --> 0:18:39.800 most international of all the money centers. UH is the 0:18:39.880 --> 0:18:43.480 cheapest for a reason. Well, I think it's cheapest because 0:18:43.520 --> 0:18:46.360 it's not as simple a story. Bank of America has 0:18:46.400 --> 0:18:51.639 a very large retail business. UM, it's very attractive, very cheap. 0:18:52.240 --> 0:18:55.600 City is cheaper still partly because of its international exposure. 0:18:56.520 --> 0:18:59.160 I think there's a very rational case to be made 0:18:59.520 --> 0:19:03.080 for a mix of investing across all of those companies. 0:19:03.640 --> 0:19:07.000 Do you believe that higher interest rates will show themselves 0:19:07.080 --> 0:19:13.920 this year? Yes, I like that. That sucks SYNC. You 0:19:13.960 --> 0:19:17.200 don't hear that often. Well, I'm trying to be straightforward 0:19:18.160 --> 0:19:21.240 that Uh yeah, I think we are going to see it. 0:19:21.359 --> 0:19:24.760 I think at the margin, we're already seeing higher inflation. 0:19:25.200 --> 0:19:29.919 The Fed is going to continue to slowly methodically ramp 0:19:30.040 --> 0:19:34.800 up policy rates, meaning another basis points in September and 0:19:34.880 --> 0:19:40.400 another in December. But we're we're running out of room 0:19:40.640 --> 0:19:44.320 for us to be surprised by a shocking inflation number. 0:19:44.800 --> 0:19:50.520 I don't dismiss the possibility. But it's already August, so 0:19:51.119 --> 0:19:53.679 I think we are going to get a number that 0:19:53.880 --> 0:19:55.920 is kind of a shock to the market. I think 0:19:55.920 --> 0:19:59.320 the market is very complacent about inflation pressures, and so 0:20:00.280 --> 0:20:03.679 I think that that's going to be the big mover 0:20:04.119 --> 0:20:07.600 for the bond market. Give you about twenty seconds, Chuck Lieberman. 0:20:07.680 --> 0:20:12.439 You mentioned cychnical stocks. What about consumer discretionary Uh, some 0:20:12.560 --> 0:20:16.160 of those are fairly well placed. Also, with so many 0:20:16.200 --> 0:20:21.840 households now employed, unemployment so far down, consumers do have 0:20:22.040 --> 0:20:25.439 more discretionary income that they can afford to spend, and 0:20:25.480 --> 0:20:32.920 they're doing it. So the discretionary retail space is extremely competitive, however, 0:20:33.200 --> 0:20:35.920 so you really have to look at company by company. 0:20:36.680 --> 0:20:40.360 I think the cruise lines, as an example, are well placed, 0:20:40.840 --> 0:20:45.080 they will do well. The retail space for clothing is 0:20:45.720 --> 0:20:49.879 just an absolute minefield, and so some companies are losing 0:20:49.880 --> 0:20:53.240 out and others like Amazon or picking up share. Thanks 0:20:53.359 --> 0:20:56.280 very much, Chuck Lieberman. He is the chief investment officer 0:20:56.400 --> 0:21:00.639 at Advisers Capital Management, is also a Bloomberg Opinion columnists. 0:21:00.680 --> 0:21:03.880 Helps to manage more than one point three billion dollars 0:21:17.440 --> 0:21:21.840 the world of cryptocurrencies for example, bitcoin Bitcoin now trades 0:21:21.880 --> 0:21:23.920 about five and a half percent lower than it did 0:21:24.000 --> 0:21:29.560 yesterday at eighty dollars for bitcoin, Ripple is down about 0:21:29.600 --> 0:21:33.480 twelve percent, Atherium down four percent, light Coin down seven 0:21:33.480 --> 0:21:35.560 and a quarter percent. Here to help us understand a 0:21:35.560 --> 0:21:38.560 little bit more about the world of cryptocurrencies and their 0:21:38.560 --> 0:21:41.320 exchanges is Joe Marino. He is a partner in the 0:21:41.359 --> 0:21:46.800 White Collar Defense and Investigations Group at Cadwalader in Washington, 0:21:46.920 --> 0:21:48.400 d C. But he joins us here in our eleven 0:21:48.440 --> 0:21:50.520 three oh studios. Joe, it is a pleasure. Thank you 0:21:50.560 --> 0:21:52.679 for coming in. Maybe just give people a little bit 0:21:52.720 --> 0:21:55.239 of your background so they understand where you're coming from 0:21:55.280 --> 0:21:57.960 in your level of expertise. Sure him, and thank you 0:21:58.000 --> 0:22:00.679 so much for having me so. My background is as 0:22:00.680 --> 0:22:04.120 a federal prosecutor and I specialized is specifically in terrorist 0:22:04.160 --> 0:22:07.760 financing at Main Justice down in Washington, d C. And 0:22:07.960 --> 0:22:09.880 just to give a little background as to what we 0:22:10.320 --> 0:22:13.120 used to look at in terms of how individuals would 0:22:13.119 --> 0:22:15.720 funnel money to terrorist groups. In the old days, it 0:22:15.800 --> 0:22:18.359 was cash, right, It was cash carried over the border, 0:22:18.440 --> 0:22:21.439 sometimes mailed in FedEx boxes. Then it was Hawalla's right, 0:22:21.440 --> 0:22:25.159 which are these informal ways with very little documentation of 0:22:25.200 --> 0:22:28.600 moving money between parties as a way to avoid taxes. 0:22:28.920 --> 0:22:32.480 The regulators, the I r S, the Treasury Department and 0:22:32.480 --> 0:22:35.680 so on, and the FBI, and this would be electronic. Well, 0:22:35.720 --> 0:22:39.320 Hawailli's typically we're kind of old school, you know, person 0:22:39.359 --> 0:22:42.120 to person, So maybe two persons in the US would 0:22:42.560 --> 0:22:45.960 exchange money for the purposes of exchanging the same amount overseas, 0:22:46.440 --> 0:22:48.879 mostly off the books. Well, now we're in a digital age. 0:22:49.080 --> 0:22:53.040 So now what we're looking at is largely unregulated, unbanked 0:22:53.040 --> 0:22:56.479 transactions through digital currency, and that is very much on 0:22:56.520 --> 0:22:59.920 the radar of federal prosecutors and regulators because they see 0:23:00.040 --> 0:23:02.480 this as really the wild West, and it's a way 0:23:02.520 --> 0:23:05.639 for people to avoid taxes, to launder money from criminal 0:23:05.720 --> 0:23:10.280 enterprises potentially, and you know, even to violate campaign finance 0:23:10.600 --> 0:23:13.239 and various different things. So it's very much on the 0:23:13.359 --> 0:23:17.440 radar of prosecutors and regulators when it comes to cryptocurrency. 0:23:17.520 --> 0:23:20.080 And again, there's so much promise to this technology, so 0:23:20.119 --> 0:23:21.600 it's a shame that it's gotten a bit of a 0:23:21.640 --> 0:23:24.800 blemish from some bad actors. But when it comes to regulators, 0:23:26.000 --> 0:23:29.199 I would characterize their view of cryptocurrency as ranging from 0:23:29.280 --> 0:23:33.120 highly skeptical to openly hostile because of these reasons. So 0:23:33.160 --> 0:23:38.560 what do you believe the government's process is in determining 0:23:39.040 --> 0:23:42.800 how to regulate or manage this market, Because as you 0:23:42.920 --> 0:23:47.840 just describe, they're not agnostic at all. They're not agnostic. 0:23:47.920 --> 0:23:51.520 So if you are an individual, you can mind cryptocurrency, 0:23:51.720 --> 0:23:55.560 you can invest in cryptocurrency, you can buy and sell cryptocurrency, 0:23:55.720 --> 0:23:58.760 and the government will largely leave you alone except for 0:23:58.800 --> 0:24:00.560 the fact that you have to pay axes on it. 0:24:00.680 --> 0:24:03.520 And the i r S does consider bitcoin and other 0:24:03.560 --> 0:24:06.639 types of cryptocurrency to be property, and they expect you 0:24:06.680 --> 0:24:09.840 to declare and pay capital gains tax on that. And 0:24:09.880 --> 0:24:12.600 a taxable event can come out a number of different ways. 0:24:12.800 --> 0:24:15.359 It's not just when you buy or sell or trade 0:24:15.400 --> 0:24:18.199 the cryptocurrency. It's when you buy something. So if you 0:24:18.240 --> 0:24:21.480 bought bitcoin at one hundred, it's now at two hundred, 0:24:21.560 --> 0:24:24.040 and you buy something at two hundred dollars, the i 0:24:24.200 --> 0:24:26.560 r S sees that as a taxable event and expects 0:24:26.560 --> 0:24:29.399 you to pay short or long term capital gains on 0:24:29.600 --> 0:24:33.639 that differential. So, but in general, if you're not in 0:24:33.680 --> 0:24:38.520 the business of exchanging cryptocurrency, you're largely off the government's radar. Now, 0:24:38.640 --> 0:24:42.600