WEBVTT - Michael Cohen Is A Much Bigger Risk To Trump Than Manafort 0:00:05.800 --> 0:00:08.719 Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. 0:00:08.760 --> 0:00:11.560 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 M L 0:00:20.880 --> 0:00:32.840 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Well, 0:00:32.840 --> 0:00:35.920 we've gotten a lot of news having to do peripherally 0:00:35.960 --> 0:00:40.560 with President Trump. Michael Cohen, former attorney to the President, 0:00:41.159 --> 0:00:46.640 pleaded guilty to a number of charges including campaign finance misuse, 0:00:47.320 --> 0:00:51.080 lack of reporting, as well as tax fraud. We also 0:00:51.159 --> 0:00:54.960 are hearing about Paul Manafort, who was convicted of a 0:00:55.040 --> 0:00:58.560 number of different things, including also tax fraud but also 0:00:58.640 --> 0:01:03.160 potentially money laundering. Paul Manafort was former campaign campaign advisor 0:01:03.200 --> 0:01:05.320 to President Trump. Joining us down to break this all 0:01:05.319 --> 0:01:08.880 down as Joe Marino Partner, White Collar Defense and Investigations 0:01:09.080 --> 0:01:12.600 Group member at Cadwalader in Washington, d C. He also 0:01:12.760 --> 0:01:16.760 is a former prosecutor with the Department of Justice working 0:01:16.760 --> 0:01:20.240 for the United States in the National Security Division. Also 0:01:20.440 --> 0:01:24.360 a decorated veteran and a former law attorney with the 0:01:24.400 --> 0:01:27.120 Securities and Exchange Commission. Joe, I want to start just 0:01:27.319 --> 0:01:30.240 giving you a pretty a pretty broad question, which is, 0:01:30.680 --> 0:01:33.479 you've seen the coverage of both Paul Manaford as well 0:01:33.520 --> 0:01:36.880 as Michael Cohen. What are people getting wrong or what 0:01:36.959 --> 0:01:39.800 are we focusing on, uh that we shouldn't be and 0:01:40.080 --> 0:01:43.680 what should we be focusing on? Hey, Belisa, Hey, thanks, thanks, 0:01:43.800 --> 0:01:46.280 thanks for having me on. Really appreciate it. And uh, 0:01:46.520 --> 0:01:48.480 just one caveat, I was actually not with the Securities 0:01:48.480 --> 0:01:50.400 and Exchange Commission, but the rest of that interest had 0:01:50.440 --> 0:01:53.040 absolutely right. Just want to put that out there. But 0:01:53.040 --> 0:01:55.640 but you're right, I mean a lot happened yesterday afternoon 0:01:55.680 --> 0:01:59.160 in terms of Paul Manafort, Michael Cohen, and even Duncan Hunter, 0:01:59.280 --> 0:02:03.040 a Republican wristman from California being indicted. So to kind 0:02:03.040 --> 0:02:06.360 of mix through what to focus on going forward and 0:02:06.400 --> 0:02:08.760 what is sort of gonna you know, is significant, but 0:02:08.800 --> 0:02:12.120 it's going to blow past us. Uh. Paul Manifests trial 0:02:12.280 --> 0:02:15.280 generated a lot of attention. I mean, I'm here in Washington, 0:02:15.400 --> 0:02:18.320 d C. Alexandria is five miles away, and people have 0:02:18.360 --> 0:02:20.919 been waiting, waiting with bated breath to figure out what's 0:02:20.919 --> 0:02:24.520 going to happen. So now we know. But the reality is, 0:02:25.000 --> 0:02:29.440 aside from Mr Manafort's probably potentially significant sentence and his 0:02:29.520 --> 0:02:32.640 second trial in DC on money laundering charges next month, 0:02:33.080 --> 0:02:35.920 he may not have a lot of impact on the 0:02:35.960 --> 0:02:38.839 White House directly. It does not seem like he's going 0:02:38.880 --> 0:02:42.040 to crack. He might not have anything that's helpful to 0:02:42.080 --> 0:02:45.000 the Special Counsel in terms of Russia collusion. So while 0:02:45.120 --> 0:02:48.560 it's headline generating and it's fascinating to see the fall 0:02:48.600 --> 0:02:52.120 of this person um, in terms of the longer picture 0:02:52.160 --> 0:02:56.200 and impact on the administration, it might not be that significant. Now. 0:02:56.280 --> 0:02:59.880 Michael Collen, on the other hand, could be very potentially significant, 0:03:00.120 --> 0:03:01.799 and you honed in on it in your intro, which 0:03:01.840 --> 0:03:05.160 is that he's facing well, he's pled now to several 0:03:05.240 --> 0:03:09.080 different charges, but the ones that really have the potential 0:03:09.160 --> 0:03:12.360 for some further impact have to do with campaign finance 0:03:12.440 --> 0:03:15.799 violations and specifically the fact that he indicated that he 0:03:16.040 --> 0:03:22.200 he he conducted these offenses at the behest of another person, 0:03:22.360 --> 0:03:24.680 and the you know, the implication is that person was 0:03:24.720 --> 0:03:28.320 the candidate for presidency, Donald Trump. So wait, wait, you're 0:03:28.360 --> 0:03:31.080 absolutely glossing over this one. If you read the the 0:03:31.160 --> 0:03:34.960 actual charging documents, you know, with person number one who 0:03:35.040 --> 0:03:37.840 was candidate for president of the United States, it's pretty 0:03:37.880 --> 0:03:41.360 clear cut that is talking about President Trump. Yes, yes, 0:03:41.400 --> 0:03:44.360 it could be no one else. So while you know, 0:03:44.400 --> 0:03:46.960 the while the president is not not indicated by names, 0:03:47.000 --> 0:03:49.880 certainly that's you know, that's the exposures here. And so 0:03:49.920 --> 0:03:52.119 the question will be very focused now in those two 0:03:52.240 --> 0:03:54.800 charges count seven and eight, that Michael Cohen has now 0:03:54.800 --> 0:03:58.280 pled guilty to, and what are the implications for other people, 0:03:58.360 --> 0:04:01.600 specifically the president. And so this goes to, you know, 0:04:01.640 --> 0:04:04.680 what exactly was the offense. And it's not the kind 0:04:04.680 --> 0:04:08.120 of campaign finance violation we often think of right where 0:04:08.120 --> 0:04:11.200 we have donations from individuals that are meant to be 0:04:11.280 --> 0:04:14.640 used for legitimate campaign expenses and instead they're used for 0:04:15.200 --> 0:04:18.800 vacations or personal kind of use, or sports cars or 0:04:18.839 --> 0:04:22.600 completely inappropriate things. That's the case that's being built against 0:04:22.680 --> 0:04:26.360 Duncan Hunter. In this case, it's not so much use 0:04:26.440 --> 0:04:32.320 of campaign funds. It's a contribution allegedly to the campaign 0:04:32.560 --> 0:04:35.880 that was used to benefit the campaign and so and 0:04:35.880 --> 0:04:39.480 it was done in this circuitous way of going through 0:04:39.560 --> 0:04:45.119 Michael Cohen reimbursed in a kind of a strange way 0:04:45.480 --> 0:04:50.200 through invoices to the Trump a Trump organization compensated as 0:04:50.279 --> 0:04:54.200 lawyers fees, when instead it appears that this was money 0:04:54.240 --> 0:04:58.239 paid to advance the campaign by keeping individual silent about 0:04:58.279 --> 0:05:03.160 information negative information about candidate Trump. So the scheme that 0:05:03.200 --> 0:05:05.640 Michael Cohen has pled to is a little unusual and 0:05:05.640 --> 0:05:08.560 it could be a little complicated, and there are experts 0:05:08.560 --> 0:05:10.800 on both sides that would argue whether or not this 0:05:10.880 --> 0:05:13.960 in fact is a violation because the campaign finance rules 0:05:14.240 --> 0:05:17.599 and the laws are complicated, and this is not a 0:05:17.640 --> 0:05:20.359 case that's been brought in the past. So there's a 0:05:20.400 --> 0:05:22.800 bit of a leap here. But in terms of what 0:05:22.960 --> 0:05:26.320 the president's legal team is hunkering down now to think about, 0:05:26.400 --> 0:05:28.719 this has got to be their focus and it'll be 0:05:28.800 --> 0:05:31.360 really instructive in the coming days. And we've already seen 0:05:31.360 --> 0:05:34.799 some tweets this morning about how the president's legal team 0:05:34.839 --> 0:05:36.880 is going to address this. Are they going to take 0:05:36.880 --> 0:05:39.200 it head on and say Michael Cohen is just he's 0:05:39.240 --> 0:05:42.520 out of his mind, he's lying it didn't happen, or 0:05:42.640 --> 0:05:45.359 are they going to take a more nuanced approach and say, well, 0:05:46.760 --> 0:05:49.520 maybe it didn't go down exactly this way, but even 0:05:49.560 --> 0:05:53.600 if it did it's a technicality, and that seems clear violation. 0:05:53.680 --> 0:05:55.400 To be honest. That seems to be the tax that 0:05:55.440 --> 0:05:57.159 they're taking, based in the fact that he said that 0:05:57.200 --> 0:05:59.760 this was not breaking the law, President Trump, I'm talking 0:05:59.760 --> 0:06:01.600 about in a Twitter post today, So that seems to 0:06:01.600 --> 0:06:03.560 be the tax, sort of honing in on the fact 0:06:03.560 --> 0:06:06.600 that this is a non traditional, uh and non usual 0:06:07.440 --> 0:06:11.440 sort of use of this particular provision. Correct, correct, And 0:06:11.520 --> 0:06:13.520 so you know, that's the approach I would take, right, 0:06:13.800 --> 0:06:17.120 I would. It's gonna be hard to say it didn't 0:06:17.160 --> 0:06:20.320 happen if, in fact, Michael Cohen has tapes and and 0:06:20.440 --> 0:06:22.880 his one testimony and other evidence he may or may 0:06:22.920 --> 0:06:26.000 not have. So to kind of take the nuanced approach 0:06:26.000 --> 0:06:28.800 and say, well, it's not quite a clear violation, and 0:06:28.839 --> 0:06:32.000 even if it is, it's a technicality at the slap 0:06:32.000 --> 0:06:34.720 on the wrist. Others done this. You point to other 0:06:34.760 --> 0:06:37.599 cases like John Edwards and say, you know, it's not 0:06:37.640 --> 0:06:42.279 a clear violation, and hope that that flies both with 0:06:42.320 --> 0:06:44.599 the American people and with Congress. Well, Joe, you know, 0:06:44.680 --> 0:06:46.640 there's one aspect of this whole thing that I find 0:06:46.680 --> 0:06:50.840 incredibly confusing, and that is that Michael Cohen is pleaded 0:06:50.880 --> 0:06:53.800 to a non cooperation agreement. In other words, he hasn't 0:06:54.000 --> 0:06:58.200 he hasn't been recognized for his cooperation with federal prosecutors. 0:06:58.279 --> 0:07:00.320 This is confusing to me because he's out there and 0:07:00.360 --> 0:07:02.840 his attorneys are out there basically begging to give as 0:07:02.880 --> 0:07:05.720 much information as they can to whoever will listen. What 0:07:05.880 --> 0:07:08.440 how did you interpret that? Well, you're not the only 0:07:08.440 --> 0:07:10.600 one who's confused. This is this is a kind of 0:07:10.640 --> 0:07:13.240 a nuance in the Southern District of New York. There's 0:07:13.240 --> 0:07:15.840 effectively two ways he could have pled. One was what 0:07:15.920 --> 0:07:18.680 he did, which was a straight plea. Basically, he says, 0:07:18.760 --> 0:07:20.800 I'm owning up to it. I'm not going to fight 0:07:20.840 --> 0:07:24.720 the charges. I take responsibility for these counts, and I 0:07:24.800 --> 0:07:27.080 plead guilty, and I throw myself at the mercy of 0:07:27.120 --> 0:07:29.320 the court. The other one would have been through a 0:07:29.360 --> 0:07:33.280 cooperation agreement where he was obligated to give to give 0:07:33.400 --> 0:07:36.160 some kind of assistance to the FBI and the prosecutors 0:07:36.160 --> 0:07:37.960 in New York. Now, there could be a couple of 0:07:38.000 --> 0:07:41.040 reasons why he didn't go that route. One could be 0:07:41.160 --> 0:07:44.840 that he doesn't have anything that's particularly helpful to them. 0:07:44.880 --> 0:07:47.400 Either he's not credible or what he said to them 0:07:47.600 --> 0:07:51.080 was not especially helpful. Uh, the other possibilities, they have 0:07:51.240 --> 0:07:54.440 what they need. They you know, the SDN Y was 0:07:54.520 --> 0:07:58.160 looking at Michael Cohen specifically. They built their case around him. 0:07:58.240 --> 0:08:00.880 They had with the evidence that they needed, and they're 0:08:00.880 --> 0:08:06.040 not really concerned about ancillary people. And so the person 0:08:06.080 --> 0:08:08.800 who could be concerned about ancillary people, of course the 0:08:08.880 --> 0:08:12.720 Special Counsel Mueller. So that's why there's certainly a possibility 0:08:12.840 --> 0:08:15.480 and this has been sort of intimated by Michael Collen's 0:08:15.520 --> 0:08:18.960 lawyer already that he is eager to help Special Council 0:08:19.000 --> 0:08:23.160 Muller anyway he can. So, yeah, perhaps that will be 0:08:23.200 --> 0:08:24.840 the way for him to get a deal. Unfortunately, have 0:08:24.840 --> 0:08:26.520 to leave it there. Joe Moreno, thank you so much 0:08:26.520 --> 0:08:29.600 for taking the time. Joe Moreno is partner with Goodwalader 0:08:29.680 --> 0:08:33.520 in the White Collar Defense and Investigations Group, former federal prosecutor, 0:08:33.800 --> 0:08:50.720 also a veteran of the United States Army. Well, today, 0:08:50.840 --> 0:08:54.440 aside from the Washington d C drama, you are seeing 0:08:54.559 --> 0:08:58.520 a little bit of drama in oil markets among others, 0:08:58.520 --> 0:09:02.280 where you are seeing uh significant gain after the US 0:09:02.360 --> 0:09:05.120 government report showed the biggest decline in crede inventories since 0:09:05.200 --> 0:09:07.600 late July Hugh Johnson joining US now chairman and chief 0:09:07.600 --> 0:09:11.080 investment officer of Hugh Johnson Advisers. I want to start 0:09:11.120 --> 0:09:15.440 with oil because my sense is, uh that your life 0:09:15.520 --> 0:09:18.240 is not being very significantly impacted by what's going on 0:09:18.280 --> 0:09:21.840 with Washington. D c AM. I correct, Yeah, you're absolutely correct. 0:09:21.840 --> 0:09:24.480 On we're not paying attention to what Washington. D see 0:09:24.480 --> 0:09:26.839 what's going on there, and it doesn't appear is so 0:09:27.000 --> 0:09:29.520 it's going to impact the things that really tried the markets, 0:09:29.520 --> 0:09:32.360 which of course are interest rates and earnings. Since so 0:09:32.600 --> 0:09:35.880 right now we're not we're we're not completely ignoring it, 0:09:35.920 --> 0:09:38.959 but we're not changing our investment strategy because of what's 0:09:39.000 --> 0:09:41.440 going on in Washington. All right, So given that, I 0:09:41.480 --> 0:09:43.560 do want to just home in a little bit on oil, 0:09:43.679 --> 0:09:46.959 just because commodity markets have had kind of an uncertain 0:09:47.080 --> 0:09:49.880 outlook for the past couple of weeks, in particular with 0:09:49.960 --> 0:09:54.319 the plunge in metals oil also declining UM, but now 0:09:54.360 --> 0:09:56.840 you're seeing a little bit of a gain. I'm curious 0:09:56.920 --> 0:09:59.120 about how much you think about the price of oil 0:09:59.160 --> 0:10:01.800 and how that factor into what you what you buy. 0:10:02.040 --> 0:10:04.719 We think about oil all the time, and it's very 0:10:04.800 --> 0:10:07.240 volatile and it would be grandiose of me Lesa to 0:10:07.320 --> 0:10:09.920 say that I could forecast what's going to happen to 0:10:09.960 --> 0:10:13.160 the price of oil, but quite frankly, we do work 0:10:13.200 --> 0:10:16.240 hard on forecasting it. In a price for West Texas 0:10:16.320 --> 0:10:21.959 intermediate around sixty five dollars, prepare more accurately reflects global 0:10:22.000 --> 0:10:24.600 supply and demand conditions, but you'll get a lot of 0:10:24.679 --> 0:10:28.080 volatility around that, so you get a decline from sixty 0:10:28.080 --> 0:10:31.520 dollars down to fifty dollars. Paths very unusual, but not 0:10:31.600 --> 0:10:35.160 in a volatile environment. Most of that decline, in fact, 0:10:35.200 --> 0:10:37.480 I would say just about all of that decline is 0:10:37.559 --> 0:10:40.440 largely a function of the fact that the dollar has 0:10:40.480 --> 0:10:43.959 been so strong, which really means to every other country 0:10:43.960 --> 0:10:46.560 around the world, the price of oil has gone up 0:10:46.600 --> 0:10:49.680 and gone up significantly as a result of that, and 0:10:49.720 --> 0:10:52.559 it's not in today's report, but as a result of that, 0:10:53.040 --> 0:10:57.800 over time, what we've seen is a significant increase in inventories, 0:10:57.920 --> 0:11:00.760 and basically what that has done is has caused a 0:11:00.880 --> 0:11:04.640 very sharp decline below with the sixty five dollars or 0:11:04.720 --> 0:11:08.280 equilibrium level, which you know, I think we're going to 0:11:08.440 --> 0:11:12.079 return to that level even when we get the sanctions 0:11:12.160 --> 0:11:16.440 on oil and around in November, but it's it looks 0:11:16.480 --> 0:11:18.440 like we're headed in that direction. So I think oil 0:11:18.559 --> 0:11:21.560 is very undervalued right now. Okay, but I'm looking right 0:11:21.559 --> 0:11:24.520 now at a sixty seven dollars and thirty barrel for 0:11:24.559 --> 0:11:27.080 oil and w c I barrel of oils. So I'm 0:11:27.080 --> 0:11:28.520 just wondering. I mean, you're saying it's going to go 0:11:28.600 --> 0:11:31.840 down to sixty five barrel. Yeah, well, I think it's 0:11:31.920 --> 0:11:34.760 I think it's gonna Basically, if we're at sixty sixty 0:11:34.800 --> 0:11:38.480 seven today, then I think it will probably stabilize around 0:11:38.600 --> 0:11:43.640 current current levels. But believe me, I think that more 0:11:43.679 --> 0:11:47.800 accurately reflects supply and demand conditions as they exist today. 0:11:47.920 --> 0:11:50.400 All right, So given that, how do you use that 0:11:50.520 --> 0:11:54.920 thesis in your investments? Mean, do you buy equities in 0:11:55.000 --> 0:11:58.559 the big oil companies? Do you look for shell opportunities 0:11:58.559 --> 0:12:02.040 and MLPs? What's what sort of your strategy there? Okay? 0:12:02.040 --> 0:12:04.600 The strategy and energy is, first of all, I think 0:12:04.640 --> 0:12:07.160 I balanced either market weight maybe even a little bit 0:12:07.840 --> 0:12:11.920 overweighted in a sector, in the energy sector in a portfolio. Remember, 0:12:11.960 --> 0:12:14.080 you want to be diversified. You want to exposure to 0:12:14.520 --> 0:12:17.120 all eleven sectors of the market. And then within the 0:12:17.240 --> 0:12:20.120 energy sector, you want to have things that work well 0:12:20.160 --> 0:12:22.600 when the price of oil goes up and things that 0:12:22.640 --> 0:12:24.920 work well when the price of oil goes down. That 0:12:24.960 --> 0:12:28.439 means you want to own production companies. We own production 0:12:28.520 --> 0:12:31.640 companies conticles an example, but you also want to own 0:12:31.679 --> 0:12:34.599 companies like Valero and again we own that one, and 0:12:34.640 --> 0:12:38.040 the Valerios of course a refiner, and that really benefits 0:12:38.040 --> 0:12:40.760 from a decline in the price of oil. So it's 0:12:40.840 --> 0:12:43.760 not just owning energy. You want to have a market 0:12:43.760 --> 0:12:47.120 weight or a slight overweight, but also within the oil sector, 0:12:47.200 --> 0:12:50.440 make sure you have a sensibly put together portfolio, and 0:12:50.480 --> 0:12:55.160 that means production companies and also refiners. How much does 0:12:55.360 --> 0:12:59.679 the price of oil, in your view, hinge on an 0:12:59.760 --> 0:13:04.600 escal leastion of trade tensions or a lack thereof. You know, 0:13:05.200 --> 0:13:08.360 that largely depends on the dollar and what happens to 0:13:08.400 --> 0:13:11.640 the dollar as a result of trade tensions and what 0:13:11.800 --> 0:13:14.680 we've seen more recently. And it's important because what the 0:13:14.720 --> 0:13:17.760 dollar has been doing is very important. And we've seen 0:13:17.760 --> 0:13:20.839 the dollar go up and we've seen foreign currencies go down, 0:13:20.880 --> 0:13:24.040 and that's got good news for it because it attracts 0:13:24.040 --> 0:13:26.000 a lot of capital to our markets, which in my 0:13:26.120 --> 0:13:29.920 judgment is very important because domestic money conditions are are 0:13:30.000 --> 0:13:32.959 are really not that good. We're not getting enough growth 0:13:32.960 --> 0:13:35.679 and the money supply to drive the economy and earnings. 0:13:35.720 --> 0:13:39.800 And fortunately the dollar has been strong attacted attracted foreign 0:13:39.880 --> 0:13:42.400 capital to our markets, and that's all set the domestic 0:13:42.440 --> 0:13:46.000 liquidity shortfall. So sort of, kind of indirectly, I would 0:13:46.040 --> 0:13:50.600 say that the escalation of trade tensions has to some 0:13:50.760 --> 0:13:54.480 extent benefit us, and thankfully we've got a stronger dollar, 0:13:54.640 --> 0:13:58.320 and thankfully we've got uh the international flow of capital 0:13:58.360 --> 0:14:01.160 to to our markets and off set at that domestic 0:14:01.160 --> 0:14:04.920 liquidity shortfall. It's a little technical leasa. I's apologized for that, 0:14:05.200 --> 0:14:08.719 but at the same time it's an extremely important concept. 0:14:08.800 --> 0:14:12.200 So I'm not worried too much about the trade trade 0:14:12.240 --> 0:14:16.000 problem right now. One one last thing just quickly here. 0:14:16.240 --> 0:14:18.320 President Trump has come out and said that he wishes 0:14:18.360 --> 0:14:21.080 that the dollar we're weaker, also accused China and the 0:14:21.080 --> 0:14:24.240 European Union of manipulating their currencies. I'm wondering, how much 0:14:24.320 --> 0:14:28.200 is it, portfolio manager, do you care? You know? Um 0:14:28.280 --> 0:14:30.600 right now? And I'd say it's really right now. And 0:14:30.600 --> 0:14:33.720 that's where I would emphasize is right now because of 0:14:33.760 --> 0:14:38.720 the domestic liquidity shortfall, a strong dollar is extremely important. 0:14:38.720 --> 0:14:42.040 It's important for the reasons that I just mentioned attracting 0:14:42.080 --> 0:14:44.880 foreign capital to our markets when we need it the most. 0:14:45.280 --> 0:14:47.760 So a week dollar young. I know that's supposed to 0:14:47.840 --> 0:14:51.320 help a lot of US companies compete in international markets, 0:14:51.880 --> 0:14:54.160 and and there are times when you have to have that, 0:14:54.440 --> 0:14:57.440 but not right now. Right now, with liquidity conditions as 0:14:57.480 --> 0:15:00.720 weak as they are, a strong dollar is extreme, really important, 0:15:00.760 --> 0:15:03.600 and we all ought to be very thankful we've got it. 0:15:03.840 --> 0:15:05.800 Hugh Johnson, thank you so much for being here. It's 0:15:05.800 --> 0:15:07.920 really interesting to speak with you. Hugh H. Johnson is 0:15:08.000 --> 0:15:12.440 chairman and chief investment officer and Hugh Johnson Advisers, which 0:15:12.440 --> 0:15:16.040 overseas more than a billion dollars from Albany, New York. 0:15:16.640 --> 0:15:20.680 Talking about that dollar, which actually is weakening a little 0:15:20.680 --> 0:15:24.120 bit today. Mexican pasto climbing is there are there is 0:15:24.160 --> 0:15:43.720 speculation that a NAFTA agreement will come up shortly. If 0:15:43.720 --> 0:15:46.240 you haven't gotten your Tesla fix today, have no fear 0:15:46.280 --> 0:15:49.000 we're gonna be talking about that company right now, because 0:15:49.000 --> 0:15:52.040 it is the drama that just keeps on giving. But 0:15:52.080 --> 0:15:54.320 We're gonna take a little bit different of attack here. 0:15:54.360 --> 0:15:57.360 We're gonna take a look at the debt aspect of 0:15:57.440 --> 0:16:02.440 this story. The company has basically financed itself with a 0:16:02.680 --> 0:16:05.320 debt and I guess to some degree equity, but more 0:16:05.400 --> 0:16:09.040 debt as it burns through cash. And there's a question 0:16:09.120 --> 0:16:12.080 if this company does go private, as Elon Musk seems 0:16:12.080 --> 0:16:15.440 to want to see it do. So what happens to 0:16:15.480 --> 0:16:18.280 all that debt? And joining us now is Joel Lovington, 0:16:18.320 --> 0:16:22.120 senior credit analyst for Bloomberg Intelligence and just general credit guru. 0:16:22.200 --> 0:16:25.560 If you have a question about credit, you called Joel Lovington. Joel, So, 0:16:25.600 --> 0:16:27.440 what's your take on this? I mean, what could potentially 0:16:27.440 --> 0:16:30.160 happen to this debt? Not a lot. I think it's 0:16:30.400 --> 0:16:34.080 gonna be sticking out there, particularly the bonds, the senior 0:16:34.120 --> 0:16:35.960 insecure bonds that we often talk about that are in 0:16:35.960 --> 0:16:38.600 the Bloomberg indussees. I think it becomes a game of 0:16:38.640 --> 0:16:42.360 will they be structurally subordinated and to what degree will 0:16:42.400 --> 0:16:44.760 be the issue, and that will determine where the bonds 0:16:44.760 --> 0:16:47.640 are going. Okay, so today we had a story on 0:16:47.720 --> 0:16:52.560 the Bloomberg Tesla bonds may see doomsday and private deal, 0:16:52.800 --> 0:16:55.200 don't don't And it was sort of. It was citing 0:16:55.320 --> 0:16:58.600 this UM blog post by twenty four Asset Management chief 0:16:58.600 --> 0:17:01.800 executive Mark Coleman say, secure debt funding to take Tesla 0:17:01.840 --> 0:17:07.760 private may become practically impossible. Do you agree? Well, taking 0:17:07.800 --> 0:17:09.960 a private and putting a lot of debt on it 0:17:10.000 --> 0:17:13.919 our two different things cannot be taken private? Yes. I 0:17:13.920 --> 0:17:16.320 think the math in my models tell me that you 0:17:16.320 --> 0:17:19.119 need roughly about sixty billion dollars of equity to have 0:17:19.240 --> 0:17:22.639 that done, meaning that you can at a at a 0:17:22.720 --> 0:17:26.359 maximum probably put about ten billion dollars of additional debt 0:17:26.400 --> 0:17:29.800 on the company today and I take private scenario and 0:17:29.840 --> 0:17:33.480 still make it work. Um, you know, from a rational 0:17:33.880 --> 0:17:39.040 uh capital structure standpoint. Okay, I guess that one question 0:17:39.040 --> 0:17:41.880 that I have is we talk about Tesla and going private. 0:17:42.160 --> 0:17:46.639 Morgan Stanley perhaps coming in on this, UM, I have 0:17:46.720 --> 0:17:48.720 to wonder when does the Tesla run out of cash? 0:17:48.760 --> 0:17:51.720 When are we sort of done with this? Uh sort 0:17:51.760 --> 0:17:53.840 of when will they do? What will they do? Kind 0:17:53.840 --> 0:17:57.880 of discussion to how long can they survive? Discussion? Right, well, 0:17:57.960 --> 0:18:01.800 that might be never ending until they go p of it. Um. 0:18:01.840 --> 0:18:04.000 You know, the company had said that it would be 0:18:04.080 --> 0:18:06.000 as early as the third quarter, where they would be 0:18:06.000 --> 0:18:09.480 free cash flow neutral. Uh, the mathematics that I do 0:18:09.600 --> 0:18:12.040 tell me that it would be really, really difficult for 0:18:12.080 --> 0:18:14.320 that to happen in the third quarter or in the 0:18:14.320 --> 0:18:17.800 fourth quarter. And you know, with all of the challenges 0:18:17.800 --> 0:18:20.399 that are going on now with Elon Musk and the 0:18:20.480 --> 0:18:23.320 issues that I'm sure are taking up much more of 0:18:23.359 --> 0:18:26.520 his time than he ever imagined. Uh, the odds are 0:18:26.520 --> 0:18:28.640 they're probably taking the ball, their eye off the ball 0:18:28.640 --> 0:18:31.440 a little bit, and uh, I think they'll struggle into 0:18:32.680 --> 0:18:36.760 which may eventually be a mechanism which will preclude them 0:18:36.760 --> 0:18:40.399 from going into a private scenario. All right, So you know, 0:18:40.400 --> 0:18:42.760 I want to use Tesla as an example of the 0:18:42.800 --> 0:18:47.440 broader phile debt market because right now we talk about Tesla, 0:18:47.800 --> 0:18:51.160 it's burning through cash, it has an erotic CEO, their 0:18:51.240 --> 0:18:54.919 questions about executive leadership, their questions about the board oversight, 0:18:55.440 --> 0:18:57.160 especially with some of the tweets that are now being 0:18:57.160 --> 0:19:01.000 investigated by the SEC for possible market manipulation, and Tesla 0:19:01.040 --> 0:19:04.480 bonds that are doing certainly trying to get a discounted 0:19:04.720 --> 0:19:07.879 a little bit more than eighty seven cents on the dollar. 0:19:08.240 --> 0:19:10.359 But that isn't that much. I mean the yield to 0:19:10.359 --> 0:19:13.560 maturity there is seven point six, not as much as 0:19:13.600 --> 0:19:16.159 you would think, given the fact that over the past 0:19:16.160 --> 0:19:19.080 two decades that's been very average, if not below the 0:19:19.119 --> 0:19:21.720 average of high out bonds. I mean, just in general, 0:19:21.800 --> 0:19:25.080 when you look around the speculative grade universe, do you 0:19:25.119 --> 0:19:28.840 feel like things are really overvalued at this point or 0:19:28.920 --> 0:19:30.600 you think that it sort of is in line with 0:19:30.640 --> 0:19:32.960 what we've seen elsewhere. Well, I think for the broader 0:19:33.040 --> 0:19:35.480 universe that I cover, which are industrials and autos, I 0:19:35.520 --> 0:19:39.280 don't particularly think that it's overvalued. I think, um, in 0:19:39.359 --> 0:19:42.200 many cases, it becomes hard to find an upside case 0:19:42.240 --> 0:19:43.800 for some of these bonds. That doesn't mean that they're 0:19:43.840 --> 0:19:47.359 going down. I just think, particularly on the auto side, 0:19:47.400 --> 0:19:49.560 it's hard to make cases that autos are going to 0:19:49.640 --> 0:19:52.280 get better in any way. So I think there are 0:19:52.280 --> 0:19:55.040 definitely spots where it becomes more challenging to find a 0:19:55.080 --> 0:19:59.640 balanced upside downside case. UM. But in aggregate, I think 0:19:59.680 --> 0:20:02.479 you're you're fine because there's very low default risk. If 0:20:02.520 --> 0:20:05.200 you're talking about the foot level, yeah, so from the 0:20:05.760 --> 0:20:08.320 foot level, it doesn't seem like you're gonna necessarily see 0:20:08.359 --> 0:20:11.199 some kind of wave of bankruptcies. But that said, if 0:20:11.200 --> 0:20:13.280 you've got very little upside, does that mean that people 0:20:13.280 --> 0:20:16.240 are just basically buying for for the carry and that's 0:20:16.240 --> 0:20:18.479 basically the trade at this point? I think so. I 0:20:18.480 --> 0:20:21.199 think so in many cases, is the carry enough to 0:20:21.240 --> 0:20:25.400 justify especially as treasuries gets treasure yields get higher. Uh, Well, 0:20:25.440 --> 0:20:29.479 you know, treasuries and high yield don't necessarily correlate all 0:20:29.520 --> 0:20:31.760 that well together. If you think about, you know, why 0:20:31.880 --> 0:20:35.600 reachs would be rising to slow growth? Uh, that implies 0:20:35.680 --> 0:20:38.480 that growth is pretty good and smaller companies, when you 0:20:38.560 --> 0:20:43.359 have smaller numbers like EBNAH and sales, they go up 0:20:43.400 --> 0:20:48.480 exponentially relative to large caps. So in some ways, uh, 0:20:48.840 --> 0:20:52.160 a rising rate environment is indicative of a strong economic 0:20:52.200 --> 0:20:55.879 backdrop for the for high yield monds to perform well. 0:20:56.400 --> 0:20:59.720 And one thing that I'm wondering is, you know, are 0:21:00.000 --> 0:21:01.520 do you think that there could be a substantial hit 0:21:01.560 --> 0:21:04.399 to some of these companies if borrowing costs rise? You know, 0:21:04.440 --> 0:21:06.600 if you do see treasure yields continue to rise, because 0:21:06.600 --> 0:21:08.760 that people haven't been talking about that that much since 0:21:08.880 --> 0:21:11.320 treasure yields haven't risen all that much in the past 0:21:11.320 --> 0:21:13.199 few months. But I'm just wondering, you know, is that 0:21:13.240 --> 0:21:15.120 still on the radar here? Yeah. I mean I don't 0:21:15.119 --> 0:21:16.959 think it's a twenty nineteen event, but I think if 0:21:16.960 --> 0:21:19.879 you look at to twenty let's say one, as a 0:21:19.960 --> 0:21:23.399 spot where debt maturities will start to elevat again and 0:21:23.400 --> 0:21:26.120 you'll be resetting at higher rates. I definitely do think 0:21:26.119 --> 0:21:27.880 that there is risk, but I think there's been enough 0:21:28.400 --> 0:21:31.040 refinancing activity that's taken place over the last couple of 0:21:31.119 --> 0:21:32.679 years that the cand has been kicked down the road 0:21:32.720 --> 0:21:35.560 a little bit longer. Joel Levington, thank you so much 0:21:35.600 --> 0:21:37.760 for being with me. I love speaking with you. Joel Lovington, 0:21:37.840 --> 0:21:41.240 senior credit analyst for Bloomberg Intelligence, joining us here in 0:21:41.240 --> 0:21:43.800 our eleven three oh studios. Just want to bring you 0:21:43.880 --> 0:21:46.639 up to speed on the markets. Sp NAZDAC both have 0:21:46.760 --> 0:21:51.560 turned green since a somewhat saggy open Dow Jones still down, 0:21:51.640 --> 0:21:54.360 but just barely less than one tenth of one percent. 0:21:54.880 --> 0:21:56.280 If we switch up the boards and we get a 0:21:56.280 --> 0:21:58.680 sense of what's going on in the bond market, well 0:21:58.720 --> 0:22:01.359 you're getting a little bit of actually uh decline in 0:22:01.640 --> 0:22:04.639 yield so rally there as well as people try to 0:22:04.760 --> 0:22:08.439