Speaker 1: Runt You by Bank of America Mary Lynch with virtual reality,
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Speaker 1: Be of a mL dot Com, slash VR, Mary Lynch,
Speaker 1: Pierced Fenner and Smith Incorporated. Ye. Welcome to the Bloomberg
Speaker 1: Surveillance Podcast. I'm Tom Keene with David Gura. Daily we
Speaker 1: bring you insight from the best of economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg David Gurral,
Speaker 1: why don't you bring it into a steam guest? Yeah,
Speaker 1: Jeffrey Sax with this university Professor at Columbia University, author
Speaker 1: of building the New American Economy, Smart, fair, and Sustainable.
Speaker 1: Julia Cornado joining us as well in our Bloomberg and
Speaker 1: v in three studios, Founder and president of Macro Policy Perspective.
Speaker 1: Let me start with with you as we await the
Speaker 1: job support here at thirty Uh, will the Fed ever
Speaker 1: declare that we've reached full employment? Is that something that
Speaker 1: just a specter looming in the in the background? What
Speaker 1: what is the Fed waiting for? Well, they're not waiting.
Speaker 1: I mean they're they're raising rates. They have basically said
Speaker 1: on the on the employment side of the mandate there
Speaker 1: there there may be a little bit more slack is
Speaker 1: their assessment. But um, they have kind of declared victory
Speaker 1: on the employment mandate. Now it's the inflation side of
Speaker 1: their mandate that's still falling short. But they are raising rates,
Speaker 1: and they are going to put in a balance sheet
Speaker 1: reduction plan it seems later this year. So they are
Speaker 1: moving forward with policy tightening ever so slowly, but surely
Speaker 1: how tenuous the position are they in right now? Look
Speaker 1: looking at the jobs market where it is, and as
Speaker 1: you say, worried about the other other half of the mandate, Well,
Speaker 1: I think the job situation is probably the least of
Speaker 1: their worries, uh, in a lot of senses. I mean,
Speaker 1: assessing the outlook with so much uncertainty and the risks
Speaker 1: to it is is a very difficult job. And again
Speaker 1: the the inflation side, things have been going in the
Speaker 1: wrong direction lately, both headline inflation, commodity prices falling, core
Speaker 1: inflation giving up a good quarter point of progress, wage
Speaker 1: growth lagging behind inflation expectations really sort of getting anchored
Speaker 1: at a lower level so, uh, it really looks like
Speaker 1: they'll struggle. They've emphasized the symmetry of their inflation target lately,
Speaker 1: but uh, they can't even really get to two. So
Speaker 1: I think that's where the worries lie for them. Jeffrey
Speaker 1: Sacks will dive past the headline into the greater detail
Speaker 1: of this job support this when we look at manufacturing
Speaker 1: this administration. Others have talked about manufacturing in the US.
Speaker 1: We were talking about innovation and manufacturing a few moments ago.
Speaker 1: Where is that going to come from? Where is the
Speaker 1: the impulse for innovation, the the the training to do
Speaker 1: new manufacturing going to come from. Is that to be
Speaker 1: something pioneered by companies going forward, or is that something
Speaker 1: that is in the providence of the government. First of all,
Speaker 1: innovation comes from a combination of academia, government and business.
Speaker 1: And that's the rich model. We call it the innovation system.
Speaker 1: And that was the vision vanever Bush right after World
Speaker 1: War Two, that we would build a science and tech
Speaker 1: based economy through the interactions of the government, academia, and
Speaker 1: and business. And it works great, and our manufacturing sector
Speaker 1: is incredibly dynamic technologically, but the technologies of today in
Speaker 1: the future are eliminating jobs, not creating jobs on the whole.
Speaker 1: And this is quite real phenomenon. There's nothing special about
Speaker 1: it or paradoxical about it. We are in a job
Speaker 1: saving technology mode because the machines are getting smarter and
Speaker 1: smarter and able to replace what people do, so manufacturing
Speaker 1: is healthy. Jobs is another matter. That's why the wages
Speaker 1: are going down for more and more of the labor force.
Speaker 1: And the winners of this are the equity owners because
Speaker 1: the whole national income has shifted towards capital. Should we
Speaker 1: wax historical here, Julia? I mean I think you should
Speaker 1: wax historical. Let's talk about young sacks thirty five years ago. Comment.
Speaker 1: Try to remember the employment real wage relationship. You were
Speaker 1: thinking about this when you started out. This is after
Speaker 1: Kotlikoff and Lemur, and that this is the employment real
Speaker 1: wage relationship. Are we a guilded age now like we
Speaker 1: were a guilded age back then. It's interesting. I have
Speaker 1: been thinking about how technological change or oil price shocks
Speaker 1: affects the demand for labor and writing about that for
Speaker 1: oh my word, almost four decades. But the fact is
Speaker 1: that the whole uh machine age, which is not just
Speaker 1: now but goes back to the nineteenth century, has been
Speaker 1: replacing lower skilled work. And that's why to keep ahead,
Speaker 1: we have what Larry Katz and Claudia Golden of Harvard
Speaker 1: is famously called the race between technology and education. Now
Speaker 1: technology is winning that race, meaning that more and more
Speaker 1: of our population is not able to keep up with
Speaker 1: the machines. This doesn't mean that as a whole we're
Speaker 1: losing from technological innovation. The winners are Larry Page and
Speaker 1: Sergey Brinn and Tim Cook and UH and Bill Gates,
Speaker 1: and we have and Jeff Bezos. We have more money
Speaker 1: at the top than ever. We have a larger economy
Speaker 1: than ever. We have a dollar economy, but the labor
Speaker 1: share of national income has been falling. You've got to
Speaker 1: get off an airplane, polluting, destroying hydrocarbon airplane. Get off
Speaker 1: the airplane and comeback. Jeff says, thank you so much,
Speaker 1: really really helpful. They thank you, folks for your many comments.
Speaker 1: Mr Sachs's appearance, We welcome on Bloomberg Radio and Bloomberg
Speaker 1: Television worldwide from Janice Anderson. William Gross joins us as
Speaker 1: he always does after the good analysis of Uh. Jim Glassman.
Speaker 1: It's good to speak to Bill Gross. Bill, I haven't
Speaker 1: done the three months moving average of jobs, but we're
Speaker 1: not getting the job's growth we got ten years ago.
Speaker 1: Is that a surprise? No, I don't think so, certainly,
Speaker 1: not at the levels of unemployment that we're at now,
Speaker 1: not only in terms of you three, but U six.
Speaker 1: I think as an economy matures, and this recovery is
Speaker 1: eight nine, close to ten years in the making. Uh.
Speaker 1: You know, job growth comes down, so I think it's
Speaker 1: to be expected. It's a weaker number than the market
Speaker 1: expected today, but not the less, you know. I think
Speaker 1: it reflects via the work week, via wages, that we're
Speaker 1: on on steam for a two point two percent type
Speaker 1: of real economy going forward, which I mean, not see
Speaker 1: what the market's expecting, but what I think is going
Speaker 1: to happen. Does the tepidness of this the vectors the
Speaker 1: three months to the six month or twelve month job
Speaker 1: formation and also wage growth, does it adjust what chair
Speaker 1: Yelling will confront June. I don't think it changes much.
Speaker 1: I do agree that the chair you know, believes in
Speaker 1: job growth more than anything else, in the the extent
Speaker 1: that it's lower than the market expected, perhaps, but she's
Speaker 1: going in June. I think the Fed tom is for
Speaker 1: clemped to site an old Saturday Night Live skipped phrase.
Speaker 1: You know, it wants inflation higher in the real economy,
Speaker 1: but not necessarily in the financial markets. And so we have, um,
Speaker 1: you know, not dreaded fear, but you know, concern about
Speaker 1: financial bubbles in some areas commercial real estate and and
Speaker 1: so on. And and to be fair, other central banks
Speaker 1: are really pouring on the coal in terms of the
Speaker 1: global economy. The ECB and the b o J by
Speaker 1: the way, tom UH now have balance sheets larger than
Speaker 1: the Fed at four and a half trillion plus each
Speaker 1: of them. And so there's a lot of money coming
Speaker 1: into this global economy. And for the Fed to uh
Speaker 1: you know, join in and stop raising the FED funds
Speaker 1: level or even you know, not address what we have
Speaker 1: in terms of their balance sheet later in the year,
Speaker 1: I think would be a mistake. A little coffee talk
Speaker 1: here with Bill Gross if Jana Centerson here on Jobs Day, Bill,
Speaker 1: let me ask you what happens when the FED begins
Speaker 1: unwinding this balance sheet. What's that going to mean for
Speaker 1: for term premium? Well, it depends on how fast, right
Speaker 1: David um and we're talking about not only treasuries but
Speaker 1: mortgages because they're in that pot too. You know, at
Speaker 1: the moment the forecasts are the private forecasts are for
Speaker 1: like ten to fifteen billion dollars a month, which makes
Speaker 1: an end road in terms of uh, you know, reducing
Speaker 1: the balance sheet, but certainly at a very slow pace.
Speaker 1: I think ultimately a though, to answer your question that
Speaker 1: the term premium for five to ten thirty year treasuries,
Speaker 1: which are a significant part of that balance sheet, you know,
Speaker 1: basically have to has to increase. The term premium is
Speaker 1: uh you know, not only forecast but put into evidence
Speaker 1: by several district fed uh FED reserve banks has suggested
Speaker 1: that seventy five basis points lower, you know, was the
Speaker 1: net net of the four trillion dollar edition that we've seen,
Speaker 1: you know, prior to the past few years. And so
Speaker 1: you would have to expect the term premium to go up.
Speaker 1: Does go back up by seventy five basis points, I
Speaker 1: don't think so, but certainly higher over the short term.
Speaker 1: David Gary pick up the question here. But we got
Speaker 1: to do a data check for radio and television right now,
Speaker 1: because this is really remarkable. Two on the ten ure
Speaker 1: yield the thirty year BONDUS seventeen basis points in from
Speaker 1: three percent. That is a huge deal. And over on
Speaker 1: the cream. Get over here right now in Bloomberg Television
Speaker 1: for those of you in radio, this is a wow statistic.
Speaker 1: Bill Gross is minting money this morning. The two tens
Speaker 1: spread is broken under ninety basis points. Gross may have
Speaker 1: to cancel ther David jumping with Bill Well, I continue
Speaker 1: to look at the spread market. Bill. Let me ask you,
Speaker 1: your global investor. We have seen changes to geopolitics here
Speaker 1: over the last twenty four hours and certainly over the
Speaker 1: last week plus. How does a different role for the
Speaker 1: US in the world to change your outlook and your positioning? See,
Speaker 1: I think it's significant. I don't think the market thinks
Speaker 1: it's significant, because the stocks blew by that news yesterday.
Speaker 1: But you know, let's look at it this way in
Speaker 1: terms of the Paris accord, and uh, you know, our
Speaker 1: our absence, at least in terms of philosophical absence. You know,
Speaker 1: it's destructive from my point of view for equities because
Speaker 1: equitists are long term cash flow dependent. And what we're
Speaker 1: talking about here in terms of global warming going higher
Speaker 1: as the increase in long term liabilities, and so ultimately
Speaker 1: stocks have to be affected by the potential for the
Speaker 1: expense the liability you know, to contain global warming goes
Speaker 1: much higher. Okay, here's the heart amount of cream. Come
Speaker 1: over here again, cream, Come on, I make the rules.
Speaker 1: This chart was to Capitlan of Dallas. This is the
Speaker 1: vector of inflation, and Bill Gross has been dead on that.
Speaker 1: We're not right that the court pc inflation is rolling
Speaker 1: over Bill With this job's report and with the two
Speaker 1: stents spread under ninety beeps, with yields coming in weaker dollar,
Speaker 1: would you say even more so now that inflation is
Speaker 1: just not part of the debate, and that gives Janet
Speaker 1: Yellen cover to lengthen out her path to a normal
Speaker 1: yield policy. Well, I I'm not sure I understood the
Speaker 1: two parts of that question, but I think what it
Speaker 1: does for Janet Yellen is allow her to m you know,
Speaker 1: to to keep the Fed funds level, the neutral, the
Speaker 1: long term neutral Fed funds rate, at a lower level
Speaker 1: than she would have previously. You know, there is a
Speaker 1: contentious debate among the Fed officials as to what our star,
Speaker 1: which is really the real long term uh you know,
Speaker 1: Fed funds right what it is, and at the moment
Speaker 1: it appears that it's less than zero. And I think
Speaker 1: Janet Yellen will keep on keeping on and as long
Speaker 1: as financial markets in some areas of the economy did
Speaker 1: not show bubblish types of characteristics. How are you adjusting
Speaker 1: your portfolio, Janie Henderson, I mean, we have seen a
Speaker 1: bill gross economy over the last two months, I would
Speaker 1: suggest where it's been a little bit disappointing from the enthusiasm.
Speaker 1: How have you ingested your portfolio? Well, let's look at
Speaker 1: it this way. From all asset classes, tom, So we
Speaker 1: know of all futility is low. We know about the
Speaker 1: vix it's less than ten, which is historically low. We're
Speaker 1: not so uh, you know, necessarily informed on bond volatility,
Speaker 1: but it's historically low as well. And so when you
Speaker 1: have volatility and the two major markets at low levels,
Speaker 1: you know you certainly don't want to sell that volatility.
Speaker 1: And the way investors basically assume risk and sell volatility
Speaker 1: is to buy stocks, to buy duration, to buy hild
Speaker 1: bonds that relatively low spreads. In other words, they move
Speaker 1: into markets that have low risk premiums when they should
Speaker 1: move into markets that have high risk premium. So this
Speaker 1: is definitely a market not just with stocks, but with
Speaker 1: bonds and other essays classes where an investor has to
Speaker 1: be careful because of the low volatility that's into the market.
Speaker 1: David Gern, Tim Keenan New York joining us from Janis Anderson,
Speaker 1: uh William Gross. Bill Gross, wonderful to have you with us.
Speaker 1: As always, what I noticed today build it is so
Speaker 1: different as you get a reaction from the report, and
Speaker 1: we've had now one into impulses twenty minutes down the line,
Speaker 1: twenty four minutes down the line of lower yields, weaker dollar.
Speaker 1: When does the twos ten spread begin to get Bill
Speaker 1: Gross's attention? If we had a Trump surge, a Trump fade,
Speaker 1: we went through the curve flatness of November eight to
Speaker 1: an ever flatter yield curve in with a vengeance, we
Speaker 1: see more of this morning. When does Bill Gross look
Speaker 1: at the twos tenants say this has my attention? Well,
Speaker 1: tell me, it's had my attention actually for a long time.
Speaker 1: You know, I think most portfolio managers and economists have
Speaker 1: it wrong. They talk about the flatness and the move
Speaker 1: of the two ten to a you know, basically a
Speaker 1: flat level which creates a recession, and it always has
Speaker 1: historically in the past. But to me, you know, the
Speaker 1: two ten has been flattening for at least two to
Speaker 1: three years. It started close to two oter basis points
Speaker 1: and now where it is as you cite, and so
Speaker 1: that's an indication of tightening. Now why do we not
Speaker 1: need to go back to zero to create recessionary types
Speaker 1: of environments? I think because the US economy and the
Speaker 1: global economy is much more highly levered and to the
Speaker 1: extent that the US dollar is the global currency. To
Speaker 1: the extent that you flat flat flat, you know, it
Speaker 1: creates more and more risk in terms of a global
Speaker 1: economic slowdown, not necessarily a recession. So it's got my attention,
Speaker 1: has had my attention, and I think an actor should
Speaker 1: continue to watch it and not just look for zero
Speaker 1: as opposed to where we are now at eight to
Speaker 1: nine basis point. Bill, you and I should have a
Speaker 1: moment of silence for all those taking the CFA exam
Speaker 1: this Saturday. I guess we can do that. And is
Speaker 1: you know, Bill gross level one convexity is about acceleration.
Speaker 1: How worried are you of tantrums of convexity? Of acceleration
Speaker 1: in the glide pass. For Janet Yellen, can she believe
Speaker 1: in stability or does she have to worry about real upset.
Speaker 1: I don't think we have to worry about convexity and
Speaker 1: acceleration from the yelling economy and the yelling FED. I
Speaker 1: think we have to worry about it from the standpoint
Speaker 1: of the e c BE, not necessarily the b O J.
Speaker 1: At some point the e c B, and they've suggested
Speaker 1: already that they're going to cut back in terms of
Speaker 1: their purchases. But ultimately, remember the Fed, uh, you know,
Speaker 1: eliminated quantitative easy and about two years ago, and you
Speaker 1: know the taper tantrum was before that, but an anticipation
Speaker 1: of it. And so I think, simply because buns and
Speaker 1: because um you know, um J g B s are
Speaker 1: calling the tune for the global market, that we should
Speaker 1: look to the e c B as the potential leader
Speaker 1: for any type of tantrum going forward. At the moment,
Speaker 1: Droggy is basically calm markets and said, hey, inflation is
Speaker 1: not high enough. But when we come to that point
Speaker 1: where the ECB starts to cut back, then uh, you know,
Speaker 1: bond markets globally maybe at risk. But I want to
Speaker 1: get you react to what James Gorman said to Bloomberg
Speaker 1: a couple of days ago. We had an exclusive with
Speaker 1: him in Beijing. The CEO of Morgan Stanley said, the
Speaker 1: dirty little secret is the U s economy is doing
Speaker 1: just fine. Secrets out. Do you agree with him? Well, no,
Speaker 1: I don't think so. You know, I think it comes
Speaker 1: down to productivity. And as we know over the past
Speaker 1: few years, actually over the past five years, productivity basically
Speaker 1: is close to flatlined. And so that's the ultimate indicator
Speaker 1: of how the US economy is doing. We know that
Speaker 1: labor force growths. Today's report included you know, it is
Speaker 1: moving at a point to five percent to point five
Speaker 1: percent rate going forward. And so the balance, if we're
Speaker 1: going to go to a two percent the economic growth
Speaker 1: or higher has to come from productivity. Now, what are
Speaker 1: the reasons why productivity is flatlined and why might it
Speaker 1: go higher? You know, perhaps it could go higher simply
Speaker 1: because there's a lag between technology and the ultimate real economy.
Speaker 1: But you know, there are negatives to Robert Gordon from
Speaker 1: Northwestern sites, low hanging fruit and all of it being picked.
Speaker 1: You know, there's demographics, there's high debt, levels, there's de globalization,
Speaker 1: all of which suggests, you know, lower productivity going forward.
Speaker 1: And one last point on you know, the productivity of finance,
Speaker 1: which has been inherent in the economy for the past
Speaker 1: twenty or thirty years with lower refi rates and mortgages
Speaker 1: and so on, you know, basically has gone. And so
Speaker 1: productivity is the key, and we're not seeing it, and
Speaker 1: so I don't think the U. S. Economy is doing fine.
Speaker 1: We saw we saw manufacturing tickdown for the first time
Speaker 1: in a while in this report today, and I'm just
Speaker 1: looking through the layers of it. Here is the is
Speaker 1: the morning. Whereas what does that say to you again
Speaker 1: putting into that sort of global context we're talking about
Speaker 1: globalization and the last in the last block, well, I
Speaker 1: think I'm not sure what's influenced that we know about
Speaker 1: Ford and we know about the auto companies and the
Speaker 1: cutbacks in terms of their labor. I don't know whether
Speaker 1: that's influenced this recent report. But you know, manufacturing depends
Speaker 1: and we'll give Trump a little bit of credit here,
Speaker 1: Manufacturing depends on a lower dollar, and to the extent
Speaker 1: that we've had that for the last three or four months,
Speaker 1: maybe you know, there's hope for manufacturing going forward, but
Speaker 1: at the level that Paller was four or five six
Speaker 1: months ago, you know, the US manufacturing was not at
Speaker 1: a competitive level. I mean, Bill within this in in
Speaker 1: the number of minutes that we've got left to do,
Speaker 1: I want to talk about the to do list for investors.
Speaker 1: I assume in the battle of yields moving around and
Speaker 1: prices right now, we got price up, yield down. So
Speaker 1: I guess you're making money today. But at Janice Henderson,
Speaker 1: what is the methodology of Bill Gross to be safe
Speaker 1: and capture yield? What are you actually doing day to day? Okay,
Speaker 1: first of all, time you have to accept the fact
Speaker 1: that returns and yields are lower and that you know
Speaker 1: your investors are going to be slightly disappointed almost no
Speaker 1: matter what. But secondly, what am I doing? Um and
Speaker 1: you know, basically avoiding high risk premium markets and to
Speaker 1: be frank, those are equi These those are long term
Speaker 1: high yield bonds. You know, those are anything with long
Speaker 1: term cash flows that may be affected by you know,
Speaker 1: ultimately slower growth point forward, What is the substitute in
Speaker 1: the meantime? You know, we heard about Chuck Prince and
Speaker 1: dancing on the floor until the music stops. Well, to
Speaker 1: a certain extent, investors are in the same thing. They say,
Speaker 1: what do I do with my money? Well, what do
Speaker 1: they do with their money? I think if you're going
Speaker 1: to invest in high yield bonds, you invest, you know,
Speaker 1: very short term. There's some E t F S H, Y,
Speaker 1: G J and K some other alternatives which you know
Speaker 1: provide four to five percent returns with a three to
Speaker 1: four year maturity level. I think those are okay. We're
Speaker 1: buying some of those. There's a preferred E t F
Speaker 1: called PFF, the biggest preferred PFF, the biggest E t F,
Speaker 1: and it yields about five and a half percent. Are
Speaker 1: these low risk types of investments. They're lower risk than
Speaker 1: UH than long term bonds are box and technology high flyers,
Speaker 1: and so you know, that's what we're doing to produce
Speaker 1: a three to four or five percent retire And you
Speaker 1: sound like a good collo league. Christopher Whalen, who we
Speaker 1: speak to, like those preferreds from time to time. I
Speaker 1: believe that's called capturing a coupon. Bill Gross. I want
Speaker 1: to know the levels where you begin to pay attention.
Speaker 1: The yen is on a tear this morning, stronger yen
Speaker 1: one ten seventy three. We mentioned the two ten steps
Speaker 1: spread flattening out oil down to forty seven. We had
Speaker 1: a forty six handle in West Texas intermediate. Do you
Speaker 1: sense a tip point here in the correlation of markets
Speaker 1: that signal disinflation or can you really say it's a
Speaker 1: steady American economy and Janet Yelling will act as predicted. Yeah,
Speaker 1: I think it's a steady American economy and that the
Speaker 1: market is expecting and we'll see, you know, hike in
Speaker 1: June and perhaps one later in the year, but the
Speaker 1: feed is going to stay very, very low, and so
Speaker 1: that the supports markets to some extent. I would say,
Speaker 1: you didn't mention gold, but gold is up today. You know,
Speaker 1: golds a reflection of a weeker dollar and it's a
Speaker 1: reflection of lower real interest rates, and we see both
Speaker 1: of those today and so you know, some markets will
Speaker 1: be affected by the lower yields and by the weaker
Speaker 1: dollar to to the extent that we continue to see
Speaker 1: that trend, and those would be markets where you'd want
Speaker 1: to invest. Bill Gross, thank you was always for your time.
Speaker 1: He's with Janie Henderson as well. Of course, with Janie
Speaker 1: Henderson unconstrained. Uh fun, just great to get his perspective.
Speaker 1: Mr Gross, He's not taking the cf A this weekend,
Speaker 1: just so you know, you're just for fun. He's we
Speaker 1: we did it and somehow and they're done that Survive.
Speaker 1: He went home and he relicked his whole stamp collection.
Speaker 1: He was so so charted after level three. Example Brunt
Speaker 1: You by Bank of America Mary Lynch. With virtual reality,
Speaker 1: virtually everything will change. Discover opportunities in a transforming world.
Speaker 1: VI of a mL dot Com slash VR, Mary Lynch,
Speaker 1: Pierced Fenner and Smith Incorporated. There's something new from Bloomberg.
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Speaker 1: lens Okay, so let's start with the problem. What's your
Speaker 1: analysis of the problem. Why has the stock price not
Speaker 1: reflected a fairly successful operation. Yeah. I think that GM
Speaker 1: is strong and very many areas of its business, and
Speaker 1: it's made a number of really good strategic moves that
Speaker 1: positions itself very well for the future. There's lots of
Speaker 1: areas in operating an automobile company, from product designed to sales,
Speaker 1: to manufacturing, customer support, so on and so forth. But
Speaker 1: one area where GM is weak is in its capital structure.
Speaker 1: It's weak in finance and it has a balance sheet
Speaker 1: which is fundamentally too conservative for um for the value
Speaker 1: that's being created in the operations to be unlocked. The
Speaker 1: company has a market cap of just about fifty billion dollars.
Speaker 1: They have twenty billion in cash, They have an undrawn
Speaker 1: revolver of another thirteen or fourteen billion dollars. They have
Speaker 1: a few billion dollars more in cash sitting offshore in
Speaker 1: places like China that isn't even counted. And with so
Speaker 1: much of the value locked in cash preserving for the downside,
Speaker 1: it it leaves an in a few capital structure for
Speaker 1: the company, and shareholders have been rewarded. Therefore, with the
Speaker 1: lowest PE multiple in the entire s and P five hundred,
Speaker 1: it trades it a huge discount even to Ford, where
Speaker 1: to have Ford's PE multiple the stock would be higher.
Speaker 1: So I think that something needs to be done to
Speaker 1: unlock the value that's at GM. So if that's the diagnosis,
Speaker 1: why hasn't management addressed it? I mean, Mary bars certainly
Speaker 1: is concerned about her stock price. She said it to me,
Speaker 1: she said at other people. She knows there's a problem.
Speaker 1: She has a team around her. Why haven't they addressed it?
Speaker 1: I think there's caring about a stock price and caring
Speaker 1: about a stock price. It's kind of like I could
Speaker 1: lose that last five pounds, but do I really care
Speaker 1: enough to change my diet and change my exercise to
Speaker 1: do that. And whereas I would rather have five pounds less,
Speaker 1: I'm not really willing to do that. GM similarly would
Speaker 1: prefer a higher stock price there, but they're not really
Speaker 1: willing to do what it takes to make that happen.
Speaker 1: Is it also possible that they are scarred from the
Speaker 1: experience of going bankrupt and then having come back into
Speaker 1: the marketplace, and so they're saying, we really need money
Speaker 1: for a rainy day, and might they be right about that? Sure,
Speaker 1: the company has said that they're forever grateful to the
Speaker 1: United States for bailing themselves out and and preserving the
Speaker 1: company through the last the last recession, and the company
Speaker 1: is capitalized to make sure that that absolutely positively never
Speaker 1: happens again. So I think that there's several ways to
Speaker 1: get at that particular thing. One is is you could
Speaker 1: decide that you're fighting the last war, and you could
Speaker 1: change your balance sheet, uh to make it more conducive
Speaker 1: to the current business, to the current cost structure of
Speaker 1: the company, which is structurally improved, which would require you know,
Speaker 1: much less liquidity in cash. Or alternatively, you could do
Speaker 1: something that's kind of clever, and we have kind of
Speaker 1: a clever proposal that we've made which allows the company
Speaker 1: to keep all of its cash, to keep all of
Speaker 1: its rainy day money, to have its preservation for any
Speaker 1: future downturn that comes the exact same way that they
Speaker 1: have it right now, but would unlock the value at GM.
Speaker 1: So let's take us through that exactly that clever as
Speaker 1: you call it, clever plan. It involves two classes of stock.
Speaker 1: Essentially what those two classes essentially, what we're saying is
Speaker 1: is you have the stock right now, and as the
Speaker 1: owners of GM, you get dividends, and you get all
Speaker 1: the other values of ownership. And if you separate it out,
Speaker 1: the value of the dividends from all the other values,
Speaker 1: you would unlock you know, thirty to increase in the values.
Speaker 1: So there's a over simple, there's a dividend share, and
Speaker 1: there's a growth share, correct, and each shareholder would get
Speaker 1: one of each one of each, and you still have
Speaker 1: the same dividend that you're getting now, and you'd have
Speaker 1: the same growth you're getting right now. But if you
Speaker 1: wanted to, you could trade one of them or the other.
Speaker 1: And the result is is people who are more interested
Speaker 1: in dividends, you'd have new buyers that would come in
Speaker 1: for those dividend shares. And alternatively, if you're not interested
Speaker 1: in the dividend but you're interested in the growth of
Speaker 1: the company, you would buy you would buy the other shares. Now,
Speaker 1: if the market we're working properly, the value of those
Speaker 1: two shares should equal the value of the one share
Speaker 1: right now, and yet you and your proposals say that
Speaker 1: you think there's a fair amount of upside there. Why
Speaker 1: is that? Where is the market imperfection? It has to
Speaker 1: do with choice. I think of it as as an
Speaker 1: ice cream the end that sells just vanilla chocolate swirl.
Speaker 1: There's some people who like vanilla chocolate swirl, and we'll
Speaker 1: call those the GM shareholders. But if chocolate is the
Speaker 1: dividend and vanilla is the rest of the operation, imagine
Speaker 1: if you sold chocolate, vanilla or swirl in any combination
Speaker 1: that you want, that ice creamstand would attract more customers.
Speaker 1: So there's people who would be interested in the income
Speaker 1: feature of the dividend. They would buy they would buy
Speaker 1: the dividend shares, and those would be new participants in
Speaker 1: the market that would come in and they would bid them.
Speaker 1: You know, we think to a seven to nine percent yield.
Speaker 1: And similarly, there's people who are not that interest in
Speaker 1: the dividend but want just to see the stock go up.
Speaker 1: They would buy the growth shares, the capital appreciation shares,
Speaker 1: and we think that would trade about the same pe
Speaker 1: as you have right now. Adding the math together, is
Speaker 1: what would unlock the value, greater choice would bring in
Speaker 1: new investors. You took that math to Mary Borrow and
Speaker 1: her team, sat down with them, walk them through it.
Speaker 1: They did not embrace you. I think it's fair to
Speaker 1: say fair to say, so, what are they missing? Why
Speaker 1: wouldn't they say that's a good idea. I want to
Speaker 1: get my stock up, let's do that. Yeah. I think
Speaker 1: the truth of the matter is they never really engaged
Speaker 1: in it. They took a little bit of a not
Speaker 1: invented here attitude and they've just fought what we've done
Speaker 1: from the very, very beginning. But what I would say
Speaker 1: is is what we wanted from the beginning was a collaborative,
Speaker 1: iterative process to solve the balance sheet process at g M,
Speaker 1: the balance sheet problem. And so we've done is in
Speaker 1: addition to our plan, which is up for the shareholder
Speaker 1: meeting next week, we've nominated three directors. And these three
Speaker 1: directors bring in enormous capital markets sophistication which is not
Speaker 1: present at GM. I think they're the CFO is a
Speaker 1: little bit weak. I think Mary Barr is a wonderful CEO,
Speaker 1: but finance is the one area where she is not
Speaker 1: as strong as she is in other areas, and I
Speaker 1: think the board lacks this level of financial expertise. So
Speaker 1: what we're bringing in, if if the shareholders vote them on,
Speaker 1: we're bringing in three people who are extraordinarily good in
Speaker 1: this area. One is Leo Henry, who is the CEO
Speaker 1: with UM John Malone Act and all that. For all
Speaker 1: of those years we did all kinds of clever things
Speaker 1: with their balance sheet to minimize the cost of capital
Speaker 1: and animizing cost of capital is very important because GM
Speaker 1: needs to access capital to fund itself. That's a basic
Speaker 1: function of a business. And that's that That's why why
Speaker 1: you bring in that kind of expertise. Then then we
Speaker 1: have Bill Thorndyke, who wrote The Outsiders, which is like
Speaker 1: the Bible on capital allocation and minimizing cost of capital.
Speaker 1: And then my partner vinit Sethi, who is who is
Speaker 1: just a genius at capital asset pricing models. So let
Speaker 1: me kick the tires here a little bit. Has this
Speaker 1: ever been done in any other companies successfully? There's sort
Speaker 1: of restructure. There are many companies that have divided their
Speaker 1: equity interests, whether it's MLPs versus LPs, whether it's reads
Speaker 1: and prop cos and OP cos there's all kinds of
Speaker 1: companies that have transformed their businesses to create essentially one
Speaker 1: stream of income and another stream of capital appreciation. And
Speaker 1: if you're the board or you're the CEO and you
Speaker 1: have this happen, presumably you could sell one of the
Speaker 1: shares and keep the other, so you have divided ownership
Speaker 1: over time. How do you avoid a conflict of interest
Speaker 1: on the part of the divid of the dividend holders
Speaker 1: receivers as opposed to the growth people. As you make
Speaker 1: a decision, cash gets a little shorter. How do you
Speaker 1: make a decision that doesn't favor one set of shareholders
Speaker 1: over another. First of all, you start with the issue
Speaker 1: that the dividend is very stable. G m PA has
Speaker 1: had a little over two billion dollars in dividends, and
Speaker 1: that's what would happen under this proposal. There's twenty billion
Speaker 1: dollars of cash sitting on the balance sheet, so it's
Speaker 1: eight years of dividends. So in almost any scenario you
Speaker 1: can think of, the answer to the dividend is you
Speaker 1: just pay, You just pay the dividend. The second thing
Speaker 1: is is that boards of directors jobs. The reason they're
Speaker 1: paid hundreds of thousands of dollars a year is to
Speaker 1: balance out competing interests of different stakeholders. Those could be suppliers,
Speaker 1: they could be workers, they could be managers, they could
Speaker 1: be executives. They could be customers, they could be dealers,
Speaker 1: they could be regulators, um, they could be just the
Speaker 1: general public. They could be creditors of different status and shareholders.
Speaker 1: And the idea that this board thinks that the corporate
Speaker 1: governance concern is so much that they should reject a
Speaker 1: plan that would increase the stock price by thirty over
Speaker 1: a potential conflict basically just says this board is not
Speaker 1: is not engaged to do its job. Now. In fairness,
Speaker 1: it's not just management who has not been shall we say,
Speaker 1: enthusiastic about this. The market overall has not responded. When
Speaker 1: you came out with this proposal and you've talked about it,
Speaker 1: the market did not take GM shares up. So isn't
Speaker 1: the market sort of voting or at least questioning what
Speaker 1: you're proposing. Well, there's there's no doubt about that. GM
Speaker 1: is a spent essentially spending fifteen million dollars to pedal
Speaker 1: the bear case on its own stock. What they're basically
Speaker 1: saying is is we can't do anything about our stock price.
Speaker 1: The fact that we have a pe that's five when
Speaker 1: even when Ford's is around seven. Well, you know, we're
Speaker 1: an auto company and we're at the top or towards
Speaker 1: the top of the cycle, and nothing can be done
Speaker 1: here until we get to the downturn. And if you
Speaker 1: don't really like that, what you should do is sell
Speaker 1: the stock. So they've been running around to shareholders pitching
Speaker 1: effectively the bear case on their own stock, saying that
Speaker 1: any innovation, you know, it's just too risky even to
Speaker 1: to contemplate. And as a result, I think that um,
Speaker 1: I think that people are hearing the message from management
Speaker 1: and they're sensing fear as opposed to optimism, and I
Speaker 1: think that's having negative impact on the stock. Okay, we
Speaker 1: want to welcome once again both Bloomberg TV and Radio.
Speaker 1: We're talking about David Einhorn about his proposal for General Motors.
Speaker 1: We had in a prominent auto analyst from Morgan Stanley
Speaker 1: just to day before yesterday, and in talking about the
Speaker 1: relative value of Tesla on the one hand and General
Speaker 1: was in the other, he said, if you gave me
Speaker 1: twenty billion dollars to get to either Elon Musk or
Speaker 1: Mary Barrow. I would give it to Elon Musk because
Speaker 1: there's more growth there. It was his response. So what's
Speaker 1: your response to that question, because you have a short
Speaker 1: position on Tesla at the same time you're proposing this
Speaker 1: for General Motors. Yeah. I think it's a question of
Speaker 1: what the purpose of the twenty billion dollars is. If
Speaker 1: the purpose of the twenty billion dollars is to earn
Speaker 1: a profit and a return on the twenty billion dollars,
Speaker 1: I think you would give it to Mary Barra because
Speaker 1: GM is interested in its return on capital. They're trying
Speaker 1: to make about return on its invested capital, and that's
Speaker 1: a wonderful return on twenty billion dollars to the extent
Speaker 1: that they were able to deploy it. I think if
Speaker 1: the purpose of a business is to advance the future,
Speaker 1: to have science experiments and really cool, buzzworthy kind of things,
Speaker 1: then you would give it to Tesla, because there you
Speaker 1: have a guy who's done all kinds of fancy innovation
Speaker 1: and it is thinking about how society should be fifty
Speaker 1: years from now, a hundred years from now, but he's
Speaker 1: yet to actually take any money and turn it into
Speaker 1: a profitable business and I don't have any optimism that
Speaker 1: that will change. Well, you may be right, we'll find
Speaker 1: out about Tesla, but there seems to be a lot
Speaker 1: of investors who are willing to give him more money
Speaker 1: to do science moments or what are he's doing. I mean,
Speaker 1: how much commitment do you have to have as a
Speaker 1: long short investor when you go short outside of testa
Speaker 1: That can get pretty painful. Yeah, Um, Tesla is one
Speaker 1: of you know, many things we have and what we
Speaker 1: so call call our bubble basket of stocks that we
Speaker 1: just think are mispriced, and they're mispriced by huge, huge amounts,
Speaker 1: and um, you know, they're sized in a way that
Speaker 1: gives us the ability to, you know, wait a fair
Speaker 1: amount of time to be proven right or wrong. I
Speaker 1: think eventually the mood of the market will change. Eventually
Speaker 1: the com will be called into account to demonstrate profitability.
Speaker 1: I don't know when that will happen, And and the
Speaker 1: portfolios positioned properly relative to the risk and the reward.
Speaker 1: There you also have a very large position in general motors.
Speaker 1: I mean, you know, I think three of the shares. Yeah,
Speaker 1: it's much larger than our Tesla short, much exactly exactly.
Speaker 1: So if in fact you don't get your three members
Speaker 1: on the board and your plan doesn't go forward, what
Speaker 1: do you do with that position in General Motors? Well,
Speaker 1: our investment in General Motors goes way back before we started.
Speaker 1: We basically bought the stock in two thousand eleven. We
Speaker 1: did sell it for a little while around the ignition
Speaker 1: recall issue, but basically we've been large holders of the
Speaker 1: stock for six years. Um. You know, our investment thesis
Speaker 1: is not predicated on this plan being put into place
Speaker 1: or our directors being nominated. Those are things that came
Speaker 1: up along the way as part of a multi year
Speaker 1: investment we had in GM. UM. You know, I would
Speaker 1: look to Apple, where we had a similar experience talking
Speaker 1: about an idea that we advanced a few years ago.
Speaker 1: Even though they didn't do exactly what we wanted them
Speaker 1: to do, they did change their capital policy and unlocked
Speaker 1: a lot of value. And we're still large holders of
Speaker 1: Apple today, though we have reduced the position some. Well,
Speaker 1: that does raise the question there was a large very
Speaker 1: much the same way exactly. I'm glad you raised Apple
Speaker 1: because there was an extraordinary stock buy back there that
Speaker 1: have got a lot of cash into some shareholders hands.
Speaker 1: Would that if not satisfy you, at least say okay,
Speaker 1: that's good enough. With General Motors, sure, Look with Apple,
Speaker 1: they had a problem with capital allocation. They were storing
Speaker 1: lots and lots of cash, they were returning none of
Speaker 1: it to shareholders. We had an idea. Maybe some people
Speaker 1: thought it was too clever. Management thought it was too clever.
Speaker 1: But instead what they did was they changed their constraint.
Speaker 1: They previously said we're not buying backstock, and since then
Speaker 1: they've borrowed a hundred billion dollars. They've bought back a
Speaker 1: quarter of the stock about less than a hundred dollars
Speaker 1: a share. The pe net of cash is expanded from
Speaker 1: seven to thirteen, in part because Apple has a better
Speaker 1: capital allocation policy today than it did before we came in.
Speaker 1: Now g M has a similar inefficient balance sheet. They've
Speaker 1: said that there's these constraints because they want to retain
Speaker 1: all of this money for a potential rainy day. There's
Speaker 1: several ways to get at it. Our purpose and electing
Speaker 1: directors is to get at that problem. It could be
Speaker 1: through the plan and the proposal that we've advanced, or
Speaker 1: it could be an alternate solution. But either way, when
Speaker 1: you look at GM and you say your cost of
Speaker 1: thirty year debt is five and a half percent or
Speaker 1: five and a quarter percent, and your cost of equities
Speaker 1: basically or the reciprocal of a five p E, that's
Speaker 1: just too big of a gap and something needs to
Speaker 1: be done to close that. So David, finally, um, you're
Speaker 1: a long short investor. You've had extraordinary success through your career,
Speaker 1: I mean legendary success. It hasn't been as easy at
Speaker 1: the less a little while You're not alone in that,
Speaker 1: there are a number of other hedge funds that have
Speaker 1: really been struggling a bit. In your view, because you
Speaker 1: are an expert in this, does that tell us something
Speaker 1: larger about that way of investing or is this a
Speaker 1: temporary aberration? I believe that it's cyclical. There's a period
Speaker 1: where certain types of stocks do better than other types
Speaker 1: of stocks, and you know, we're probably about three years
Speaker 1: into period. That is uh. You know, it's been a
Speaker 1: bit of a headwind for our style of investing. Does
Speaker 1: it put pressure on you both in terms of retaining
Speaker 1: investment um and also in terms of the fees pay?
Speaker 1: I mean, that's what we all, all the talk is
Speaker 1: about fees, right the two and twenty, things like that.
Speaker 1: Do you feel pressure? I've been looking. I've been very
Speaker 1: lucky in my career, and essentially when we started Greenlight
Speaker 1: in with a million dollars, I never envisioned it would
Speaker 1: be anything close to what it's turned out to be.
Speaker 1: When we reached a hundred million dollars, I thought we
Speaker 1: had hit a success that I you know, that I
Speaker 1: never would have imagined. And really, since then, I've never
Speaker 1: really cared about what the size of the fund is
Speaker 1: so it'll go out or to go down. But mostly
Speaker 1: we've we've been closed. We haven't been opened for new
Speaker 1: investment for you know, for many, many years. And my
Speaker 1: goal is not to manage the most money. My job
Speaker 1: is to do a good job with the money that
Speaker 1: we do manage. Finally, going back to General Motors in conclusion, Um,
Speaker 1: if you are successful, why will it be Will it
Speaker 1: be because Mary bar changes her mind? Or will be
Speaker 1: because you get your three directors on the board. Well,
Speaker 1: I guess I don't know the answer to that. There's
Speaker 1: lots of different ways to get to success. Thanks for
Speaker 1: listening to the Bloomberg Surveillance Podcast. Subscribe and listen to
Speaker 1: interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.
Speaker 1: I'm on Twitter at Tom Keene. David Gura is at
Speaker 1: David Gura. Before the podcast, you can always catch us worldwide.
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