1 00:00:05,800 --> 00:00:08,720 Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. 2 00:00:08,760 --> 00:00:11,560 Speaker 1: Along with my co host Lisa Abramowitz. Each day we 3 00:00:11,640 --> 00:00:15,120 Speaker 1: bring you the most important, noteworthy, and useful interviews for 4 00:00:15,200 --> 00:00:17,840 Speaker 1: you and your money, whether you're at the grocery store 5 00:00:17,960 --> 00:00:20,720 Speaker 1: or the trading floor. Find the Bloomberg P and L 6 00:00:20,840 --> 00:00:30,800 Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. The 7 00:00:31,000 --> 00:00:35,280 Speaker 1: topic is China and how to absorb what some describe 8 00:00:35,320 --> 00:00:41,320 Speaker 1: as industrial quantities of the most indigestible stuff had a 9 00:00:41,440 --> 00:00:46,080 Speaker 1: grapple with China's economy and its political system. Here to 10 00:00:46,159 --> 00:00:49,680 Speaker 1: tell us about it is none other than George Magnusi, 11 00:00:49,760 --> 00:00:53,640 Speaker 1: an associate of the China Center at Oxford University, former 12 00:00:53,720 --> 00:00:56,639 Speaker 1: chief economist for UBS, and the author of a new 13 00:00:56,720 --> 00:01:01,520 Speaker 1: book entitled Red Flags Y G's China Is in Jeopardy. 14 00:01:01,600 --> 00:01:03,720 Speaker 1: George magnus thank you very much for being with us. 15 00:01:04,200 --> 00:01:07,400 Speaker 1: Tell us what you want people to take away from 16 00:01:07,440 --> 00:01:11,959 Speaker 1: your book. Well, I think the main thing is that 17 00:01:13,040 --> 00:01:18,240 Speaker 1: China is facing a number of economic issues which are 18 00:01:18,280 --> 00:01:22,720 Speaker 1: not necessarily unique to China. Um, they're very special in 19 00:01:22,760 --> 00:01:25,679 Speaker 1: the kind of China's case. But the main thing really 20 00:01:25,880 --> 00:01:28,680 Speaker 1: is that since Seijing pin came to power in two 21 00:01:28,720 --> 00:01:33,560 Speaker 1: thousand and twelve. There's been a very substantial shift in 22 00:01:33,720 --> 00:01:36,800 Speaker 1: the way in which China is governed, in what we 23 00:01:36,880 --> 00:01:40,280 Speaker 1: might call its governance system. And this is not the 24 00:01:40,360 --> 00:01:46,039 Speaker 1: China that we thought we knew, that erupted onto the 25 00:01:46,040 --> 00:01:49,160 Speaker 1: world scene, so to speak, during the last kind of 26 00:01:49,160 --> 00:01:53,720 Speaker 1: twenty or thirty years. It's obviously still in certain years, 27 00:01:53,720 --> 00:01:55,760 Speaker 1: are much more powerful China than it used to be, 28 00:01:55,960 --> 00:01:58,000 Speaker 1: and it's a much richer China than it used to be. 29 00:01:58,240 --> 00:02:01,440 Speaker 1: But the governance system has changed a dramatically. And what 30 00:02:01,480 --> 00:02:02,920 Speaker 1: I've tried to do in the book is to set 31 00:02:02,920 --> 00:02:06,880 Speaker 1: out what difference this makes to the chances of yet 32 00:02:06,960 --> 00:02:10,800 Speaker 1: another transformation which China has to make if it wants 33 00:02:10,840 --> 00:02:13,120 Speaker 1: to aspire to all the things that it says it 34 00:02:13,200 --> 00:02:16,200 Speaker 1: wants to be. So, George, can you connect that sort 35 00:02:16,240 --> 00:02:19,919 Speaker 1: of shifting governing structure in China to what we're hearing 36 00:02:20,440 --> 00:02:22,880 Speaker 1: with respect of the tensions between the US and China? 37 00:02:22,880 --> 00:02:26,160 Speaker 1: In other words, is the US misplacing some of its 38 00:02:26,200 --> 00:02:31,519 Speaker 1: concerns about the dominance of China, And is China going 39 00:02:31,560 --> 00:02:33,960 Speaker 1: to become less of a threat than than China than 40 00:02:34,040 --> 00:02:38,040 Speaker 1: US officials seemed to think UM. Now I kind of 41 00:02:38,040 --> 00:02:39,760 Speaker 1: picture the other way, to be honest. I mean, I 42 00:02:39,800 --> 00:02:43,280 Speaker 1: think that, you know, one of the remarkable transformations that 43 00:02:43,400 --> 00:02:46,720 Speaker 1: China has has done over the last thirty or forty 44 00:02:46,800 --> 00:02:48,720 Speaker 1: years is, you know, once upon a time, it used 45 00:02:48,720 --> 00:02:52,320 Speaker 1: to be a very um, you know, a magnetic customer 46 00:02:52,440 --> 00:02:56,800 Speaker 1: for global companies and particularly for Western companies, and gradually 47 00:02:56,800 --> 00:02:59,680 Speaker 1: it's sort of evolved into a very feisty competitor, not 48 00:02:59,800 --> 00:03:03,760 Speaker 1: just in low value goods, but increasingly in in medium 49 00:03:03,800 --> 00:03:07,720 Speaker 1: skill and medium technological level goods and serve one services, 50 00:03:07,800 --> 00:03:11,800 Speaker 1: but certainly goods UM. And now it's become also, of course, 51 00:03:11,840 --> 00:03:16,800 Speaker 1: a very feisty and very considerable competitor and and adversary 52 00:03:17,440 --> 00:03:20,360 Speaker 1: to the United States and some degree to to the 53 00:03:20,400 --> 00:03:23,200 Speaker 1: Western world as well. And I don't really see that 54 00:03:23,200 --> 00:03:26,000 Speaker 1: this is going to change any time in the future. 55 00:03:26,040 --> 00:03:29,359 Speaker 1: And if anything, I think that the trade war, which 56 00:03:29,360 --> 00:03:31,720 Speaker 1: of course consumes us all and it's kind of almost 57 00:03:31,800 --> 00:03:36,040 Speaker 1: front page news kind of every day, UM, is something 58 00:03:36,080 --> 00:03:39,360 Speaker 1: that we should expect to continue and perhaps to become 59 00:03:39,480 --> 00:03:43,640 Speaker 1: even starker and spill over to other areas in the future, 60 00:03:43,680 --> 00:03:48,480 Speaker 1: because it does signify a kind of an adversarial relationship 61 00:03:48,640 --> 00:03:51,920 Speaker 1: which at the moment, neither of the two presidents of 62 00:03:51,960 --> 00:03:54,960 Speaker 1: the two countries, a President Trump and President sieging Ping, 63 00:03:55,360 --> 00:03:57,200 Speaker 1: you know, seemed to be, you know, one of them 64 00:03:57,240 --> 00:03:59,720 Speaker 1: is following an America first policy, the others following a 65 00:03:59,800 --> 00:04:02,920 Speaker 1: chi in the first policy, and that sort of dialogue 66 00:04:02,920 --> 00:04:06,920 Speaker 1: that America and China used to have has has clearly 67 00:04:06,960 --> 00:04:08,840 Speaker 1: kind of broken down, at least for the time being. 68 00:04:09,880 --> 00:04:15,880 Speaker 1: Can China pursue policies for speedy growth and simultaneously reduce 69 00:04:16,040 --> 00:04:20,160 Speaker 1: the risk of financial instability? M Now that is the 70 00:04:20,200 --> 00:04:23,200 Speaker 1: sixty four trillion you are in question, um, And the 71 00:04:23,240 --> 00:04:27,359 Speaker 1: answer that very simply is that I think is no. UM, 72 00:04:27,400 --> 00:04:30,040 Speaker 1: so as I think a lot of people who are 73 00:04:30,040 --> 00:04:33,280 Speaker 1: watching China kind of realize and understand. Since the end 74 00:04:33,320 --> 00:04:38,720 Speaker 1: of two thousand sixteen, China has embarked on a quite 75 00:04:38,800 --> 00:04:44,360 Speaker 1: quite a seriously minded course of deleveraging the financial system 76 00:04:44,440 --> 00:04:49,680 Speaker 1: to try to unhook the economy's dependency on debt and 77 00:04:49,760 --> 00:04:54,120 Speaker 1: on credit creation, and to some degree they have been successful, 78 00:04:54,200 --> 00:04:57,760 Speaker 1: but only to a limited degree. Now that the economy 79 00:04:57,880 --> 00:05:01,240 Speaker 1: is also slowing down and falter a little bit in 80 00:05:01,440 --> 00:05:05,720 Speaker 1: the wake of this de leveraging policy, but also supplemented 81 00:05:05,839 --> 00:05:13,279 Speaker 1: increasingly by the consequences of the tariffs and the trade conflict. Um. 82 00:05:13,320 --> 00:05:16,560 Speaker 1: We can see quite a number of bits of anecdotal 83 00:05:16,600 --> 00:05:20,240 Speaker 1: evidence where the government and the People's Bank of China 84 00:05:20,279 --> 00:05:23,480 Speaker 1: a kind of rowing back a little bit from the 85 00:05:23,560 --> 00:05:27,839 Speaker 1: intensity of this kind of deleveraging squeeze. So I think 86 00:05:27,880 --> 00:05:33,200 Speaker 1: there is an unresolved conflict in China between the almost 87 00:05:33,200 --> 00:05:35,240 Speaker 1: the kind of the mantra that we have. You know, 88 00:05:35,279 --> 00:05:39,120 Speaker 1: they have to have elevated or high rates of economic growth, 89 00:05:39,600 --> 00:05:43,359 Speaker 1: and in the conviction that certainly many Chinese leaders have, 90 00:05:43,880 --> 00:05:46,760 Speaker 1: which is that they need to reduce their dependency on debt. 91 00:05:46,920 --> 00:05:49,800 Speaker 1: But I don't think they've resolved yet. You know how 92 00:05:49,839 --> 00:05:54,160 Speaker 1: those two incompatible objectives actually can co exist Because they can't. 93 00:05:54,240 --> 00:05:56,359 Speaker 1: You have to choose one or the other. Although Georgia, 94 00:05:56,520 --> 00:05:59,159 Speaker 1: some people would say the fact that China is easing 95 00:05:59,400 --> 00:06:05,040 Speaker 1: again actually prolongs this cycle and gives China more time 96 00:06:05,120 --> 00:06:07,560 Speaker 1: to sort of right size itself and fix that some 97 00:06:07,640 --> 00:06:10,400 Speaker 1: of the structural problems that it faces and avoids a 98 00:06:10,480 --> 00:06:15,040 Speaker 1: hard landing. Do you agree with that? Um? Not not really. 99 00:06:15,200 --> 00:06:18,320 Speaker 1: I mean I think that the there is an argument 100 00:06:18,400 --> 00:06:21,960 Speaker 1: that you know, if you if the Chinese authorities can 101 00:06:22,000 --> 00:06:26,320 Speaker 1: basically just hold the line on credit creation and deleveraging 102 00:06:26,360 --> 00:06:30,480 Speaker 1: for long enough that you know that faster growth will resume. 103 00:06:30,600 --> 00:06:35,680 Speaker 1: But I think that this conflates to kind of things 104 00:06:35,720 --> 00:06:39,880 Speaker 1: which actually are entirely dependent on one another. The reason 105 00:06:39,960 --> 00:06:43,080 Speaker 1: that China can have and has had during the last 106 00:06:43,080 --> 00:06:47,479 Speaker 1: ten years relatively elevated rates of growth, maybe not quite 107 00:06:47,520 --> 00:06:51,240 Speaker 1: as elevated as official numbers suggest, but certainly quite high 108 00:06:51,360 --> 00:06:55,359 Speaker 1: rates of growth is because of the because of the 109 00:06:55,400 --> 00:06:58,560 Speaker 1: credit creation that's underpending. It Once you take away that 110 00:06:58,640 --> 00:07:02,560 Speaker 1: credit creation mechanists, and growth will almost certainly drop off 111 00:07:02,640 --> 00:07:06,039 Speaker 1: quite significantly. So this is the this is the acid 112 00:07:06,120 --> 00:07:10,680 Speaker 1: test of Chinese policy making and of seizing pings kind 113 00:07:10,680 --> 00:07:13,480 Speaker 1: of governance, shall we say, in terms of macroeconomics over 114 00:07:13,520 --> 00:07:16,559 Speaker 1: the next kind of two or three years, is will 115 00:07:16,600 --> 00:07:19,280 Speaker 1: they be willing to kind of bite the bottom lips, 116 00:07:19,320 --> 00:07:23,040 Speaker 1: so to speak, and allow the economy to slow down 117 00:07:23,480 --> 00:07:28,640 Speaker 1: materially whilst this deleveraging takes place, or or will they 118 00:07:28,680 --> 00:07:31,480 Speaker 1: kind of give up and and go for growth. They 119 00:07:31,560 --> 00:07:36,600 Speaker 1: still have a system of setting annual growth targets, and 120 00:07:36,680 --> 00:07:40,480 Speaker 1: if that were ever to be abandoned, which has been 121 00:07:40,560 --> 00:07:43,640 Speaker 1: mooted but it hasn't happened yet. If that were ever 122 00:07:43,680 --> 00:07:47,040 Speaker 1: to be abandoned, I think we would see certainly a 123 00:07:47,360 --> 00:07:49,920 Speaker 1: big shift in the way in which, you know, policy 124 00:07:50,040 --> 00:07:53,400 Speaker 1: was being conducted in China and the tolerance that would 125 00:07:53,400 --> 00:07:57,800 Speaker 1: be implicit for weaker economic expansion. But so far that's 126 00:07:57,840 --> 00:08:00,440 Speaker 1: not been the case. George Magnus, thank you so much 127 00:08:00,440 --> 00:08:03,000 Speaker 1: for being with us. Wonderful to get your insights on 128 00:08:03,040 --> 00:08:06,040 Speaker 1: this very important topic. China, of course front and center 129 00:08:06,120 --> 00:08:10,240 Speaker 1: for the entire global economy, not only the US. We 130 00:08:10,320 --> 00:08:13,600 Speaker 1: respect to the tensions. George Magnus economist and associate at 131 00:08:13,640 --> 00:08:17,480 Speaker 1: the China Center at Oxford University, also a research associate 132 00:08:17,720 --> 00:08:20,760 Speaker 1: at the School of Oriental and African Studies, and formerly 133 00:08:20,880 --> 00:08:35,199 Speaker 1: he was chief economist at u b S. Ongoing questions 134 00:08:35,600 --> 00:08:41,079 Speaker 1: are continuing about China's hacking of hardware that is used 135 00:08:41,200 --> 00:08:46,080 Speaker 1: by a lot of different US agencies, governmental companies, as 136 00:08:46,080 --> 00:08:49,640 Speaker 1: well as defense units. Matt Choti joins US now vice 137 00:08:49,679 --> 00:08:54,200 Speaker 1: president chief information security Officer at Redlock from Philadelphia. Matt, 138 00:08:54,240 --> 00:08:56,280 Speaker 1: thank you so much for for coming back with us. 139 00:08:56,720 --> 00:08:59,360 Speaker 1: There was a story yesterday that our Bloomberg Business Week 140 00:08:59,360 --> 00:09:05,640 Speaker 1: reporters broke talking about additional signs that China had implanted 141 00:09:06,080 --> 00:09:09,559 Speaker 1: some sort of micro chip to be able to hack 142 00:09:09,679 --> 00:09:15,800 Speaker 1: into computers for a major US to telecommunications company. And 143 00:09:15,880 --> 00:09:19,120 Speaker 1: this was using information given by somebody who is using 144 00:09:19,160 --> 00:09:22,959 Speaker 1: their name on the record. What did you make of this? So, 145 00:09:23,000 --> 00:09:25,480 Speaker 1: you know, this is really really interesting for a couple 146 00:09:25,520 --> 00:09:28,240 Speaker 1: of reasons, right, First is that this is the first 147 00:09:28,280 --> 00:09:32,199 Speaker 1: time that we've got some indication possibly around which industry 148 00:09:32,360 --> 00:09:34,959 Speaker 1: this is affecting. And the second thing, like you mentioned, 149 00:09:35,160 --> 00:09:38,280 Speaker 1: now we have a known hardware security expert who seems 150 00:09:38,280 --> 00:09:41,240 Speaker 1: to be backing up these claims really for the first time. 151 00:09:41,679 --> 00:09:44,079 Speaker 1: And the thing that's different right this hack is different 152 00:09:44,160 --> 00:09:46,320 Speaker 1: from what we heard about last week, and that this 153 00:09:46,440 --> 00:09:49,200 Speaker 1: is not an embedded chip in the motherboard but rather 154 00:09:49,360 --> 00:09:52,440 Speaker 1: directly onto the servers network port. And I think the 155 00:09:52,440 --> 00:09:54,920 Speaker 1: other thing that's important, and hold on one second before 156 00:09:54,920 --> 00:09:57,560 Speaker 1: you continue, what does that mean? What's the difference here? 157 00:09:58,200 --> 00:10:00,439 Speaker 1: So the difference is that it's just from from a 158 00:10:00,559 --> 00:10:04,280 Speaker 1: skills perspective, it is it's much more difficult to do 159 00:10:04,320 --> 00:10:06,360 Speaker 1: what we were talking about last week. We were talking 160 00:10:06,360 --> 00:10:09,680 Speaker 1: about that really small embedded chip. In this case we're 161 00:10:09,679 --> 00:10:13,520 Speaker 1: talking about it has been reported that the server's actual port. 162 00:10:13,600 --> 00:10:15,720 Speaker 1: So where it's called an Internet jack where you plug 163 00:10:15,720 --> 00:10:18,960 Speaker 1: a computer into the network that the actual port was 164 00:10:19,040 --> 00:10:23,800 Speaker 1: replaced with a device that now can do those remote communications. 165 00:10:23,840 --> 00:10:26,600 Speaker 1: How would a company or an individual check to see 166 00:10:26,600 --> 00:10:30,079 Speaker 1: whether they are affected? So you know, this is again 167 00:10:30,120 --> 00:10:32,240 Speaker 1: we don't know the scope of this right now. That's 168 00:10:32,320 --> 00:10:35,240 Speaker 1: that's part of the challenge, right. So there is newer 169 00:10:35,320 --> 00:10:38,920 Speaker 1: technology that exists, surely not that a consumer would have, right, 170 00:10:38,920 --> 00:10:42,479 Speaker 1: but there's technology that exists today that utilizes X rays 171 00:10:42,520 --> 00:10:45,640 Speaker 1: and machine learning to compare chip designs. Right, so you 172 00:10:45,679 --> 00:10:47,400 Speaker 1: show it this is what a good chip looks like, 173 00:10:47,679 --> 00:10:49,880 Speaker 1: and then it will compare it. And so this type 174 00:10:49,880 --> 00:10:53,520 Speaker 1: of technology can help provide assurances, but today it's use 175 00:10:53,640 --> 00:10:56,000 Speaker 1: is very limited. So Matt, I want to go back 176 00:10:56,000 --> 00:10:58,800 Speaker 1: to this idea that you're talking about, where the prior 177 00:10:58,880 --> 00:11:00,600 Speaker 1: story that we were talking at about how to deal 178 00:11:00,600 --> 00:11:03,280 Speaker 1: with them planting a chip on the motherboard. This is 179 00:11:03,320 --> 00:11:07,720 Speaker 1: an easier way of accessing information going through the ethernet port. 180 00:11:07,760 --> 00:11:09,840 Speaker 1: I'm sure I'm butchering this, but I'm just wondering from 181 00:11:09,840 --> 00:11:13,600 Speaker 1: your perspective, is it also easier to detect from sort 182 00:11:13,640 --> 00:11:16,480 Speaker 1: of a security standpoint or does it just sort of 183 00:11:16,720 --> 00:11:19,960 Speaker 1: raise the fear that this type of hacking and in 184 00:11:20,000 --> 00:11:22,480 Speaker 1: these types of implants are all the more prevalent than 185 00:11:22,480 --> 00:11:26,120 Speaker 1: anyone could ever imagined. Surely, in this case, this is 186 00:11:26,160 --> 00:11:28,480 Speaker 1: something that was visibly different. I think I remember reading 187 00:11:28,480 --> 00:11:31,040 Speaker 1: that it was you know that one is normally plastics, 188 00:11:31,120 --> 00:11:34,080 Speaker 1: this sport, and this one was metallic. So surely this 189 00:11:34,120 --> 00:11:37,080 Speaker 1: would be easier to spot just visually. But I think, 190 00:11:37,120 --> 00:11:39,480 Speaker 1: you know, the thing that's really important remember is that 191 00:11:39,559 --> 00:11:42,560 Speaker 1: this is not a super micro issue, right, this is 192 00:11:42,559 --> 00:11:45,200 Speaker 1: an industry wide concern that's actually gone back for a 193 00:11:45,240 --> 00:11:48,640 Speaker 1: number of years. Um. I found a report from that 194 00:11:48,760 --> 00:11:51,760 Speaker 1: the Department of Defense issued. It was called the Cyber 195 00:11:51,920 --> 00:11:55,400 Speaker 1: Supply Chain, and in there they identified concerns similar to 196 00:11:55,440 --> 00:11:58,320 Speaker 1: what's been reported, and they actually made a couple of recommendations, right. 197 00:11:58,320 --> 00:12:01,800 Speaker 1: The first was training, the SEC was developing new technical 198 00:12:01,840 --> 00:12:04,920 Speaker 1: methods to identify malicious hardware. And the last one was 199 00:12:05,120 --> 00:12:09,040 Speaker 1: new regulations that would require all defense suppliers to report 200 00:12:09,120 --> 00:12:11,840 Speaker 1: hardware issues. So this, again, this is not really new. 201 00:12:12,080 --> 00:12:14,640 Speaker 1: It's just the first time that the general public has 202 00:12:14,679 --> 00:12:17,079 Speaker 1: been made aware of it. Matt, do you think that 203 00:12:17,160 --> 00:12:22,000 Speaker 1: this will become a factor in the approval or disapproval process, 204 00:12:22,080 --> 00:12:27,679 Speaker 1: the review process for US companies combining with Chinese companies 205 00:12:27,800 --> 00:12:31,600 Speaker 1: or Chinese foreign investment in the United States. I think 206 00:12:31,600 --> 00:12:34,200 Speaker 1: it's certainly going to add a whole new level of 207 00:12:34,360 --> 00:12:39,600 Speaker 1: rigor in review. Right. So today companies they spend billions 208 00:12:39,720 --> 00:12:43,840 Speaker 1: to secure software, but almost nothing for hardware. So definitely 209 00:12:43,880 --> 00:12:46,640 Speaker 1: it will definitely become a point of contention. But again, 210 00:12:46,679 --> 00:12:49,079 Speaker 1: it's not just a super micro issue. This is an 211 00:12:49,120 --> 00:12:53,400 Speaker 1: industry wide concern. All right, So Matt, let's let's say 212 00:12:53,440 --> 00:12:56,040 Speaker 1: that this is an industry wide concern and its evidence 213 00:12:56,080 --> 00:13:00,160 Speaker 1: that China is trying to infiltrate big companies as well 214 00:13:00,200 --> 00:13:04,600 Speaker 1: as possibly governmental units. I'm just wondering from your perspective, Uh, 215 00:13:05,360 --> 00:13:07,520 Speaker 1: how how how do you sort of counter it on 216 00:13:07,600 --> 00:13:10,120 Speaker 1: a broad level? And have you heard any I mean, 217 00:13:10,120 --> 00:13:13,120 Speaker 1: you talked about regulations, but have you heard any movement 218 00:13:13,240 --> 00:13:16,959 Speaker 1: in that direction. I have not personally seen that. I 219 00:13:17,000 --> 00:13:19,280 Speaker 1: haven't read anything about it. But I guarantee you this 220 00:13:19,480 --> 00:13:21,440 Speaker 1: is going to spurn it. That's why I think, you know, 221 00:13:21,520 --> 00:13:26,520 Speaker 1: regardless if what's being reported accurate, this news will have 222 00:13:26,640 --> 00:13:29,400 Speaker 1: a positive effect, and that it's going to spurn companies 223 00:13:29,400 --> 00:13:33,000 Speaker 1: and governments worldwide to begin investigating the security of their hardware. 224 00:13:33,040 --> 00:13:35,760 Speaker 1: All right, so let's let's actually go with that, because 225 00:13:36,120 --> 00:13:37,960 Speaker 1: a lot of people I tweeted out the story and 226 00:13:38,000 --> 00:13:40,760 Speaker 1: a lot of people were saying, hmmm, well, all of 227 00:13:40,800 --> 00:13:43,880 Speaker 1: the governmental agencies and all of the companies are denying 228 00:13:43,960 --> 00:13:46,240 Speaker 1: that this is the case, when at least the initial 229 00:13:46,280 --> 00:13:49,400 Speaker 1: story they're saying that there was no microchip that was 230 00:13:49,440 --> 00:13:52,719 Speaker 1: implanted in their hardware. Uh So, you know, with all 231 00:13:52,760 --> 00:13:55,439 Speaker 1: of those denials, could it be that somebody is trying 232 00:13:55,480 --> 00:13:57,760 Speaker 1: to get out this story or a lot of people 233 00:13:57,800 --> 00:14:00,720 Speaker 1: are in order to prompt change, but that perhaps aren't 234 00:14:00,760 --> 00:14:03,880 Speaker 1: getting the facts totally right. That's absolutely true. I mean, 235 00:14:03,960 --> 00:14:06,319 Speaker 1: that could absolutely be the case. The other thing to 236 00:14:06,440 --> 00:14:09,080 Speaker 1: keep in mind, right, if this really is a top 237 00:14:09,120 --> 00:14:12,880 Speaker 1: secret government investigation, no doubt, each one of these companies 238 00:14:12,920 --> 00:14:16,040 Speaker 1: would have received a national security letter, and if they 239 00:14:16,040 --> 00:14:18,679 Speaker 1: receive that national security letter, it may have very well 240 00:14:18,760 --> 00:14:21,840 Speaker 1: to have one that has a non disclosure provision, in 241 00:14:21,880 --> 00:14:25,960 Speaker 1: which case they are legally prevented from even talking about it, 242 00:14:26,080 --> 00:14:28,440 Speaker 1: and it would be in their best interest to stringently 243 00:14:28,480 --> 00:14:30,520 Speaker 1: deny it. We don't know if that is the case, 244 00:14:30,680 --> 00:14:34,640 Speaker 1: but it's certainly probable given the wide ranging nature of 245 00:14:34,680 --> 00:14:38,960 Speaker 1: this reported issue. If you're an individual that has responsibility 246 00:14:39,000 --> 00:14:41,240 Speaker 1: for the security of a network, or you had a 247 00:14:41,280 --> 00:14:44,840 Speaker 1: team that has such responsibility, what kind of money are 248 00:14:44,880 --> 00:14:47,720 Speaker 1: we talking about that's necessary in order to do the 249 00:14:47,840 --> 00:14:51,000 Speaker 1: right kind of review? You know, it's it's really going 250 00:14:51,040 --> 00:14:53,520 Speaker 1: to take in terms of investment. It's hard to say 251 00:14:53,560 --> 00:14:56,600 Speaker 1: what it would be for a specific company. Certainly would 252 00:14:56,640 --> 00:14:59,560 Speaker 1: depend upon, you know, just the scale at which that 253 00:14:59,600 --> 00:15:02,480 Speaker 1: company operating. You know, for example, my company, right we 254 00:15:02,560 --> 00:15:06,600 Speaker 1: operate all our compute capacity in for example, the Amazon 255 00:15:06,640 --> 00:15:10,840 Speaker 1: Web Services cloud. We've outsourced in a sense that hardware 256 00:15:10,880 --> 00:15:14,160 Speaker 1: security to Amazon and they do a phenomenal job at that. 257 00:15:14,480 --> 00:15:17,480 Speaker 1: But for companies that are still operating traditional data centers, 258 00:15:17,800 --> 00:15:20,320 Speaker 1: it could be a really large and very expensive effort. 259 00:15:20,520 --> 00:15:23,800 Speaker 1: As I mentioned, we know that companies are spending billions 260 00:15:23,800 --> 00:15:27,280 Speaker 1: of dollars on software security, but almost nothing for hardware. 261 00:15:27,600 --> 00:15:31,120 Speaker 1: That's going to need to change quickly. So, just in general, 262 00:15:31,160 --> 00:15:33,920 Speaker 1: from your perspective, how concerned should people be about this 263 00:15:33,960 --> 00:15:37,400 Speaker 1: in a broad level? I mean, I think that the 264 00:15:37,520 --> 00:15:41,080 Speaker 1: at the consumer level, I wouldn't be that concern right now, 265 00:15:41,120 --> 00:15:45,040 Speaker 1: simply because we really don't have specifics of around how 266 00:15:45,120 --> 00:15:48,240 Speaker 1: this may affect a consumer. Now, if I am a 267 00:15:48,280 --> 00:15:52,320 Speaker 1: business owner, if I am protecting very expensive, very sensitive 268 00:15:52,320 --> 00:15:55,640 Speaker 1: intellectual property, if I am a government right we're talking defense. 269 00:15:55,840 --> 00:15:58,720 Speaker 1: I'm very concerned over this, and this is something again 270 00:15:58,720 --> 00:16:01,120 Speaker 1: that's going to require a lot of investment. Again, I 271 00:16:01,160 --> 00:16:03,680 Speaker 1: mentioned that report. This is something that's been around for 272 00:16:03,720 --> 00:16:06,240 Speaker 1: a while. It's not new. It's just the first time 273 00:16:06,280 --> 00:16:09,680 Speaker 1: that this has been brought to such public attention, so 274 00:16:09,760 --> 00:16:11,240 Speaker 1: you know. And the only thing I've mentioned too is 275 00:16:11,360 --> 00:16:13,600 Speaker 1: there's been a lot of academic research on this just 276 00:16:13,640 --> 00:16:16,080 Speaker 1: in the last two years, so the information on how 277 00:16:16,080 --> 00:16:18,320 Speaker 1: to address this is out there. It just seems like 278 00:16:18,520 --> 00:16:21,640 Speaker 1: this may actually be the stimulus to finally get something done. 279 00:16:21,880 --> 00:16:24,360 Speaker 1: Matt ki Audi, thanks very much for being with US 280 00:16:24,480 --> 00:16:39,000 Speaker 1: Vice president chief Information Security officer for Redlock. Tesla has 281 00:16:39,040 --> 00:16:41,920 Speaker 1: been the focus for many who wished to short sell it, 282 00:16:42,000 --> 00:16:45,360 Speaker 1: basically betting on its demise or at least it's swoon, 283 00:16:45,480 --> 00:16:48,000 Speaker 1: and certainly it shares a fall in thirty four percent 284 00:16:48,200 --> 00:16:51,760 Speaker 1: since August seven, so it has been a pretty big swoon. 285 00:16:52,000 --> 00:16:54,640 Speaker 1: But is there more to come here? Molly Smith joining 286 00:16:54,680 --> 00:16:57,880 Speaker 1: US now corporate finance reporter for Bloomberg News Molly, you 287 00:16:57,920 --> 00:17:00,520 Speaker 1: wrote a story that I thought was really important because 288 00:17:00,680 --> 00:17:03,040 Speaker 1: people can talk about the short interest on Tesla, people 289 00:17:03,080 --> 00:17:06,159 Speaker 1: can talk about the business model of Tesla, but really 290 00:17:06,280 --> 00:17:08,520 Speaker 1: what you need to focus on is the debt. Please 291 00:17:08,560 --> 00:17:11,199 Speaker 1: explain why, right, I mean, the debt right now is 292 00:17:11,240 --> 00:17:14,880 Speaker 1: really Tesla's uh, it should be at least their first 293 00:17:14,880 --> 00:17:18,520 Speaker 1: and foremost priority. Right now, everyone's really been looking at 294 00:17:18,560 --> 00:17:22,679 Speaker 1: this million dollar maturity that's coming to in March on 295 00:17:22,720 --> 00:17:27,080 Speaker 1: a convertible bond, and Tesla Elon Musk in particular, has 296 00:17:27,080 --> 00:17:30,520 Speaker 1: said that he plans to repay, not refinance this bond, 297 00:17:30,640 --> 00:17:33,680 Speaker 1: which is pretty strong language, especially given that the company 298 00:17:33,720 --> 00:17:36,879 Speaker 1: had two point two billion dollars of cash as of June, 299 00:17:37,119 --> 00:17:41,120 Speaker 1: so it would, in most analysts and investors opinion, be 300 00:17:41,280 --> 00:17:44,520 Speaker 1: very prudent to do another capital raise or try to 301 00:17:44,760 --> 00:17:49,480 Speaker 1: refinances bond instead of pay it outright. How much debt 302 00:17:49,600 --> 00:17:52,400 Speaker 1: does Tesla have right now at eleven and a half 303 00:17:52,400 --> 00:17:57,000 Speaker 1: billion dollars worth and the likelihood that they would be 304 00:17:57,040 --> 00:18:01,680 Speaker 1: able to raise capital any s demn No, I don't 305 00:18:01,720 --> 00:18:04,400 Speaker 1: think there's any indication right now the capital markets are 306 00:18:04,440 --> 00:18:08,920 Speaker 1: closed to Tesla. The equity valuation is still incredibly strong. 307 00:18:08,960 --> 00:18:12,760 Speaker 1: I mean, thet bllion dollars is still an incredible sum 308 00:18:13,359 --> 00:18:16,400 Speaker 1: regardless of what the debt is trading at. But even 309 00:18:16,400 --> 00:18:18,720 Speaker 1: if you do look at the bonds right now, they're 310 00:18:18,720 --> 00:18:21,280 Speaker 1: trading in line with other triple C rated peers, which 311 00:18:21,320 --> 00:18:24,399 Speaker 1: is what these bonds are rated. They're not showing any 312 00:18:24,560 --> 00:18:28,280 Speaker 1: imminent panic or distress levels. So yes, it would be 313 00:18:28,400 --> 00:18:31,080 Speaker 1: expensive to go that root of an unsecured bond, but 314 00:18:31,440 --> 00:18:35,000 Speaker 1: doing another convertible bond or equity or possibly secured debt, 315 00:18:35,080 --> 00:18:37,959 Speaker 1: those are definitely options that have been raised. So has 316 00:18:38,000 --> 00:18:42,200 Speaker 1: anyone looked at just how much interest they can take on, 317 00:18:42,280 --> 00:18:44,960 Speaker 1: how much how much they can actually afford to pay 318 00:18:45,000 --> 00:18:49,240 Speaker 1: out in interest payments to lure in new investors, given 319 00:18:49,280 --> 00:18:52,320 Speaker 1: the fact that they're burning through cash and they need 320 00:18:52,359 --> 00:18:56,439 Speaker 1: to increase their profitability, their productivity. I mean, they've got 321 00:18:56,440 --> 00:18:58,520 Speaker 1: a lot of needs and wants here and kind of 322 00:18:58,600 --> 00:19:01,439 Speaker 1: does the math work. I haven't seen any numbers that 323 00:19:01,520 --> 00:19:05,480 Speaker 1: actually put out Tesla's interest payment capacity, but that would 324 00:19:05,520 --> 00:19:07,560 Speaker 1: be a really interesting stat to nail down. But that's 325 00:19:07,560 --> 00:19:10,480 Speaker 1: exactly right that there is. There are just so many 326 00:19:10,560 --> 00:19:13,680 Speaker 1: needs that the company has right now, between servicing the debt, 327 00:19:13,720 --> 00:19:17,040 Speaker 1: between funding the operations and are we going to finally 328 00:19:17,040 --> 00:19:19,520 Speaker 1: see positive free cash flow and a profit for the 329 00:19:19,560 --> 00:19:22,280 Speaker 1: first time in this company's fifteen year history. Well, and 330 00:19:22,320 --> 00:19:24,520 Speaker 1: just to put into perspective what we have seen in 331 00:19:24,640 --> 00:19:28,000 Speaker 1: terms of price action on the Tesla bonds maturing in 332 00:19:28,960 --> 00:19:31,000 Speaker 1: they're currently trading at less than eighty four cents in 333 00:19:31,040 --> 00:19:33,679 Speaker 1: the dollar. August of last year, they were trading at 334 00:19:33,720 --> 00:19:35,240 Speaker 1: more than a hundred cents in the dollars. So this 335 00:19:35,280 --> 00:19:37,359 Speaker 1: has been a huge swoon. People are pricing in a 336 00:19:37,440 --> 00:19:40,240 Speaker 1: much bigger risk today, uh than they were a little 337 00:19:40,240 --> 00:19:42,840 Speaker 1: bit more than a year ago, even though in general 338 00:19:43,119 --> 00:19:46,439 Speaker 1: triple c's have actually rallied right right, and at Tesla 339 00:19:46,520 --> 00:19:49,600 Speaker 1: bonds right they were issued at part. They have never 340 00:19:49,720 --> 00:19:52,680 Speaker 1: traded at parts since they were issued. These were fell 341 00:19:52,960 --> 00:19:55,600 Speaker 1: right out of the gates and have been you know, 342 00:19:55,720 --> 00:19:58,439 Speaker 1: I guess, uh whenever there's you know, some kind of 343 00:19:58,480 --> 00:20:01,320 Speaker 1: event that drives the bonds down on maybe a Musk 344 00:20:01,440 --> 00:20:04,960 Speaker 1: tweet or an SEC lawsuit for example, that you've seen 345 00:20:05,000 --> 00:20:07,080 Speaker 1: them go down as low as I think somewhere in 346 00:20:07,080 --> 00:20:09,560 Speaker 1: the two eight three range maybe, but they tend to 347 00:20:09,600 --> 00:20:13,800 Speaker 1: come back into this eight seven level, and that seems 348 00:20:13,800 --> 00:20:16,919 Speaker 1: to be the sweet spot right now, but exactly in 349 00:20:16,960 --> 00:20:19,240 Speaker 1: line with the triple ceas, which, like you said, yeah, 350 00:20:19,240 --> 00:20:21,280 Speaker 1: are the best performing part of the high yield market 351 00:20:21,400 --> 00:20:25,080 Speaker 1: right now. Who owns most of the debt it's not 352 00:20:25,160 --> 00:20:28,399 Speaker 1: institutional hands. I can tell you that every traditional asset 353 00:20:28,480 --> 00:20:30,439 Speaker 1: manager who I've talked to has said they will not 354 00:20:30,560 --> 00:20:33,920 Speaker 1: look at these. They want companies with proven free cash 355 00:20:34,000 --> 00:20:36,840 Speaker 1: flow that they can show ability to service their debt. 356 00:20:37,080 --> 00:20:40,879 Speaker 1: It's mostly short money that's in it. Uh make an 357 00:20:40,920 --> 00:20:45,040 Speaker 1: individual money managers like about Post Group, White Box Advisor 358 00:20:46,160 --> 00:20:50,920 Speaker 1: without naming names. Yeah, alright, so just looking forward, let's 359 00:20:50,960 --> 00:20:53,000 Speaker 1: talk about just how much do they have coming do? 360 00:20:53,720 --> 00:20:57,199 Speaker 1: And you know, has Testla started to have conversations with 361 00:20:57,280 --> 00:21:00,600 Speaker 1: investors about what their potential, uh post abilities are for 362 00:21:00,680 --> 00:21:03,199 Speaker 1: raising additional cash From those that I have talked to, 363 00:21:03,440 --> 00:21:06,560 Speaker 1: it doesn't sound that way, but the company is still 364 00:21:06,600 --> 00:21:09,320 Speaker 1: really maintaining this stance that they're going to be able 365 00:21:09,680 --> 00:21:12,640 Speaker 1: to pay out this bond in March, and there's also 366 00:21:12,680 --> 00:21:17,439 Speaker 1: a maturity do in November on convertible bonds issued by 367 00:21:17,480 --> 00:21:20,360 Speaker 1: Solar City, which these bonds are what we would call 368 00:21:20,440 --> 00:21:23,480 Speaker 1: out of the money, Like there's uh the conversion price 369 00:21:23,520 --> 00:21:25,960 Speaker 1: would be so high for Tesla to be able to 370 00:21:26,000 --> 00:21:29,040 Speaker 1: convert the bonds into stock, that it looks like they 371 00:21:29,040 --> 00:21:31,720 Speaker 1: will have to pay the two million dollars of principle 372 00:21:31,840 --> 00:21:35,280 Speaker 1: outright to holders, just as a quick reality check. Does 373 00:21:35,480 --> 00:21:38,919 Speaker 1: anyone who you speak to believe that Tesla really doesn't 374 00:21:39,040 --> 00:21:46,239 Speaker 1: need to raise additional cash? No? Alright, I mean, but 375 00:21:46,240 --> 00:21:48,680 Speaker 1: then that's telling. I mean basically that that Elon Musk 376 00:21:48,720 --> 00:21:50,879 Speaker 1: is saying we don't need to do it, and not 377 00:21:51,080 --> 00:21:53,920 Speaker 1: one person who has been studying corporate finance for their 378 00:21:53,960 --> 00:21:57,360 Speaker 1: lifetimes believes that that's the case. They will all tell 379 00:21:57,680 --> 00:22:01,480 Speaker 1: Some will tell you definitely. I've definitely heard people say, yes, 380 00:22:01,560 --> 00:22:04,760 Speaker 1: they have the money to pay the maturities to do 381 00:22:04,840 --> 00:22:07,960 Speaker 1: what they say they can do. Is that a wise move? 382 00:22:08,080 --> 00:22:11,480 Speaker 1: Is that what they should be doing? No, everyone will 383 00:22:11,480 --> 00:22:15,280 Speaker 1: tell you no. Well done. Thanks very much for being here. 384 00:22:16,000 --> 00:22:19,399 Speaker 1: Molly Smith our expert for all things related to the 385 00:22:19,440 --> 00:22:22,880 Speaker 1: debt markets and of course talking about Tesla and it's debt, 386 00:22:23,119 --> 00:22:27,600 Speaker 1: and you can follow Molly Smith on Twitter at Molly 387 00:22:27,600 --> 00:22:41,760 Speaker 1: Smith News. Our next guest is Jim Paulson. He is 388 00:22:41,800 --> 00:22:44,840 Speaker 1: the chief investment strategist for the Luthhole Group, helping to 389 00:22:44,880 --> 00:22:49,320 Speaker 1: manage nearly one and a half billion dollars based in Minneapolis. Jim, 390 00:22:49,359 --> 00:22:51,719 Speaker 1: I want you to define a couple of terms for us. 391 00:22:52,040 --> 00:22:56,320 Speaker 1: Let's begin with toggle switch. What's a toggle switch? When 392 00:22:56,400 --> 00:23:00,520 Speaker 1: it comes to Wall Street? Well, damn us to do? 393 00:23:00,960 --> 00:23:03,840 Speaker 1: Um UM. I think people are looking. You know, the 394 00:23:03,920 --> 00:23:09,520 Speaker 1: question everywhere today is what yield level bites stocks? And UM. 395 00:23:09,560 --> 00:23:11,920 Speaker 1: I think people when they look back historically, they go, well, 396 00:23:12,200 --> 00:23:14,600 Speaker 1: let's look back historically. You know, yields had to get 397 00:23:14,600 --> 00:23:17,000 Speaker 1: the five per cent or whatever on the tenure before 398 00:23:17,040 --> 00:23:20,399 Speaker 1: that happens. And I think it's not about a yield level. 399 00:23:21,160 --> 00:23:25,639 Speaker 1: It's about an attitude that develops. And that attitude I 400 00:23:25,680 --> 00:23:30,280 Speaker 1: think is captured by the correlation between stocks and bonds. 401 00:23:31,040 --> 00:23:35,119 Speaker 1: And when the correlation UH is positive between the stock 402 00:23:35,200 --> 00:23:37,480 Speaker 1: market and yields, which it has been most of the 403 00:23:37,520 --> 00:23:40,720 Speaker 1: time in the last twenty years, what that says is 404 00:23:40,760 --> 00:23:43,600 Speaker 1: that good good news comes out and it pushes yields up. 405 00:23:44,320 --> 00:23:47,720 Speaker 1: But because the attitude on Wall Street is mostly concerned 406 00:23:47,760 --> 00:23:51,320 Speaker 1: about weak growth, that's good news for stocks as well. 407 00:23:51,840 --> 00:23:55,840 Speaker 1: It just means we're farther away from recession or depression. Um. 408 00:23:55,880 --> 00:23:59,560 Speaker 1: But occasionally this this correlation is turned negative, that is 409 00:23:59,600 --> 00:24:03,439 Speaker 1: to say that higher yields caused stock market to fall. 410 00:24:03,840 --> 00:24:07,119 Speaker 1: And I think that's because good news becomes bad news 411 00:24:07,160 --> 00:24:10,560 Speaker 1: for stocks. And and it's a shift in the Wall 412 00:24:10,600 --> 00:24:13,960 Speaker 1: Street attitude from worried about we growth to worried about 413 00:24:14,520 --> 00:24:20,400 Speaker 1: overheat uh and inflation conditions. And we just actually, if 414 00:24:20,400 --> 00:24:23,679 Speaker 1: you update this correlation, the fifty two week trailing correlation 415 00:24:23,840 --> 00:24:28,440 Speaker 1: between stock movements and yield movements, that just went negative 416 00:24:28,680 --> 00:24:33,240 Speaker 1: or the toggle switch just went off as it's toggled 417 00:24:33,280 --> 00:24:38,080 Speaker 1: from positive to negative correlation. And in the past when 418 00:24:38,119 --> 00:24:40,480 Speaker 1: this has gone negative, it has not been a good 419 00:24:40,480 --> 00:24:44,200 Speaker 1: sign for the stock market. Alright, So basically taking taking 420 00:24:44,200 --> 00:24:46,440 Speaker 1: a big step back to try to get this sort 421 00:24:46,480 --> 00:24:49,880 Speaker 1: of ten thousand foot picture here. Uh. The Fed another 422 00:24:49,920 --> 00:24:54,320 Speaker 1: central banks suppressed rates across the board, brought down overnight rates, 423 00:24:54,680 --> 00:24:58,359 Speaker 1: purchased bonds to lower longer term rates. They're stepping away 424 00:24:58,359 --> 00:25:00,760 Speaker 1: from that rates rising. We don't have to reach for 425 00:25:00,840 --> 00:25:05,320 Speaker 1: yield anymore, so people are not needing to go into equities. UH. 426 00:25:05,359 --> 00:25:07,399 Speaker 1: And and to risk your corporate that we're seeing some 427 00:25:07,400 --> 00:25:10,439 Speaker 1: pretty big outflows overnight, actually some of the biggest I've 428 00:25:10,480 --> 00:25:12,920 Speaker 1: ever seen. And I'm just trying to understand from from 429 00:25:12,920 --> 00:25:16,480 Speaker 1: your perspective, how bad could this get right and what 430 00:25:16,600 --> 00:25:20,200 Speaker 1: sort of the threshold of yields at which things really 431 00:25:20,200 --> 00:25:23,760 Speaker 1: start to heat up in terms of losses for stocks. Well, 432 00:25:23,760 --> 00:25:25,800 Speaker 1: you know, it's I think it's been building for a 433 00:25:25,800 --> 00:25:29,760 Speaker 1: while UM already, Lisa, in the sense that yields that 434 00:25:29,880 --> 00:25:33,280 Speaker 1: came up earlier this year at the yield rise pause 435 00:25:33,400 --> 00:25:37,600 Speaker 1: for a while, but eventually you kind of saw defensive stocks. 436 00:25:37,600 --> 00:25:40,159 Speaker 1: A lot of those stocks. Utility stocks have been have 437 00:25:40,240 --> 00:25:44,520 Speaker 1: been matching the market, for example since January of this year, 438 00:25:45,280 --> 00:25:49,119 Speaker 1: and uh staple stocks have been matching since April. You know, 439 00:25:49,600 --> 00:25:53,440 Speaker 1: you're seeing a similar type of matching with the SMP 440 00:25:53,600 --> 00:25:57,399 Speaker 1: dividend aristocrats and with low valve the SMP Lovaland my 441 00:25:57,480 --> 00:26:01,040 Speaker 1: point is is that even the stopped going up for 442 00:26:01,080 --> 00:26:04,560 Speaker 1: a while, defensive stocks started to help perform the leadership 443 00:26:04,760 --> 00:26:07,720 Speaker 1: of the market for the last few years, technology started 444 00:26:07,760 --> 00:26:11,199 Speaker 1: to underperform, and so a lot of this has already 445 00:26:11,200 --> 00:26:15,200 Speaker 1: been building. You look at the narrowing of the market, 446 00:26:15,680 --> 00:26:18,800 Speaker 1: the equally weighted SMP has been falling relative to the 447 00:26:18,840 --> 00:26:22,680 Speaker 1: market cap. For example, small cap stocks have started to 448 00:26:22,720 --> 00:26:27,320 Speaker 1: underperform UM. So I I think it wouldn't take a 449 00:26:27,359 --> 00:26:30,520 Speaker 1: lot more for this too turn into more of not 450 00:26:30,640 --> 00:26:34,440 Speaker 1: just to sell off, but a panic to some degree. 451 00:26:34,960 --> 00:26:37,840 Speaker 1: I don't really see the conditions for a recession or 452 00:26:37,880 --> 00:26:42,479 Speaker 1: bear market, but I certainly do see rising conditions for 453 00:26:42,800 --> 00:26:46,600 Speaker 1: a really healthy correction that scares a lot of players. 454 00:26:47,200 --> 00:26:50,600 Speaker 1: Jim Paulson, Just to your point about the utilities, the 455 00:26:50,720 --> 00:26:54,760 Speaker 1: Dow Utility Index has gained thirteen and a half percent 456 00:26:55,280 --> 00:27:01,800 Speaker 1: since mid June. Is this because investor sentiment has changed 457 00:27:01,920 --> 00:27:07,040 Speaker 1: or is there something underlying the actual corporate fundamentals that 458 00:27:07,080 --> 00:27:11,040 Speaker 1: has changed well? Or might be both? Yeah, it might be. 459 00:27:11,600 --> 00:27:14,199 Speaker 1: I think it is maybe a little both, but I 460 00:27:14,240 --> 00:27:17,680 Speaker 1: do think it. Uh, It's very interesting that in the 461 00:27:17,800 --> 00:27:20,640 Speaker 1: year where the economy by all accounts has been better 462 00:27:20,640 --> 00:27:22,679 Speaker 1: than it's ever been in this recovery, and that people 463 00:27:22,720 --> 00:27:26,760 Speaker 1: feel very excited about conditions on main Street and super 464 00:27:26,800 --> 00:27:30,320 Speaker 1: excited about profits, that in the last you know, six 465 00:27:30,359 --> 00:27:33,800 Speaker 1: months or more, and and particularly this last move to 466 00:27:33,880 --> 00:27:35,800 Speaker 1: a new high we just did in the last couple 467 00:27:35,840 --> 00:27:39,760 Speaker 1: of months was led by defensive stocks. Now what is 468 00:27:39,800 --> 00:27:43,840 Speaker 1: that saying? What when defensive stocks start to outperform in 469 00:27:43,880 --> 00:27:48,640 Speaker 1: a good economy, when financial is no longer outperformed? Uh, 470 00:27:48,680 --> 00:27:52,440 Speaker 1: in a in a good economy. When raw industrial commodity 471 00:27:52,440 --> 00:27:56,760 Speaker 1: prices have a ten fall since June, what's the message 472 00:27:56,760 --> 00:27:59,000 Speaker 1: of that. I think it's a message that weaker growth 473 00:27:59,119 --> 00:28:01,840 Speaker 1: is coming on mas read in the stock markets already 474 00:28:01,840 --> 00:28:03,960 Speaker 1: starting to pick it up. Jim Paulson, thank you so 475 00:28:04,040 --> 00:28:06,720 Speaker 1: much for being with us. Jim Paulson, Chief Investment Strategies 476 00:28:06,800 --> 00:28:12,320 Speaker 1: at the Luthhold Group. Thanks for listening to the Bloomberg 477 00:28:12,359 --> 00:28:15,040 Speaker 1: P and L podcast. You can subscribe and listen to 478 00:28:15,040 --> 00:28:19,600 Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. 479 00:28:20,000 --> 00:28:23,560 Speaker 1: I'm Pim Fox. I'm on Twitter at Pim Fox. I'm 480 00:28:23,600 --> 00:28:26,879 Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast. 481 00:28:26,920 --> 00:28:29,520 Speaker 1: You can always catch us worldwide on Bloomberg Radio.