WEBVTT - Commodities, Instacart, 3M, and Hawaiian Electric (Podcast) 0:00:00.840 --> 0:00:04.000 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside 0:00:04.040 --> 0:00:05.240 my co host Matt Miller. 0:00:05.640 --> 0:00:09.600 Every business day, we bring you interviews from CEOs, market pros, 0:00:09.720 --> 0:00:13.640 and Bloomberg experts, along with essential market moven news. 0:00:14.160 --> 0:00:17.279 Find the Bloomberg Markets Podcast on Apple Podcasts or wherever 0:00:17.400 --> 0:00:20.520 you listen to podcasts, and at Bloomberg dot com slash podcast. 0:00:20.880 --> 0:00:23.079 All right, I'm reading speaking of Bloomberg Intelligence, I'm reading 0:00:23.120 --> 0:00:26.480 some research here. It says most commodities are melting except 0:00:26.480 --> 0:00:29.760 for gold. What stops it? Let's go right to the 0:00:29.960 --> 0:00:32.920 person who wrote this stuff. Mike mcclooney covers all the 0:00:32.960 --> 0:00:36.400 commodity stuff. He's a senior macro strategist for Bloomberg Intelligence. Mike, 0:00:36.760 --> 0:00:38.720 what are you thinking about these days in terms of 0:00:38.720 --> 0:00:40.640 the commodity space? What are you telling your clients? What 0:00:40.680 --> 0:00:43.760 are the conversations you're having with your clients about commodities? 0:00:44.360 --> 0:00:47.000 Well, hello, Paul, I appreciate you reading that headline because 0:00:47.000 --> 0:00:50.519 it's something I like to re iterate periodically, particularly when 0:00:50.520 --> 0:00:54.600 it's relevant. Is typically historically over time, gold is the 0:00:54.640 --> 0:00:57.520 best performing commodity now, basically because it's not really a commodity. 0:00:57.600 --> 0:01:01.000 It's it's a store of value. It's a metal. I mean, 0:01:01.080 --> 0:01:03.160 you can store it on your body in terms of jewelry. 0:01:03.200 --> 0:01:06.200 But certainly lately it's been the key case. It's the 0:01:06.200 --> 0:01:08.480 best performing command this year. It's up ten percent, and 0:01:08.480 --> 0:01:10.840 the average, the Bloomberg Commodi Index this year is down 0:01:11.160 --> 0:01:13.280 sixteen percent. And the key thing I like to ask 0:01:13.360 --> 0:01:18.080 myself is those are bodies in motion. And as a strategist, 0:01:18.120 --> 0:01:20.119 I say, okay, is it going to stay the same 0:01:20.400 --> 0:01:23.720 reverse or accelerate. I think it's more likely accelerate, particularly 0:01:23.760 --> 0:01:26.119 at some point if we get to a point where 0:01:26.160 --> 0:01:29.640 the FED pivots, it's going to happen. But that's the 0:01:29.680 --> 0:01:33.000 bottom line is we had this massive pump and commandis 0:01:33.040 --> 0:01:35.360 last year and they're proving what they always do. Elastic 0:01:35.680 --> 0:01:39.679 supply demand makes commandies their worst enemy. It's the higher 0:01:39.680 --> 0:01:43.400 priced cure. As a farmers say, well, that's. 0:01:43.200 --> 0:01:46.840 Interesting, though, I feel like we're a far bit away 0:01:46.959 --> 0:01:49.320 at least if you listen to J Powell on Friday 0:01:49.360 --> 0:01:53.160 from when we see the FED reverse course, I mean, 0:01:53.400 --> 0:01:57.000 talk me through the timeline there. When would you expect 0:01:57.480 --> 0:02:00.480 goal to start showing some outporfore? I mean, I guess 0:02:00.480 --> 0:02:01.440 it is showing out performance. 0:02:01.520 --> 0:02:04.600 Right, that's the point. Goal's looking ahead, and that's a 0:02:04.680 --> 0:02:08.079 key point. They will probably not be cutting rates anytime soon, 0:02:08.200 --> 0:02:10.880 particularly in my view, until the stock market tells them to. 0:02:11.560 --> 0:02:13.880 And that's part of the lose lose for risk ads. 0:02:14.320 --> 0:02:17.480 There's then a high high connection and correlation between stock 0:02:17.520 --> 0:02:20.400 market bouncing this year, all this massive fiscal stimus and 0:02:20.440 --> 0:02:23.280 the FED hiking another one hundred basis points. They are 0:02:23.320 --> 0:02:25.920 still on that hiking trajectory. Despite then you look over 0:02:25.919 --> 0:02:28.520 a commodities, what's the number one source of demand historically 0:02:28.520 --> 0:02:30.440 at least the last twenty years or so, is China 0:02:30.960 --> 0:02:34.880 demand estimate revisions heading lower in China are just getting started, 0:02:35.240 --> 0:02:39.640 so their key customers, their key export customers Europe, US 0:02:39.639 --> 0:02:42.600 and Europe are in these early days of just getting 0:02:42.639 --> 0:02:46.320 showing signs of what you expect from high interest rates jumping. 0:02:46.639 --> 0:02:48.959 And then of course the leader of China, President z 0:02:49.160 --> 0:02:51.560 cozing up with Putin right before the war, so we 0:02:51.639 --> 0:02:55.640 see that tilt just get us out, and so that 0:02:55.720 --> 0:02:57.600 to me is this is early days. So I look 0:02:57.639 --> 0:03:00.840 at this is what's normally is potentially a very bear 0:03:01.040 --> 0:03:03.440 scenario for commodities, and you look at yourself so what's 0:03:03.440 --> 0:03:05.840 going to change is typically also you need a week dollar, 0:03:06.040 --> 0:03:07.720 and for the dollar to get week, we have a 0:03:07.760 --> 0:03:11.280 major issue there. It's the hardest, you know, most expensive 0:03:11.280 --> 0:03:14.239 to short commodity currency in the planet, particularly if you 0:03:14.320 --> 0:03:19.720 look very compared versus the top top top commodities and 0:03:20.000 --> 0:03:24.600 I'm sorry economies in the planet China, Japan, and Germany, 0:03:24.840 --> 0:03:26.920 US is just a much higher rate. So that to 0:03:26.960 --> 0:03:29.480 me is basically a train wreck heading for commodities and 0:03:29.560 --> 0:03:30.280 for deflation. 0:03:31.360 --> 0:03:32.960 So, Mike, I know you come from the land of 0:03:32.960 --> 0:03:36.040 the great American farmer. I wonder how the American farmers 0:03:36.080 --> 0:03:38.080 doing here. I'm looking at corn down thirty percent year 0:03:38.120 --> 0:03:41.040 to date, soybeans down eight percent year to date, wheat 0:03:41.160 --> 0:03:44.040 down twenty six percent year to date. How is the 0:03:44.040 --> 0:03:45.080 farmer doing these days? 0:03:45.600 --> 0:03:48.839 They are crushing it, so it will price us down 0:03:48.920 --> 0:03:51.480 so much, oh well down from where they were. So 0:03:51.600 --> 0:03:54.400 corn right now the number one, as I'm going back 0:03:54.440 --> 0:03:56.920 next to next week and lesson I learned going and 0:03:57.000 --> 0:03:58.880 raised and having owned the farm in the corn belt, 0:03:59.160 --> 0:04:01.480 we plant soybe so we can plant corn. We plant 0:04:01.480 --> 0:04:02.880 corn because that's what we do and that's where we 0:04:02.880 --> 0:04:08.520 make our Money's world's most significant commoditybeans the plant corn 0:04:08.640 --> 0:04:12.240 that fit. It's a rotation because soybeans add nitrogen and 0:04:12.280 --> 0:04:17.520 fertilizer to the soil and they're a legome. Corn takes 0:04:17.560 --> 0:04:19.880 it away. It's very nitro and expensive. It's a grass. 0:04:20.040 --> 0:04:22.880 It's just that rotation that the corn belt has crushed. 0:04:23.080 --> 0:04:25.240 But the bottom line is, partly because of this war 0:04:25.279 --> 0:04:27.560 in Europe, you've had prices well above their cost of 0:04:27.600 --> 0:04:31.239 productions and the cost of costs of production. For instance, 0:04:31.279 --> 0:04:34.840 anhydrous ammonia is collapsing, and so we're making a lot 0:04:34.880 --> 0:04:36.960 of money. It's just called profits. What a profits mean 0:04:37.000 --> 0:04:39.600 for farmers production. So this year is probably gonna be 0:04:39.640 --> 0:04:42.520 close to the biggest production year ever for corn, just 0:04:42.640 --> 0:04:44.800 in the weather is not so great. And also what 0:04:45.400 --> 0:04:47.839 did they do with corn and soybeans in Argentina and 0:04:47.920 --> 0:04:50.320 I'm sorry in South America, but most noted in Brazil 0:04:50.800 --> 0:04:53.680 record production I mean off the charts. So this is 0:04:53.760 --> 0:04:57.040 just a normal lasticity of supplying demand in the area 0:04:57.080 --> 0:04:59.920 of the commodites. We can bring on that supplying one 0:05:00.080 --> 0:05:02.000 year and the bottom line is are making a lot 0:05:02.040 --> 0:05:05.560 of money, and that means more supply, more production, and 0:05:05.640 --> 0:05:07.919 it means typically lower prices. But I'll just end with this. 0:05:08.000 --> 0:05:10.800 September is the worst monthly year for grains, typically buys 0:05:10.800 --> 0:05:13.360 a harvest, and that's how futures came about because it 0:05:13.440 --> 0:05:15.920 needed to start hedging, most knownly when they all try 0:05:15.920 --> 0:05:17.000 to sell at the same time. 0:05:18.160 --> 0:05:20.120 And I've been looking at it. I've been I've been 0:05:20.200 --> 0:05:24.120 pulling out, pulling back a little bit our our commodity 0:05:24.160 --> 0:05:27.200 price for corn, and we're levels where we were in 0:05:27.279 --> 0:05:30.360 late twenty twenty, but those are substantially higher than where 0:05:30.360 --> 0:05:36.840 we were in previous to that. Talk me through, Mike's 0:05:36.880 --> 0:05:40.800 what's happening in wheat, because you know we have all 0:05:40.800 --> 0:05:44.000 this stuff with a grain deal in Turkey. Very interesting 0:05:44.000 --> 0:05:45.440 to see where you think this is going. 0:05:45.560 --> 0:05:49.480 Also, so the significance of wheat is that was at 0:05:49.520 --> 0:05:54.680 the epicenter of what happened with Russia's I'm sorry, President 0:05:54.760 --> 0:05:58.200 Putin's invasion of Ukraine. But it's been in a straight 0:05:58.240 --> 0:06:01.560 downward trajectory since reaching that high last year, right around 0:06:01.640 --> 0:06:04.599 thirteen dollars a bushel. But typically what we does now 0:06:04.640 --> 0:06:06.120 it's back to a level that was kind of en 0:06:06.200 --> 0:06:08.839 during before. Because what happens is you can bring on 0:06:08.920 --> 0:06:13.120 rate supply rapidly, and it's the most widely grown agricultural 0:06:13.200 --> 0:06:17.360 crop on almost every country will can grow wheat. Now, 0:06:17.440 --> 0:06:21.200 Ukraine was a big exporter US we explored over fifty 0:06:21.240 --> 0:06:22.839 five percent of our week. We grow less of it 0:06:22.880 --> 0:06:24.760 every day because it's so much easier to produce. It's 0:06:24.800 --> 0:06:28.560 basically considered a weed, and it's one commodity you never 0:06:28.600 --> 0:06:30.839 want to be long after it goes up. It's just 0:06:30.880 --> 0:06:32.599 the way it works because you're bringing on so we 0:06:32.640 --> 0:06:34.560 it's been a good indicator. Right now it's around six 0:06:34.640 --> 0:06:36.960 dollars a bushel, and I view it's all going to 0:06:37.080 --> 0:06:39.479 continue to trend lower unless we get some kind of 0:06:39.560 --> 0:06:43.000 surprise out of that war, which means hopefully not but 0:06:43.120 --> 0:06:45.560 something nuclear could do. But there's this is a situation 0:06:45.640 --> 0:06:47.800 similar to World War two for the grain, for the 0:06:47.839 --> 0:06:50.520 grain belt, corn belt which where I'm from, and that 0:06:50.640 --> 0:06:54.640 is prices and the war in Europe kept prices rather high, 0:06:54.760 --> 0:06:57.480 which meant US did very well, created more and more 0:06:57.520 --> 0:07:00.120 production and profited, and then it all collapsed when the 0:07:00.200 --> 0:07:02.160 war ended and we had way too much supply. That 0:07:02.320 --> 0:07:04.760 is the risk, and that's markets are looking ahead to. 0:07:04.720 --> 0:07:06.560 That so real quick. 0:07:07.000 --> 0:07:09.279 WTI crude oil going to switch gears here eighty dollars 0:07:09.360 --> 0:07:11.000 or barrel seems to found a little bit of a 0:07:11.040 --> 0:07:11.840 home here for a while. 0:07:12.600 --> 0:07:15.680 Yes, it's happy, it's consolidating. Well, it's the same prices. 0:07:15.920 --> 0:07:17.840 I'll put this back into history. This price here was 0:07:17.880 --> 0:07:20.960 first traded in two thousand and seven. Imagine we said 0:07:21.000 --> 0:07:23.960 that about the stock market. Yet over that time period 0:07:24.000 --> 0:07:26.720 the PPIs of fifty percent. In terms of gold, here's 0:07:26.760 --> 0:07:29.240 one for you. It takes point zero four to two 0:07:29.320 --> 0:07:32.720 ounces of gold to buy one barrel of cruel. That's 0:07:32.760 --> 0:07:34.920 the same price as nineteen thirty one. Cruel is the 0:07:34.920 --> 0:07:37.640 world's most auto correlated acid and has a lot of 0:07:37.640 --> 0:07:41.080 reason to continue trade lower after that big pump last year. 0:07:41.320 --> 0:07:43.680 Fifteen percent of all sales of evs and the world 0:07:44.680 --> 0:07:47.880 our automobiles are evs. And then course that supply out 0:07:47.880 --> 0:07:51.000 of the US. The biggest thing that's pressured crude all 0:07:51.040 --> 0:07:53.920 the last at least almost fifteen years is the US. 0:07:53.920 --> 0:07:56.280 We just create much more than we need, and with 0:07:56.400 --> 0:07:59.360 Canada are surplus every day. It's about four million barrels 0:07:59.360 --> 0:08:01.360 a day of lick with fuels. So we can spell 0:08:01.400 --> 0:08:03.920 up the spr that's cheating Pasolium reserve in just a 0:08:03.960 --> 0:08:04.600 few months. 0:08:04.600 --> 0:08:08.280 Interesting, all right, Mike always learned something with you. You put 0:08:08.320 --> 0:08:10.680 in soybeans the ducorn I learned that at That's new 0:08:10.760 --> 0:08:15.160 Mike mcglohone's senior macro strategist and Bloomberg's resident a farmer 0:08:15.480 --> 0:08:16.560 for Bloomberg Intelligence. 0:08:17.600 --> 0:08:20.960 You're listening to the team Ken's are Live program Bloomberg 0:08:21.080 --> 0:08:24.440 Markets weekdays at ten am Eastern on Bloomberg dot Com, 0:08:24.520 --> 0:08:27.640 the iHeartRadio app and the Bloomberg Business App, or listen 0:08:27.720 --> 0:08:29.960 on demand wherever you get your podcasts. 0:08:31.560 --> 0:08:33.120 The I field market looks like it might be heating 0:08:33.160 --> 0:08:34.880 up a little bit. Had a couple of filings late 0:08:34.960 --> 0:08:38.520 last week arm Holdings, the chip maker, and then the 0:08:38.520 --> 0:08:40.560 grocery delivery company Instacart. 0:08:40.600 --> 0:08:42.240 So we want to talk about that deal. 0:08:42.800 --> 0:08:45.920 Brian Lynch joints as she's head of market insight at 0:08:45.920 --> 0:08:48.679 Equity Zen. She joins us here, so brand talked to 0:08:48.760 --> 0:08:51.480 us about Instacart here. What do we learn from their 0:08:51.960 --> 0:08:54.200 IPO filing last week? 0:08:55.440 --> 0:08:58.800 Yeah, thanks for having me. I think Instacart really painted 0:08:58.800 --> 0:09:02.319 a picture in that file of what companies are going 0:09:02.360 --> 0:09:04.840 to need to show if they want to have potentially 0:09:04.880 --> 0:09:08.920 a successful IPO. So this is a company that is growing. 0:09:09.000 --> 0:09:12.280 They grew transaction revenue thirty nine percent year over year. 0:09:12.640 --> 0:09:17.040 They're profitable with fifteen percent operating margins, which a lot 0:09:17.080 --> 0:09:20.400 of other players in the gig economy space that are public, 0:09:20.559 --> 0:09:23.160 like uber lyft Dash, you know, they all are not 0:09:23.360 --> 0:09:27.480 presenting profitability yet. And this is both a brand that 0:09:27.520 --> 0:09:30.120 people recognize and a business model that people know, so 0:09:30.240 --> 0:09:33.000 definitely a strong one that could potentially open up the 0:09:33.080 --> 0:09:34.560 IPO market for others. 0:09:35.080 --> 0:09:35.320 Well. 0:09:35.440 --> 0:09:38.400 The interesting bit as well to me, and we were 0:09:38.440 --> 0:09:42.600 talking with this about this with our equity reporter Bailey 0:09:42.640 --> 0:09:47.480 Lipshits earlier, is that this company had been valued much 0:09:47.679 --> 0:09:51.079 much higher as of twenty twenty one, I believe thirty 0:09:51.160 --> 0:09:54.920 nine billion dollars according to pitchbook, And now you know 0:09:55.240 --> 0:09:59.400 the valuation here is going to be maybe seventy percent less. 0:10:00.760 --> 0:10:03.800 Talk to me about how investors can I get comfortable 0:10:03.920 --> 0:10:07.319 allowing this company or going along with the company's plans 0:10:07.400 --> 0:10:11.520 to ibo here. How does this change the dialogue between 0:10:11.520 --> 0:10:13.119 the company and its existing investors. 0:10:14.120 --> 0:10:20.280 Sure so, Instacart has already been priming its investors about this. 0:10:20.480 --> 0:10:23.079 So while they did raise that thirty nine billion dollar 0:10:23.200 --> 0:10:27.960 round in twenty twenty one, their internal valuations have gone 0:10:28.000 --> 0:10:31.520 as low as ten billion dollars now closer to thirteen billion. 0:10:31.840 --> 0:10:34.800 So this is for the equity that they're issuing to 0:10:34.880 --> 0:10:37.840 new employees or you know, new stock grants. That's the 0:10:37.920 --> 0:10:42.400 valuation that they've given themselves. So internally at least they've 0:10:42.480 --> 0:10:46.160 accepted that haircut, and I think that's ultimately the tough 0:10:46.240 --> 0:10:49.080 pill that a lot of these venture backed companies are 0:10:49.200 --> 0:10:52.640 going to have to swallow. As we raised money at 0:10:52.800 --> 0:10:55.560 a crazy valuation in twenty twenty one, it's not where 0:10:55.559 --> 0:10:58.320 the market is anymore. And if we're going to raise 0:10:58.360 --> 0:11:01.360 capital and either the private or public markets, it's most 0:11:01.480 --> 0:11:04.520 likely going to be at a discount. And I think 0:11:04.600 --> 0:11:07.640 investors understand that as well, just given where multiples are. 0:11:08.240 --> 0:11:10.680 With a case of instacart, you have Dash as a 0:11:10.679 --> 0:11:15.319 public market competitor. That's a pretty good comp that helps 0:11:15.360 --> 0:11:16.760 from a valuation perspective. 0:11:17.320 --> 0:11:20.679 So speaking of DoorDash brand, I mean this has become 0:11:20.720 --> 0:11:23.760 a crowded space really since the pandemic, as this market's 0:11:23.760 --> 0:11:28.160 really developed and evolved. Where does instacart kind of position 0:11:28.240 --> 0:11:31.440 itself in terms of its competition, whether it is DoorDash 0:11:31.520 --> 0:11:34.040 or Uber Eats or Amazon and all the type of thing. 0:11:35.080 --> 0:11:39.120 Yeah, so they're by far the market leader. Both uber 0:11:39.200 --> 0:11:43.040 and DoorDash have less than one percent of the grocery market, 0:11:43.120 --> 0:11:47.520 and it's a market that they're aggressively pursuing, but they 0:11:47.600 --> 0:11:50.600 still are not big players in it. When you look 0:11:50.640 --> 0:11:55.400 at all of the grocery players, instackcart has partnerships with 0:11:55.440 --> 0:11:58.080 over eighty five percent of them, and this is a 0:11:58.160 --> 0:12:02.480 one point one trillion dollar market. Largest retail market is grocery, 0:12:02.800 --> 0:12:05.920 so it's a huge market where they are already the leaders. 0:12:05.960 --> 0:12:08.959 So there is a lot of competition, but they are 0:12:09.080 --> 0:12:11.600 one foot ahead. But to your point, it's not just 0:12:11.679 --> 0:12:17.000 these other kind of gig economy players they're up against. 0:12:17.000 --> 0:12:20.880 They're up against Amazon Fresh, They're up against Walmart, Grocery 0:12:21.320 --> 0:12:24.520 and other players that you have a lot more resources 0:12:24.559 --> 0:12:26.959 just from being bigger companies. So there is a lot 0:12:26.960 --> 0:12:27.680 of competition. 0:12:28.720 --> 0:12:33.360 Yeah, does that competition scare would be investors in this 0:12:34.320 --> 0:12:36.920 space at all? Because you know, you think of Amazon 0:12:36.960 --> 0:12:39.800 coming into any space and it's just sort of you know, 0:12:39.880 --> 0:12:42.920 that has the potential to be transformative, even if they've 0:12:42.960 --> 0:12:46.280 struggled a little bit with their with expanding their grocery footprint. 0:12:47.720 --> 0:12:51.320 Yeah, so they got a strong vote of confidence by Pepsi, 0:12:51.400 --> 0:12:54.280 who's investing one hundred and seventy five million in this 0:12:54.400 --> 0:12:59.320 IPO and a lot of the thesis or you know, 0:12:59.400 --> 0:13:02.800 the bulk that they see is around the advertising piece 0:13:02.840 --> 0:13:06.600 of instacarts business. So about thirty percent of their revenue 0:13:06.720 --> 0:13:11.080 comes from advertising. So when they highlight different products you know, 0:13:11.160 --> 0:13:15.280 on their marketplace to users, and this actually helps diversify 0:13:15.400 --> 0:13:18.160 their revenue stream in ways that you know, some of 0:13:18.200 --> 0:13:21.880 these other players haven't done yet. And it's also the 0:13:21.920 --> 0:13:24.800 piece of their business that is driving their profitability. So 0:13:25.280 --> 0:13:28.760 that's kind of a unique or you know, a strong 0:13:28.840 --> 0:13:31.960 point that they have now that investors have found compelling. 0:13:32.800 --> 0:13:35.000 Growth has slowed a little bit for this company. Is 0:13:35.200 --> 0:13:39.480 that just a post pandemic kind of evening out of 0:13:39.480 --> 0:13:42.320 this marketplace in terms of number of subscribers in terms 0:13:42.320 --> 0:13:43.679 of that metric. 0:13:43.960 --> 0:13:48.600 Yeah, in terms of I would say they haven't saturated 0:13:48.600 --> 0:13:52.480 the market fully, but you know, they did see such 0:13:52.640 --> 0:13:56.800 growth during the pandemic that it's probably more about activation. 0:13:57.000 --> 0:14:01.520 So of these customers you have who have used instacart, 0:14:01.800 --> 0:14:04.280 how do you get people, you know, more captive on 0:14:04.480 --> 0:14:09.320 the platform. They haven't admitted and understand that it's not 0:14:09.360 --> 0:14:13.319 going to be onlinely for every customer. People will still 0:14:13.360 --> 0:14:15.560 be going to stores. So it's more about you know, 0:14:15.720 --> 0:14:19.560 activating those customers and then just improving their margins. You know, 0:14:19.800 --> 0:14:23.760 amongst those who are transacting, so they have grown revenue, 0:14:23.800 --> 0:14:27.720 They've grown grown average cart size over the same period, 0:14:27.800 --> 0:14:30.600 So even if their customer base isn't growing, you know, 0:14:30.640 --> 0:14:31.680 their revenue is growing. 0:14:33.320 --> 0:14:39.400 We saw as well, filing by ARM for its megalistic 0:14:41.640 --> 0:14:45.880 I believe it was a filing, but we uh, what 0:14:46.040 --> 0:14:48.200 threads are there here for you that you're starting to 0:14:48.240 --> 0:14:51.640 see evolve in the the IPO space, because I think 0:14:51.640 --> 0:14:53.360 there was a bit, a fair bit of hesitancy for 0:14:53.400 --> 0:14:56.920 a while, just given what had happened to IPOs in 0:14:57.040 --> 0:15:01.360 twenty twenty one, and now maybe we were turning around. 0:15:02.680 --> 0:15:05.880 It looks like we're starting to turn around. This year 0:15:05.920 --> 0:15:09.080 has been the worst year for IPOs since two thousand 0:15:09.080 --> 0:15:12.240 and nine. We really haven't seen that many blockbuster names 0:15:12.320 --> 0:15:16.680 hit the market, and Instacart and ARM those will be 0:15:16.720 --> 0:15:19.720 the largest IPOs in the US since Rivian in twenty 0:15:19.760 --> 0:15:25.880 twenty one, So definitely starting to signify this turning tide, 0:15:26.400 --> 0:15:31.320 and ultimately you have over fourteen hundred unicorn tech companies 0:15:31.800 --> 0:15:34.800 sitting in the private markets, many of who have been 0:15:34.840 --> 0:15:38.840 waiting for the right opportunity to have an exit. Their 0:15:38.840 --> 0:15:42.160 investors are ready for an exit. Their employees who maybe 0:15:42.200 --> 0:15:45.040 have got in some liquidity but are looking for you know, 0:15:45.120 --> 0:15:48.320 broader liquidity, are looking for an exit. And I think 0:15:48.360 --> 0:15:51.200 the fact that you know, while there's been some recent 0:15:51.280 --> 0:15:56.000 market volatility, you have the nastac up thirty percent, You've 0:15:56.040 --> 0:16:00.240 seen a few successful IPOs though not tech ipo is 0:16:00.280 --> 0:16:04.880 like Kava oddity and can you hit the market. People 0:16:04.920 --> 0:16:07.360 are feeling a little bit more comfortable, like this may 0:16:07.360 --> 0:16:09.600 be the time if they're looking to exit this year. 0:16:09.960 --> 0:16:12.440 I think for a lot of investers, I think for me, 0:16:12.560 --> 0:16:14.280 the thing that jumped out of me is, as Simone 0:16:14.400 --> 0:16:18.800 was mentioning earlier, the dramatic reduction in valuation. I think 0:16:18.840 --> 0:16:21.080 that's kind of been kind of a gating issue for 0:16:21.080 --> 0:16:23.760 a lot of these companies not tapping the public markets 0:16:23.760 --> 0:16:27.040 because they didn't want to take that big write down 0:16:27.080 --> 0:16:30.840 on valuation. Is the expectation that maybe Instacartal maybe opened 0:16:30.840 --> 0:16:33.400 the way for more companies to kind of bite the 0:16:33.400 --> 0:16:34.120 bullet if you will. 0:16:35.800 --> 0:16:40.440 Absolutely, I think Instacart doing this and kind of taking 0:16:40.480 --> 0:16:43.000 it on the chin is going to open the door 0:16:43.120 --> 0:16:49.080 for others who realize it will become less taboo. Essentially, as 0:16:49.280 --> 0:16:54.640 more companies accept these valuation right downs, it becomes less 0:16:54.640 --> 0:16:58.480 of you know, a negative and just more reflection of 0:16:58.520 --> 0:17:01.520 how multiples have cracked. So I do think that they 0:17:01.560 --> 0:17:04.920 will make it easier for other companies doing this as well. 0:17:04.960 --> 0:17:08.600 You know, Klavio is another company, a marketing automation platform 0:17:08.840 --> 0:17:11.159 that also filed their S one on Friday. Got a 0:17:11.200 --> 0:17:13.840 little lost in the Instacart news, but this is a 0:17:13.880 --> 0:17:16.080 company that raised at a nine and a half billion 0:17:16.080 --> 0:17:19.119 dollar valuation twenty twenty one, so they are likely to 0:17:19.160 --> 0:17:21.760 be one that is you know, trading down from those 0:17:21.840 --> 0:17:24.200 levels as well. So it's just kind of a reality 0:17:24.200 --> 0:17:25.440 for where we are in the market. 0:17:25.760 --> 0:17:27.560 All right, Brian, thanks so much for joining us. I 0:17:27.560 --> 0:17:30.080 really appreciate getting your thoughts there. We're getting some IPO 0:17:30.119 --> 0:17:32.680 filing starting to hit the tape. Maybe get a little 0:17:32.680 --> 0:17:35.560 bit of a action in the fall here with the 0:17:35.600 --> 0:17:38.920 IPO market Brand Lynch, head of market insight at Equity 0:17:39.240 --> 0:17:41.520 Zen and again, you like to think maybe we're going 0:17:41.520 --> 0:17:43.880 get a little bit of deal activity once everybody comes 0:17:43.920 --> 0:17:44.840 back from the summer. 0:17:45.480 --> 0:17:49.919 Yeah, i mean busy Friday, even though even though Klavio 0:17:50.000 --> 0:17:52.560 is not quite as large a company and likely will 0:17:52.560 --> 0:17:55.239 not be quite as large a company when Instacart. 0:17:54.800 --> 0:17:57.240 Yeah, Instacart, you know, it's going to be a pretty 0:17:57.280 --> 0:17:59.960 big transaction. We're going to have all the big investment banks. 0:18:00.040 --> 0:18:03.439 So this deal is being led by Goldman Sachs, so 0:18:03.480 --> 0:18:05.679 it'll be certainly a deal that people will pay attention to. 0:18:05.760 --> 0:18:07.880 And there are some comps out there, as brand was mentioning, 0:18:07.960 --> 0:18:09.119 so see how that plays out. 0:18:09.400 --> 0:18:12.520 You're listening to the tape cans are live program Bloomberg 0:18:12.560 --> 0:18:16.159 Markets weekdays at ten am Eastern on Bloomberg Radio, the 0:18:16.240 --> 0:18:18.160 tune in app, Bloomberg dot Com, and. 0:18:18.119 --> 0:18:19.440 The Bloomberg Business App. 0:18:19.480 --> 0:18:22.320 You can also listen live on Amazon Alexa from our 0:18:22.320 --> 0:18:27.440 flagship New York station. Just say Alexa play Bloomberg eleven thirty. 0:18:27.920 --> 0:18:28.359 I'm looking. 0:18:28.440 --> 0:18:30.320 I mean, we're talking about Vinfest. You know what a 0:18:30.359 --> 0:18:34.040 crazy name that is. Story that is the exact opposite, 0:18:34.119 --> 0:18:38.840 might be Minnesota mining and manufacturing three m. You're talking 0:18:39.240 --> 0:18:42.480 industrial heartland, been around forever. I'm looking at this stock 0:18:42.880 --> 0:18:46.399 over the last five years, it's down ten percent on 0:18:46.440 --> 0:18:48.840 a compounded annual basis, where the S and P's up 0:18:48.840 --> 0:18:52.160 a little more than ten percent, so really underperformed the market. 0:18:52.200 --> 0:18:53.520 But they're in the news today and we want to 0:18:53.560 --> 0:18:57.000 talk about three M. We want to talk about industrial America. 0:18:57.080 --> 0:18:59.399 What's happening out there? Brooks Southerland. She covers all that 0:19:00.280 --> 0:19:02.160 so well for us. She's a columns covering. 0:19:02.000 --> 0:19:03.919 Industrials and deals for Bloomberg Opinion. 0:19:04.000 --> 0:19:06.959 She joins us live here in our Bloomberg Interactive Brooker Studio. 0:19:07.040 --> 0:19:10.600 So three M, I guess the story today Brooke agrees 0:19:10.640 --> 0:19:13.120 to pay more than five point five billion dollars over 0:19:13.200 --> 0:19:14.120 combat earplugs. 0:19:14.119 --> 0:19:16.640 Can you give us the background of this story? Sure? 0:19:17.040 --> 0:19:20.239 So threems sold. They were dual ended earplugs to the 0:19:20.440 --> 0:19:24.320 US military through its Arrow Technology subsidiary which it acquired, 0:19:24.600 --> 0:19:27.000 and the idea was that on one side it was 0:19:27.040 --> 0:19:30.320 sort of block out everything, and the other would block 0:19:30.320 --> 0:19:33.920 out sort of immediate near term gunfire sounds that you 0:19:33.960 --> 0:19:35.880 could still hear the person sitting next to you, which 0:19:35.920 --> 0:19:38.720 obviously has a lot of appeal for the US military. 0:19:39.760 --> 0:19:42.159 But the veterans have claimed that these airplugs did not 0:19:42.200 --> 0:19:45.040 in fact work and left them instead with hearing loss 0:19:45.040 --> 0:19:46.919 and tonightis and so this has been sort of a 0:19:47.040 --> 0:19:51.640 mushrooming legal challenge for three M. Veterans were increasingly winning 0:19:51.760 --> 0:19:54.640 bell weather trials at THREEM then made the move last 0:19:54.680 --> 0:19:58.720 summer to put the aerotechnology sublicidiary into bankruptcy as a 0:19:58.760 --> 0:20:01.880 means of sort of speeding up the resolution of those claims. Now, 0:20:01.920 --> 0:20:04.800 a judge earlier in June said you can't do that. 0:20:05.200 --> 0:20:09.440 This is not a valid reorganization purpose, and you know, 0:20:09.560 --> 0:20:11.680 the company was appealing that, but it looked like a 0:20:11.800 --> 0:20:13.920 rocky road. We've seen J and J run into legal 0:20:14.000 --> 0:20:17.040 challenges with a similar ploy involving some of those talk 0:20:17.200 --> 0:20:20.119 claims for that company, and so it looks like the 0:20:20.200 --> 0:20:23.040 company three M is instead moving toward a settlement, which 0:20:23.040 --> 0:20:24.760 makes sense. I mean, this was really the only way 0:20:24.760 --> 0:20:26.880 that this probably was going to end for the company. 0:20:27.160 --> 0:20:29.840 Now I understand that there are more issues the three 0:20:29.840 --> 0:20:33.919 AM space, But first, is this it for this specific issue? 0:20:34.080 --> 0:20:36.320 Is this likely to kind of settle all the claims 0:20:36.359 --> 0:20:38.760 around the ear plug issue? 0:20:38.880 --> 0:20:40.399 So we don't know a lot of the details, and 0:20:40.440 --> 0:20:43.600 so Bloomberg News has reported on this Sunday that this 0:20:43.760 --> 0:20:45.800 was in the works. It's a tentative deal at this point. 0:20:45.800 --> 0:20:47.560 I think it'll be interesting to see what the actual 0:20:47.600 --> 0:20:51.000 details look like once we get the final paperwork. One 0:20:51.000 --> 0:20:52.840 of the things that's been reported is that this settlement 0:20:52.880 --> 0:20:55.240 would be paid out over five years, which is not 0:20:55.480 --> 0:20:58.800 what Wall Street was expecting. If you think about the 0:20:58.840 --> 0:21:01.160 type of hearing loss we're talking talking about. If you, 0:21:01.160 --> 0:21:03.679 you know, lost your hearing because you were exposed to 0:21:03.840 --> 0:21:06.480 very loud gunfire, this is not something that plays out 0:21:06.560 --> 0:21:09.240 over time that we were sort of waiting to see happen, 0:21:09.359 --> 0:21:11.720 like you would with cancer coins. Okay, so I think 0:21:11.760 --> 0:21:14.639 analysts had been bracing for more sort of an upfront payment, 0:21:15.080 --> 0:21:16.800 So it wo'd be interesting to see what that actually 0:21:16.800 --> 0:21:20.080 looks like. But you know, theoretically, I don't think they 0:21:20.119 --> 0:21:22.280 would be moving forward with something like this unless they 0:21:22.320 --> 0:21:24.480 thought it was really going to put this issue behind them. 0:21:24.640 --> 0:21:26.680 Now there will be sort of ramification down the road. 0:21:26.720 --> 0:21:28.320 I do think you have to worry about a dividend 0:21:28.320 --> 0:21:30.160 cut at three M just given the fact that they've 0:21:30.200 --> 0:21:33.520 also separately agreed to a twelve point five up to 0:21:33.600 --> 0:21:36.280 twelve point five billion dollar settlement. Regarding p Fast and 0:21:36.359 --> 0:21:39.200 drinking water, but that is not the end of their 0:21:39.240 --> 0:21:42.199 p Fast liabilities by any stretch. And I think that 0:21:42.200 --> 0:21:43.679 dividend is just going to be under pressure. 0:21:43.680 --> 0:21:45.800 He Yeah, the dividend you'll looking just about five point 0:21:45.840 --> 0:21:48.240 eight percent, So that might be that's some risk there. 0:21:49.760 --> 0:21:50.399 For three M. 0:21:50.480 --> 0:21:54.400 I mean, was this hearing were these hearing aid issues 0:21:54.520 --> 0:21:57.800 just from the left since f Afghanistan in Iraq from 0:21:57.800 --> 0:21:59.760 that time period or is it even before that. 0:22:00.560 --> 0:22:03.119 I'm not sure exactly on the dates of the claims, 0:22:03.160 --> 0:22:04.560 but like I said, this has been sort of a 0:22:04.640 --> 0:22:06.360 mushrooming issue that has you. 0:22:06.280 --> 0:22:08.840 Know, certain of stocks stocks up about three or four percent, 0:22:08.880 --> 0:22:10.359 So I guess the Marco's thinking maybe it would have 0:22:10.359 --> 0:22:11.040 been a bigger number. 0:22:11.040 --> 0:22:13.320 Maybe sure, And so you know a lot of analysts 0:22:13.320 --> 0:22:15.800 have been bracing for something in the ten billion dollar range, 0:22:16.400 --> 0:22:18.520 and you know, I think the stock is up because 0:22:18.600 --> 0:22:21.359 quite frankly, any progress is good progress for three M 0:22:21.440 --> 0:22:23.960 on its legal issues. You know, the stock has lost 0:22:24.040 --> 0:22:27.520 more than fifty billion dollars in market values since CEO 0:22:27.640 --> 0:22:30.520 mic Roman took over in twenty eighteen. Like you said, 0:22:30.520 --> 0:22:33.199 it's been a serious underperformer, and some of that has 0:22:33.240 --> 0:22:37.040 to do with execution issues, operational hiccups within the company, 0:22:37.119 --> 0:22:39.240 tougher industrial markets, but a lot of it has to 0:22:39.240 --> 0:22:41.399 do with these legal liabilities that have just been hanging 0:22:41.440 --> 0:22:43.959 over the company's head. And they're very open ended and 0:22:43.960 --> 0:22:46.000 nobody could really put a number on it. So the 0:22:46.040 --> 0:22:48.160 fact that we now have a number that we're talking about, 0:22:48.200 --> 0:22:50.600 I think is a relief to shareholders. 0:22:50.880 --> 0:22:52.760 Yeah, can you talk to us a little bit about 0:22:52.920 --> 0:22:57.720 these PFEST obligations. There's one twelve plus billion dollars, but 0:22:58.160 --> 0:22:59.560 there may be more than that. 0:23:00.119 --> 0:23:03.560 Sure, So the settlement that they've agreed to covers claims 0:23:03.560 --> 0:23:07.200 that Pfast polluted drinking water supplies, and that's with US 0:23:07.320 --> 0:23:08.560 public water systems. 0:23:08.840 --> 0:23:12.840 But these are forever chemicals. They exist forever. You ingest 0:23:12.880 --> 0:23:14.480 them somehow and then they're bad. 0:23:14.640 --> 0:23:17.200 So three M manufactured them for a range of products 0:23:17.200 --> 0:23:20.560 for years. They stopped making some of the most problematic 0:23:20.640 --> 0:23:23.239 compounds several decades ago, and then more recently have come 0:23:23.280 --> 0:23:25.439 out and said we're getting out of past altogether. But 0:23:25.520 --> 0:23:28.560 so we're talking about legacy manufacturing from years and years back. 0:23:29.160 --> 0:23:31.879 So the settlement involves drinking water claims, but then there 0:23:31.880 --> 0:23:37.360 are also potentially liabilities involving state attorney generals, potentially the EPA, 0:23:37.520 --> 0:23:40.119 the military. Then there are also foreign governments to consider 0:23:40.200 --> 0:23:42.879 because three M has factories all over the world. So 0:23:42.960 --> 0:23:46.040 Barclay's analyst, Julian Mitchell has put some of these outstanding 0:23:46.080 --> 0:23:49.520 liabilities at about sixteen billion addition to the twelve point 0:23:49.560 --> 0:23:51.760 five billion that we've been talking about, and that does 0:23:51.800 --> 0:23:54.359 not include any sort of deals with the foreign government. 0:23:54.400 --> 0:23:55.320 That's just us. 0:23:55.600 --> 0:23:58.360 One of the biggest budgets is personal injury claims, property 0:23:58.440 --> 0:24:02.000 damage claims. They just brought in a very big lawyer 0:24:02.400 --> 0:24:04.200 or trying to bring in a big lawyer to help 0:24:04.520 --> 0:24:06.400 with some of those claims. He was the one who 0:24:06.400 --> 0:24:09.280 got the big tobacco settlement, and so I think we 0:24:09.280 --> 0:24:11.960 could still see some big, multi billion dollar settlements. 0:24:12.200 --> 0:24:14.919 Brooke, you cover a lot of the big industrial companies. 0:24:14.960 --> 0:24:18.159 A lot of those companies are conglomerates and conglomerates. It 0:24:18.160 --> 0:24:20.520 seems like in time and time are in favor, some 0:24:20.600 --> 0:24:22.840 of the times are out of favor. I've pitched it 0:24:22.880 --> 0:24:25.000 both ways. As a banker, you know which way the 0:24:25.160 --> 0:24:27.239 winds are blowing. You have a fascinating column out on that. 0:24:27.560 --> 0:24:31.520 Where are we now with just conglomerates to investors like them, 0:24:31.520 --> 0:24:32.760 did they not like them? What's going on? 0:24:33.240 --> 0:24:35.400 So it's interesting because we went through a moment during 0:24:35.440 --> 0:24:37.560 the pandemic where all of a sudden, diversity was an 0:24:37.600 --> 0:24:40.040 asset again because it was very helpful to not just 0:24:40.119 --> 0:24:43.159 be an aerospace company, for example, but even beyond that, 0:24:43.200 --> 0:24:45.680 you sort of had different markets were covering at different 0:24:45.760 --> 0:24:47.720 rates as we came out of the pandemic, and you 0:24:47.760 --> 0:24:50.320 actually heard a lot more companies talking about diversity as 0:24:50.359 --> 0:24:53.600 an asset, and that message is not resonating in the 0:24:53.640 --> 0:24:55.480 same way now that we're sort of on the other 0:24:55.600 --> 0:24:59.200 side of that initial robust COVID comeback, and we're sort 0:24:59.200 --> 0:25:02.200 of seeing some market slow down, other markets being more robust, 0:25:02.280 --> 0:25:05.040 and diversity is becoming a liability again. Now there's not 0:25:05.200 --> 0:25:09.840 that many big diversified industrial conglomerates left just because so 0:25:09.920 --> 0:25:13.800 many have done breakups, spinoffs, what have you. Even three 0:25:13.960 --> 0:25:16.040 MS you know is planning to spin off its healthcare 0:25:16.119 --> 0:25:17.520 unit at the end of this year. But there are 0:25:17.600 --> 0:25:19.720 a couple and I think, you know, we may see 0:25:19.760 --> 0:25:21.240 them under more scrutiny. 0:25:21.880 --> 0:25:26.080 Is this a cyclical sort of thing, because are there 0:25:26.320 --> 0:25:30.320 various times, you know, over when you look over periods 0:25:30.320 --> 0:25:32.600 of decades where it helps to be diversified because it 0:25:32.640 --> 0:25:35.159 helps insulate you from some risk, and then all of 0:25:35.200 --> 0:25:37.959 a sudden, you know, the market recovers and activists say 0:25:38.080 --> 0:25:39.760 get rid of your XYZ division. 0:25:40.000 --> 0:25:43.399 It definitely is cyclical, and to your point, you know, 0:25:43.640 --> 0:25:45.760 it's one thing to argue that diversity is a liability, 0:25:45.760 --> 0:25:47.280 and then when times get tough and you're just an 0:25:47.320 --> 0:25:50.480 aerospace company, then the numbers don't look so great. But 0:25:50.880 --> 0:25:53.480 you know, I do think it goes in waves. And 0:25:53.520 --> 0:25:55.639 one of the comments that the industrials always make is 0:25:55.640 --> 0:25:59.000 if you look outside of manufacturing, look at finance, for example, 0:25:59.280 --> 0:26:01.439 some of the big banks are in a wide variety 0:26:01.480 --> 0:26:04.399 of businesses. Look at the tech companies. Amazon will deliver 0:26:04.480 --> 0:26:06.280 goods to your front door, but then they also sell 0:26:06.320 --> 0:26:09.159 cloud computing services, and they own whole foods, and so 0:26:09.600 --> 0:26:12.439 there is you know a number of examples of conglomerate 0:26:12.520 --> 0:26:14.560 out there in the markets. And I think one of 0:26:14.600 --> 0:26:16.840 the ironic things is for all the times that this 0:26:17.280 --> 0:26:20.080 business structure has been pronounced dead, it actually has quite 0:26:20.119 --> 0:26:23.240 a lot of staying power and just reincarnates itself into 0:26:23.240 --> 0:26:24.480 sort of different visions. 0:26:24.800 --> 0:26:26.440 What are you working on these days. What's the next 0:26:26.480 --> 0:26:29.760 cool thing coming out of your Bloomberg terminal? 0:26:30.240 --> 0:26:33.760 Oh, well, I mean all kinds of things. But certainly, 0:26:33.840 --> 0:26:35.800 watching this diversity issue and how it plays out, I 0:26:35.800 --> 0:26:37.880 think will be really interesting. And we haven't really seen 0:26:37.920 --> 0:26:40.760 a lot of activists investors in the industrial sector for 0:26:40.800 --> 0:26:43.800 a while. The last big time I can remember somebody 0:26:43.800 --> 0:26:46.760 pushing for changes at an industrial conglomerate was in twenty 0:26:46.840 --> 0:26:50.000 nineteen with D. E. Shaw and Emerson Electrics, So it's really. 0:26:49.760 --> 0:26:51.600 While and Emerson did do something. 0:26:51.760 --> 0:26:54.400 They did break up, although that was not so much 0:26:55.520 --> 0:26:57.720 I don't know how much that was connected to the activist. 0:26:57.760 --> 0:26:59.560 They got a new CEO who had a lot of 0:26:59.640 --> 0:27:01.480 energy and a lot of vision for what he wanted 0:27:01.480 --> 0:27:03.080 this company to look like, and I think that was 0:27:03.119 --> 0:27:06.000 sort of more the driving force in that case. But 0:27:06.040 --> 0:27:08.320 we really haven't seen that many activists in industrials, which 0:27:08.359 --> 0:27:10.280 is fascinating, And so I wonder if you know now 0:27:10.280 --> 0:27:12.240 that sort of the pendulum is swinging the other way 0:27:12.320 --> 0:27:14.879 on diversity, if we might diversity of businesses, if we 0:27:14.960 --> 0:27:17.000 might see, you know, some activists come out of the 0:27:17.000 --> 0:27:19.040 woodwork and take a look at these companies. Honeywell, stock 0:27:19.080 --> 0:27:22.040 in particular has been under pressure since they announced a 0:27:22.119 --> 0:27:24.679 CEO change, and I think investors are just sort of 0:27:24.680 --> 0:27:27.359 waiting and watching to see what that new CEO of 0:27:27.400 --> 0:27:29.600 vim Wi Kapor might do with that mix of businesses. 0:27:29.600 --> 0:27:33.520 They're sort of the last remaining really big industrial conglomerate 0:27:33.520 --> 0:27:35.680 that has not done a massive spin off. They spent 0:27:35.720 --> 0:27:38.920 off two smaller businesses in twenty eighteen, but we haven't 0:27:38.960 --> 0:27:41.320 seen the kind of full scale breakup we've seen elsewhere. 0:27:41.480 --> 0:27:43.600 All Right, brook thanks so much for joining us. As always, 0:27:43.600 --> 0:27:46.520 Brooks Subland and Calumnists. She covers industrials and deals for 0:27:46.520 --> 0:27:50.440 Bloomberg Opinion. Joining us here on all things industrial, including 0:27:50.680 --> 0:27:52.360 Minnesota mining and manufacturing. 0:27:53.920 --> 0:27:57.760 You're listening to the Team Cancer Live program, Bloomberg Markets 0:27:57.800 --> 0:28:01.720 weekdays at ten am Easter and on Bloomberg, the iHeartRadio 0:28:01.760 --> 0:28:04.480 app and the Bloomberg Business App, or listen on demand 0:28:04.560 --> 0:28:06.080 wherever you get your podcast. 0:28:08.480 --> 0:28:10.359 Our next guest, I would say it just feels like 0:28:10.480 --> 0:28:14.600 consistently bullish on the state of California. Several weeks ago, 0:28:14.640 --> 0:28:17.679 we discussed San Francisco, and the numbers bear out a 0:28:17.720 --> 0:28:21.840 bullish outlook there. Today it's the city of Angels, Los Angeles. 0:28:21.880 --> 0:28:25.680 Matt Winker joins us. He is the founder of Bloomberg News. 0:28:25.720 --> 0:28:28.560 He is the editor emeritus right now of Bloomberg News, 0:28:29.400 --> 0:28:32.600 joining us via zoom Matt. When I think LA, I 0:28:32.640 --> 0:28:36.520 think Hollywood, because I'm a former media analyst, and Hollywood's 0:28:36.600 --> 0:28:38.920 kind of on its backside these days with the actors 0:28:38.920 --> 0:28:41.320 on strike, the writers on strike. Tell us about what 0:28:41.320 --> 0:28:44.640 the numbers show you about the health of the LA economy. 0:28:45.560 --> 0:28:48.560 Always great to be with you, and truth be told, 0:28:48.760 --> 0:28:53.600 it's not just Hollywood actors and screenwriters. At some point 0:28:53.640 --> 0:28:58.720 this year, you've had airports, shuttle drivers, boat captains, crane operators, 0:28:58.760 --> 0:29:03.920 sanitation workers, duty mechanics, custodians, longshoremen which handled, by the way, 0:29:03.960 --> 0:29:07.520 forty percent of US imports from Asia, and nurses and 0:29:07.560 --> 0:29:14.360 school teachers all on strike. However, that pervasive perception of paralysis, 0:29:14.400 --> 0:29:19.040 if you like, is really belied by the reality that 0:29:19.800 --> 0:29:22.960 not only does Los Angeles still work, its ten largest 0:29:23.000 --> 0:29:27.360 publicly traded companies are number one in sales and employee 0:29:27.400 --> 0:29:30.360 growth among the same group of firms based in each 0:29:30.400 --> 0:29:33.520 of the ten most populated US cities now and for 0:29:33.600 --> 0:29:36.440 the foreseeable future. And what are we talking about The 0:29:36.560 --> 0:29:40.760 ten run the gamut from banks, financial services, insurance to 0:29:40.880 --> 0:29:48.920 consumer discretionary staples and industrials healthcare. They're doing better as 0:29:48.960 --> 0:29:52.680 a group than any top ten companies in any of 0:29:52.720 --> 0:29:54.200 the top ten US cities. 0:29:54.840 --> 0:29:59.400 Now, does this analysis that you've done here apply to 0:30:00.200 --> 0:30:04.680 having more people work from these firms in LA itself 0:30:04.800 --> 0:30:07.880 or is it just simply that these firms are based 0:30:07.880 --> 0:30:11.560 in LA they're successful. I guess I'm trying to connect 0:30:11.600 --> 0:30:16.240 to the home base of these companies and actually bringing 0:30:16.240 --> 0:30:18.200 benefits back for the city itself. 0:30:19.080 --> 0:30:23.440 Okay, so that's a great question, And of course, none 0:30:23.440 --> 0:30:28.240 of this would be meaningful unless, as you query, all 0:30:28.320 --> 0:30:31.440 the people we're talking about are in LA proper and 0:30:31.600 --> 0:30:36.680 we are talking about employee growth within Los Angeles, not 0:30:36.800 --> 0:30:41.440 outside Los Angeles, inside Los Angeles. And there really is 0:30:41.480 --> 0:30:46.760 no city that comes close to this double digit sales 0:30:46.800 --> 0:30:50.680 gain from its top ten firms. San Jose, by the way, 0:30:51.120 --> 0:30:54.800 is the closest firm at ten percent, and LA is 0:30:54.840 --> 0:31:00.560 way above that, and way above Chicago, Phoenix, Philadelphia, and Diego. 0:31:00.680 --> 0:31:04.360 They're all distant. Also, rans San Antonio and Dallas are 0:31:04.560 --> 0:31:09.080 going to have average revenue decline. So LA really is 0:31:10.360 --> 0:31:14.400 out front here and employee growth. It's the same story 0:31:14.640 --> 0:31:17.120 all over again. So and you can see that, by 0:31:17.120 --> 0:31:19.280 the way, on the Bloomberg terminal, if you were to 0:31:19.360 --> 0:31:24.600 graph Los Angeles, for example, against the Russell three thousand, 0:31:24.680 --> 0:31:27.920 which is big and small companies alike publicly traded, the 0:31:28.080 --> 0:31:32.080 gap between the two has widened, maybe close to a 0:31:32.160 --> 0:31:33.360 record actually. 0:31:33.200 --> 0:31:35.800 Right now, Hey, Matt, if I were to listen to 0:31:35.840 --> 0:31:38.800 the leaders of states like Florida and Texas, I would 0:31:38.800 --> 0:31:41.200 get a different narrative. It seems like that, Oh, everybody's 0:31:41.280 --> 0:31:44.480 leaving California the high taxes. That's not pro business. They're 0:31:44.480 --> 0:31:49.280 coming down here to lower no tax states. What's what 0:31:50.000 --> 0:31:52.000 is the data show you? 0:31:52.000 --> 0:31:55.760 You could fit Florida, maybe a couple of them inside California. 0:31:56.600 --> 0:31:59.720 Yep, without missing a being exactly you could fit you. 0:31:59.680 --> 0:32:04.360 Could probably all of corporate Florida, all of corporate Florida 0:32:04.400 --> 0:32:07.480 inside of LA and not miss abeat. The point is 0:32:07.480 --> 0:32:12.120 that California is huge, all right, Let's be clear about this. 0:32:12.280 --> 0:32:15.280 So there's been a according to the Census, you know, 0:32:15.400 --> 0:32:18.760 three percent decline in population since twenty twenty in Los Angeles. 0:32:18.840 --> 0:32:22.480 Having said that California is thirty nine million people, Okay, 0:32:22.560 --> 0:32:25.520 that's at least ten million more than any other state. 0:32:25.760 --> 0:32:31.920 Texas is number two, and then corporate California dwarfs corporate anywhere, 0:32:32.040 --> 0:32:35.920 Corporate Texas, Corporate New York, corporate Florida. You could fit 0:32:36.200 --> 0:32:43.840 any of those economies comfortably into California without so much 0:32:43.880 --> 0:32:48.000 as a bulge. That's the reality. And you know, look, 0:32:49.080 --> 0:32:51.920 George Orwell said this best. He said, you know, to 0:32:52.000 --> 0:32:54.560 see what is in front of one's nose needs a 0:32:54.600 --> 0:32:59.440 constant struggle. And that's really the reality for California, particularly 0:32:59.520 --> 0:33:02.600 Los Angele is that it's a very diverse city. By 0:33:02.640 --> 0:33:06.280 the way, it's still got the largest manufacturing base that's 0:33:06.280 --> 0:33:09.360 five hundred thousand plus people of any city in the 0:33:09.440 --> 0:33:13.120 United States. So it's not only you know, a place 0:33:13.200 --> 0:33:17.000 where you have if you like Hollywood screenwriters, but you 0:33:17.080 --> 0:33:22.160 also have aerospace going back decades, and that's just a 0:33:22.160 --> 0:33:24.120 bigger footprint than anywhere else. 0:33:24.320 --> 0:33:24.480 You know. 0:33:24.600 --> 0:33:27.680 Interestingly, Los Angeles is one of those places that's struggling 0:33:27.720 --> 0:33:33.000 with these these empty office or not empty, but much 0:33:33.040 --> 0:33:37.320 more much high office buildings with very high vacancy rates, 0:33:37.360 --> 0:33:42.160 to the point that their owners are sometimes giving the 0:33:42.240 --> 0:33:46.280 keys back to the banks. Do you get any sense 0:33:46.320 --> 0:33:49.240 of how Los Angeles is going to tackle that problem. 0:33:49.280 --> 0:33:52.960 Is it any different than somewhere like San Francisco might 0:33:53.080 --> 0:33:55.920 be trying to tackle that problem. 0:33:57.000 --> 0:33:59.960 Well, look, it's early days. We're talking about a peer 0:34:00.800 --> 0:34:04.000 really since the pandemic, which was unprecedented in our lifetime, 0:34:04.440 --> 0:34:08.480 So who's to say, you know, what kind of calamity 0:34:08.520 --> 0:34:12.200 this really is. Certainly in the short term it seems so. 0:34:12.560 --> 0:34:16.640 But look, one of the people that we have followed 0:34:17.120 --> 0:34:21.120 closely is a thirty three year old co founder and 0:34:21.200 --> 0:34:24.520 chief executive officer of a company called Relativity Space. It's 0:34:24.520 --> 0:34:27.920 an eight year old startup. Made the first three D 0:34:28.080 --> 0:34:32.920 printed rocket to enter space. That's the one hundred and 0:34:32.960 --> 0:34:36.399 ten foot Tehran. One is the largest metal object three 0:34:36.520 --> 0:34:39.280 D printed. Okay, it's right in the backyard of Los Angeles. 0:34:39.320 --> 0:34:42.560 It's actually in Long Beach, but it's close enough, and 0:34:42.719 --> 0:34:46.080 their offices are in Los Angeles. And he'll tell you, 0:34:47.400 --> 0:34:50.680 speaking about downtown and everything else, that most of his 0:34:50.680 --> 0:34:54.960 friends are engineered, but he's friends with artists, people in fashion, 0:34:55.040 --> 0:34:58.360 people in other industries. And that's the kind of innovation 0:34:58.440 --> 0:35:01.080 and mentality says that with take to do something as 0:35:01.120 --> 0:35:05.520 crazy as put a million people on Mars and I 0:35:05.560 --> 0:35:10.480 forgot to mention he's from Plano, Texas, right, Okay, he 0:35:10.560 --> 0:35:15.440 loves California. So be careful. You know what the prevailing 0:35:15.560 --> 0:35:19.799 narrative is, because this being Bloomberg, you look at the data, and, 0:35:19.840 --> 0:35:22.919 as our owner likes to say, you know, in God 0:35:22.960 --> 0:35:24.959 we trust, but everybody else bring data. 0:35:25.600 --> 0:35:26.960 Hey, Matt, thanks so much for joining us. 0:35:27.000 --> 0:35:30.000 Matt Winkler, he is the founder of Bloomberg News fascinating 0:35:30.040 --> 0:35:33.400 column on the great city of Los Angeles and how 0:35:33.400 --> 0:35:35.480 well it is doing economically. 0:35:35.520 --> 0:35:37.560 At this point, you're listening to the tape. 0:35:37.680 --> 0:35:41.040 Can's our live program Bloomberg Markets weekdays at ten am 0:35:41.040 --> 0:35:45.040 Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and. 0:35:45.040 --> 0:35:46.319 The Bloomberg Business App. 0:35:46.360 --> 0:35:49.200 You can also listen live on Amazon Alexa from our 0:35:49.200 --> 0:35:53.600 flagship New York station, Just say Alexa play Bloomberg eleven thirty. 0:35:55.520 --> 0:35:58.320 Goldman is offloading a wealth unit to two hundred and 0:35:58.320 --> 0:36:02.359 forty billion dollar money manager. Shrinana Rojen reported that story. 0:36:02.400 --> 0:36:04.720 He joins us here in our Bloomberg Interactive Broker studio, 0:36:04.960 --> 0:36:06.680 shre what is Goldman doing here? 0:36:06.680 --> 0:36:08.600 I thought they liked the wealth management business. 0:36:08.680 --> 0:36:10.920 Well, they still like the wealth management business. But what 0:36:10.960 --> 0:36:13.439 they're doing here is another strategic flip flop, and we've 0:36:13.480 --> 0:36:15.200 seen a little bit of that over the course of 0:36:15.200 --> 0:36:18.840 the last twelve months. This is an ria investment advisory 0:36:18.880 --> 0:36:22.000 business that purchased in twenty nineteen for seven hundred and 0:36:22.000 --> 0:36:26.400 fifty million dollars. Goldman has a dominant presence when catering 0:36:26.440 --> 0:36:29.960 to the ultra rich, the ultra high net worth individuals. 0:36:30.440 --> 0:36:32.560 No one does it better than Goldman. You know, people 0:36:32.600 --> 0:36:35.360 who have twenty five thirty fifty million dollars per account. 0:36:36.080 --> 0:36:40.040 The most affluent market is one where people could have 0:36:40.320 --> 0:36:43.239 a million dollar account on average. One point to one 0:36:43.280 --> 0:36:45.440 point three million dollar account is what they got when 0:36:45.440 --> 0:36:49.560 they purchased United Capital with about twenty two thousand clients. 0:36:49.920 --> 0:36:52.600 Four years in, they've realized that really is not where 0:36:52.600 --> 0:36:54.799 they want to be. It has been a little bit 0:36:54.840 --> 0:36:57.160 of a drag on their profit pre tax margins as well, 0:36:57.280 --> 0:37:00.719 so they've decided to shed that. They're selling it to 0:37:00.800 --> 0:37:03.520 this two hundred and forty billion dollar wealth manager called 0:37:03.600 --> 0:37:06.600 Creative Planning, which is run by a very interesting gentleman 0:37:06.640 --> 0:37:09.640 by the name of Peter Muluk. But for Goldman What 0:37:09.680 --> 0:37:13.399 that means is you refocus your attention on the part 0:37:13.400 --> 0:37:15.520 of the business that you're really good at, which is 0:37:15.760 --> 0:37:20.120 serving the ultra rich. It mirrors some of their stumbles 0:37:20.120 --> 0:37:22.759 with consumer banking, which is something we've spoken about a 0:37:22.840 --> 0:37:25.560 lot over the course of the last year. Again another 0:37:25.640 --> 0:37:29.040 way to expand beyond their core roots and go into 0:37:29.040 --> 0:37:31.400 the retail banking markets. And in many ways, I think 0:37:31.440 --> 0:37:34.719 it's fair to call it an attempt that flopped, and 0:37:34.719 --> 0:37:38.120 they're getting out of much of that through trying to 0:37:38.120 --> 0:37:40.239 sell off its credit cards businesses, trying to sell off 0:37:40.239 --> 0:37:45.360 the installment lender, shutting off its lending platform for consumers. 0:37:45.400 --> 0:37:48.240 All that they've left is that Marcus Savings business, which 0:37:48.400 --> 0:37:51.720 by the way, is very successful, is a big benefit 0:37:51.760 --> 0:37:56.000 to Goldman because it doesn't mind accumulating deposits that way 0:37:56.040 --> 0:37:57.840 because what it has to pay out on that is 0:37:57.920 --> 0:37:59.400 less than what it has to pay out when it 0:37:59.440 --> 0:38:02.319 has to raise my from the market, so that they 0:38:02.320 --> 0:38:05.239 will stick with. But pretty much every other vestige of 0:38:05.280 --> 0:38:09.640 their consumer banking for a is either being you know, 0:38:09.800 --> 0:38:13.560 chucked overboard or in the process of being chucked overboard. 0:38:13.640 --> 0:38:16.880 Well, yeah, so this was purchased United Capital. This RII 0:38:16.960 --> 0:38:20.160 was purchased for seven hundred and fifty million dollars back 0:38:20.200 --> 0:38:23.759 in twenty nineteen. Is that where does that seven hundred 0:38:23.800 --> 0:38:24.719 fifty million dollars go. 0:38:25.719 --> 0:38:28.320 That's a good question because when Goldman announced the deal, 0:38:28.960 --> 0:38:31.879 which came a little bit after our story a few 0:38:31.920 --> 0:38:34.240 minutes back, they did confirm the sale of this business, 0:38:34.600 --> 0:38:36.879 they didn't give us a price, so we don't know 0:38:36.920 --> 0:38:39.440 what price this platform fetched. But they do have an 0:38:39.440 --> 0:38:41.640 important line in their press release that says when this 0:38:41.719 --> 0:38:43.400 deal closes, which they expect by the end of the 0:38:43.400 --> 0:38:45.520 fourth quarter, there will be a gain. There will be 0:38:45.520 --> 0:38:48.720 an accounting gain. That doesn't necessarily mean that the buyer 0:38:48.800 --> 0:38:51.080 is paying more than seven hundred and fifty million dollars, 0:38:51.360 --> 0:38:53.480 But the way with most of these transactions is you 0:38:53.520 --> 0:38:57.719 buy something, you have some goodwill. That goodwill gets amortized, 0:38:57.719 --> 0:39:01.200 appreciates over the years. Relative to that, I think you 0:39:01.239 --> 0:39:03.440 will see an accounting gain. And I think that's what 0:39:03.480 --> 0:39:06.200 they're signating at rather than necessarily telling us that this 0:39:06.239 --> 0:39:08.040 is something where they will get in excess of seven 0:39:08.040 --> 0:39:08.680 to fifty million. 0:39:08.840 --> 0:39:11.760 Sure, the beginning of this discussion, you characterize this deals 0:39:11.760 --> 0:39:16.520 perhaps a flip flop. Investors don't like flip flops. What's 0:39:16.560 --> 0:39:18.480 going on at the senior ranks of Goldman sacks here 0:39:18.480 --> 0:39:20.239 a lot of flip flopping in terms of what they own, 0:39:20.280 --> 0:39:21.480 what they don't own, strategies. 0:39:21.840 --> 0:39:24.600 Two ways to look at it. Right, When David Solomon 0:39:24.640 --> 0:39:27.720 took over in October twenty eighteen, there were two key pillars, 0:39:27.760 --> 0:39:31.560 which is, expand the businesses you're really good at, grow earnings. 0:39:31.600 --> 0:39:35.880 There they benefited hugely benefited from that boom in trading 0:39:35.920 --> 0:39:38.359 and deal making set off by the pandemic and every 0:39:38.360 --> 0:39:41.200 other dynamic that continued after that. But the other important 0:39:41.200 --> 0:39:43.680 pillar for David Solomon and his management team was to 0:39:43.760 --> 0:39:48.080 try and improve the stock multiple, try and convince investors 0:39:48.200 --> 0:39:50.560 the stock is worth a lot more that their price 0:39:50.600 --> 0:39:54.239 to book creature, price earnings, whatever fancy technical metric you 0:39:54.239 --> 0:39:57.240 want to throw out there, deserves more. They haven't really 0:39:57.320 --> 0:40:01.239 succeeded in doing that. A lot of book value growth 0:40:01.280 --> 0:40:05.600 because of earning's growth, but not any success in convincing 0:40:05.640 --> 0:40:09.760 investors that you can do the multiple growth. Maybe now 0:40:09.840 --> 0:40:11.960 that they've done a strategy pivot or have done the 0:40:11.960 --> 0:40:14.080 slip flop, there perhaps in the place where they want 0:40:14.120 --> 0:40:15.880 to be, and maybe investors come on board. 0:40:16.040 --> 0:40:17.640 All right, Sre, thanks so much for joining us. Glad 0:40:17.680 --> 0:40:19.600 you could join us here in studio. Shri Nana Rogen 0:40:20.600 --> 0:40:22.640 from Bloomberg News. He covers Goldman Sacks. He covers a 0:40:22.640 --> 0:40:25.920 big investment banks. He is all over Goldman Sachson, including 0:40:25.920 --> 0:40:27.880 some of the recent changes in strategy. 0:40:28.239 --> 0:40:31.360 You're listening to the tape cats are live program Bloomberg 0:40:31.400 --> 0:40:35.000 Markets weekdays at ten am Eastern on Bloomberg Radio, the 0:40:35.080 --> 0:40:37.160 tune in app, Bloomberg dot Com. 0:40:36.880 --> 0:40:38.319 And the Bloomberg Business App. 0:40:38.360 --> 0:40:41.160 You can also listen live on Amazon Alexa from our 0:40:41.160 --> 0:40:46.240 flagship New York station, Just say Alexa play Bloomberg eleven thirty. 0:40:46.800 --> 0:40:50.959 Whyant Electric Industries? It stocks up forty three percent? Looks 0:40:50.960 --> 0:40:53.080 like the company saying, hey, wait a minute, maybe we're 0:40:53.120 --> 0:40:55.960 not so much to blame. Maybe the there's a they're 0:40:55.960 --> 0:40:58.520 putting out a statement on. Maybe there's some other causes 0:40:58.920 --> 0:40:59.319 as and. 0:40:59.320 --> 0:41:02.400 As Billy talking about it still down sixty seven percent 0:41:02.440 --> 0:41:02.799 this year. 0:41:02.960 --> 0:41:03.200 Yep. 0:41:03.400 --> 0:41:05.440 So it's interesting. So I have to get the latest here. 0:41:05.440 --> 0:41:07.960 But let's do that with an analyst who covers the bonds. 0:41:07.960 --> 0:41:10.560 Here covers the credit side of the utilities. Jamon Patel. 0:41:10.800 --> 0:41:13.960 He's a senior Fixed and Come strategist for Bloomberg Intelligence, 0:41:14.360 --> 0:41:17.399 joining us via zoom. Jamie, what do you know about 0:41:17.400 --> 0:41:20.520 what's happening here with Hawaiian Electric? Quite the turnaround here. 0:41:21.520 --> 0:41:22.279 Well, you know. 0:41:23.760 --> 0:41:27.400 What, we're we're really very much in the early days here, right, 0:41:27.440 --> 0:41:30.640 So you're gonna you've had allegations being filed, you've had 0:41:30.680 --> 0:41:33.399 some responses, you've had some findings. But over the next 0:41:33.760 --> 0:41:35.680 you know, weeks, months, as as a pg and Ek 0:41:35.840 --> 0:41:37.839 showed us, this sort of thing can take a really 0:41:37.880 --> 0:41:40.200 long time. There'll be more findings, there'll be more allegations 0:41:40.239 --> 0:41:42.319 and so on. But this latest one seeds to be 0:41:42.400 --> 0:41:46.600 very interesting. Up until we you know this, this particular 0:41:46.600 --> 0:41:49.920 statement that came out from the company, Hawaiian Electric had 0:41:49.960 --> 0:41:52.799 really not mentioned anything about de energizing its lines. In fact, 0:41:52.840 --> 0:41:55.840 it said that it didn't de energize its lines simply 0:41:55.880 --> 0:42:01.440 because they were concerned about emergency usage hospitals, et cetera 0:42:01.480 --> 0:42:04.560 that would you know, be damaged obviously if if the 0:42:04.800 --> 0:42:07.480 if the powers turned off. But today they came out 0:42:07.520 --> 0:42:09.399 with a statement saying that the first fire, the one 0:42:09.440 --> 0:42:12.600 that occurred in the morning, had been contained and then 0:42:12.640 --> 0:42:16.359 according to the Maui Department of Fire, it had been extinguished. 0:42:17.120 --> 0:42:19.160 Then the second fire, which was the one that I 0:42:19.200 --> 0:42:21.719 believe created most of the damage, didn't really start to 0:42:21.840 --> 0:42:25.160 about six hours later, and they apparently, or a little 0:42:25.160 --> 0:42:27.439 bit more than six hours they had de energized their lines, 0:42:27.480 --> 0:42:31.400 presumably because of the first fire. So at the end 0:42:31.440 --> 0:42:34.600 of the day, it really depends upon the findings that 0:42:34.719 --> 0:42:36.440 come out of the next few weeks and months, what 0:42:36.480 --> 0:42:39.920 the courts decide, uh, and then how that liability is 0:42:39.920 --> 0:42:40.640 is apportioned. 0:42:40.880 --> 0:42:43.960 All right, So just the Bloomberg reporting here, Hawaii utility source, 0:42:44.000 --> 0:42:47.440 after pointing blame for the fire at the county Hawaiian 0:42:47.480 --> 0:42:51.760 Electric says power lines de energized before the fire. 0:42:52.200 --> 0:42:54.920 Yeah, And I guess the the interesting bit is there 0:42:55.000 --> 0:42:57.319 there is that they're sort of drawing this line this 0:42:57.520 --> 0:43:00.879 was not a continuation of the first fire, but rather 0:43:00.960 --> 0:43:01.759 a second fire. 0:43:01.840 --> 0:43:05.040 And of course, yeah, exactly exactly. 0:43:05.120 --> 0:43:07.560 I think I think what they you know, what, what 0:43:07.719 --> 0:43:11.240 the litigants, maybe not the county so much, but certainly 0:43:11.239 --> 0:43:13.920 the litigants will will try to claim and try. 0:43:13.800 --> 0:43:16.120 To prove is that the first the first fire. 0:43:16.160 --> 0:43:19.000 Had not been extinguished and and had eventually led to 0:43:19.000 --> 0:43:22.600 the second fire. If that's the case, then the question becomes, well, 0:43:22.800 --> 0:43:26.800 is is Maui County, through the Department of Fire liable 0:43:26.920 --> 0:43:29.359 at the end of the day, I you know, and 0:43:29.360 --> 0:43:31.480 and in addition to all this, I think you sort 0:43:31.480 --> 0:43:33.080 of have to kind of take a step back, you 0:43:34.000 --> 0:43:36.600 so you know, what's going to affect the bonds uh, 0:43:36.640 --> 0:43:38.640 and and the equity, which is you know, where where 0:43:38.680 --> 0:43:43.200 we'd started this. The whole question depends upon how much 0:43:43.280 --> 0:43:47.200 the liability is, how much h E is is determined 0:43:47.239 --> 0:43:50.520 to be responsible for, how much of it will they share? 0:43:51.160 --> 0:43:51.399 Uh? 0:43:51.440 --> 0:43:54.279 And then once that's determined, will that be tax deductible 0:43:54.400 --> 0:43:57.880 for the company, because that obviously reduces the overall. 0:43:57.520 --> 0:44:00.040 Liability, And then where. 0:43:59.880 --> 0:44:03.600 The the regulators will allow them to recover that liability 0:44:03.719 --> 0:44:07.000 as well as the obviously the restoration costs that they 0:44:07.040 --> 0:44:10.760 have to go through through rates. If they don't, that's 0:44:10.800 --> 0:44:13.400 you know, obviously not good for the bonds and and 0:44:13.560 --> 0:44:14.840 certainly not good for the equity. 0:44:15.480 --> 0:44:18.520 So, Jamie, what has the company done to date to 0:44:18.600 --> 0:44:21.520 maybe from a balance sheet perspective, to prepare for, you know, 0:44:21.560 --> 0:44:23.520 maybe some some downside scenarios. 0:44:24.480 --> 0:44:26.799 Well, so far they've they've you know, there's not much 0:44:26.800 --> 0:44:28.480 they can do on the balance sheet side, but they. 0:44:28.320 --> 0:44:29.759 Have tried to shore up their liquidity. 0:44:29.760 --> 0:44:32.960 They drew down the two revolvers that they have, one 0:44:33.000 --> 0:44:35.440 for one hundred and seventy million up at the parent 0:44:35.520 --> 0:44:37.799 and then two hundred million down at the intermediate parent 0:44:37.880 --> 0:44:42.440 Hawaiian Electric Company. So that plus any dividends that may 0:44:42.480 --> 0:44:45.840 come up from American Savings Bank and any cash that 0:44:45.880 --> 0:44:49.680 they have on hand, will hopefully take them through the 0:44:49.719 --> 0:44:51.840 restoration period through to the end of the year so 0:44:51.960 --> 0:44:55.759 that they can they can get their power up and 0:44:55.800 --> 0:44:58.440 running to all the all the customers that don't have it. 0:44:58.480 --> 0:45:02.760 At this point, I'm looking at bonds of Hawaiian Electric 0:45:03.520 --> 0:45:06.600 Do in December twenty twenty eight. It looks like they're 0:45:06.600 --> 0:45:10.759 training around eighty six cents on the dollar. How should 0:45:10.800 --> 0:45:16.319 we interpret that, jaymen? How dire are things for the 0:45:16.360 --> 0:45:19.720 company with respect to its credit worthiness? 0:45:20.440 --> 0:45:22.680 So you have to sort of differentiate between the bonds 0:45:22.760 --> 0:45:25.280 up at the parent level and then the intermediate holding 0:45:25.280 --> 0:45:28.319 company and down at the utilities the parent level bonds have, 0:45:28.840 --> 0:45:31.480 you know, and this is sort of what differentiates Hawaiian 0:45:31.480 --> 0:45:33.759 Electric from PG and E pgn E had just the 0:45:33.840 --> 0:45:38.640 electric utility as its only subsidiary. Hawaiian Electric has American 0:45:38.680 --> 0:45:41.800 Savings Bank as a separate subsidiary through which they can 0:45:42.320 --> 0:45:46.200 upstream dividends in the normal course of business to continue 0:45:46.200 --> 0:45:50.080 to service their debt. Down at the utility level, you 0:45:50.120 --> 0:45:53.160 don't have that. Everything is purely dependent upon the earnings 0:45:53.160 --> 0:45:55.920 at the utility in terms of the ability to service debt. 0:45:56.160 --> 0:45:58.400 But I think you know, we haven't seen the bonds 0:45:58.480 --> 0:46:01.040 move as much today as certainly not as much as 0:46:01.080 --> 0:46:04.160 the share prices. I think you know two reasons for that. 0:46:04.239 --> 0:46:07.480 One is the liquidity most of these bonds are privately placed, 0:46:08.440 --> 0:46:10.839 don't trade as much as you would expect. But two 0:46:11.000 --> 0:46:13.200 also the junk ratings on the bonds, right, and the 0:46:13.239 --> 0:46:15.640 bonds are going to trade in line with their ratings 0:46:16.160 --> 0:46:18.280 until there is a change those ratings. 0:46:18.239 --> 0:46:18.680 So Jim. 0:46:18.719 --> 0:46:21.759 And for these utilities, whether it's you know, you know 0:46:21.800 --> 0:46:24.080 the at in California that we saw several years ago 0:46:24.160 --> 0:46:26.560 or here in Hawaii, there's just a ton of risk 0:46:26.640 --> 0:46:29.680 that these utilities have in a world of climate change 0:46:29.800 --> 0:46:33.080 and more and more fires, some of which are caused 0:46:33.080 --> 0:46:36.080 by utility lines. Is there any way for them to 0:46:36.239 --> 0:46:39.120 ensure against that? Or if you're a creditor or you're 0:46:39.120 --> 0:46:42.960 a shareholder. You just have to assume this growing risk 0:46:43.040 --> 0:46:44.760 going forward. 0:46:45.080 --> 0:46:45.400 Yeah. 0:46:45.440 --> 0:46:48.400 So, I you know, most of the transmission assets that 0:46:48.440 --> 0:46:50.200 are owned by utilities, and those are the ones that 0:46:50.239 --> 0:46:52.480 are you know, generally the most susceptible, whether it's to 0:46:52.600 --> 0:46:56.640 hurricanes or to wildfires, are generally not in short, and 0:46:57.120 --> 0:47:01.040 the understanding there is that if they are damaged, regulators 0:47:01.040 --> 0:47:06.440 will allow the utility to recover through increased rates, recovery 0:47:06.480 --> 0:47:09.319 of those assets, and to rebuild those assets. Certainly, that's 0:47:09.320 --> 0:47:12.359 what we saw with Entergen New Orleans when when Katrina hit. 0:47:12.560 --> 0:47:15.120 That's what we saw with CNP and and FP and 0:47:15.239 --> 0:47:21.520 L when when both those were hit by hurricanes. You know, 0:47:21.560 --> 0:47:23.759 it remains to be seen what's gonna happen over here. 0:47:23.800 --> 0:47:26.800 At PG and E there wasn't the full recovery. 0:47:26.640 --> 0:47:29.080 Because PGNU was found to be liable to to the 0:47:29.120 --> 0:47:33.640 significant extent. So I think I think utilities are not 0:47:33.760 --> 0:47:38.480 those boring UH investments that that they have traditionally been, 0:47:39.280 --> 0:47:43.520 you know, sort of buying and and put away. I 0:47:43.520 --> 0:47:47.200 think you've got more risk perhaps at at at individual 0:47:47.320 --> 0:47:49.759 utilities then at the holding company to the extent that 0:47:49.800 --> 0:47:53.040 the holding company owns more than one utility. Diversification is 0:47:53.040 --> 0:47:55.239 probably the way to go. You have a utility that's 0:47:55.239 --> 0:47:59.960 operating in one jurisdiction, uh and in in different geographic 0:48:01.040 --> 0:48:05.640 localities as opposed to another. So when you've got multiple utilities, 0:48:05.640 --> 0:48:08.440 you've got a little bit of diversification that helps to 0:48:08.480 --> 0:48:12.040 prevent a hit up at the parent level and for 0:48:12.120 --> 0:48:12.600 the equity. 0:48:13.800 --> 0:48:16.680 Yeah, that's interesting. And is PG and E is that 0:48:16.760 --> 0:48:20.600 the sort of situation that we really should see as 0:48:20.680 --> 0:48:23.320 indicative of how this might play out? Or do you 0:48:23.360 --> 0:48:25.840 think we could see some sort of answer as to 0:48:25.880 --> 0:48:29.480 who's liable, et cetera more quickly. And I'm sorry we 0:48:29.480 --> 0:48:30.839 have only about twenty seconds here. 0:48:32.200 --> 0:48:37.160 So in terms of your question, is are we wondering 0:48:37.200 --> 0:48:40.239 how this is going to play out in relative to 0:48:40.320 --> 0:48:42.760 PG and E. So PG and E's you know, obviously 0:48:43.440 --> 0:48:48.279 you had a much bigger utility. The advantage that PG 0:48:48.400 --> 0:48:51.319 and E had as it came out of bankruptcy was 0:48:51.520 --> 0:48:56.800 it shared California primarily with two other solid utilities, investment 0:48:56.840 --> 0:48:59.239 grade utilities. So California was able to set up this 0:48:59.280 --> 0:49:02.520 wildfire farm twenty billion dollars plus, which all of the 0:49:02.640 --> 0:49:05.920 utilities have had to contribute into, and will continue to 0:49:05.920 --> 0:49:08.520 contribute into, and will be at least partially be able 0:49:08.520 --> 0:49:12.000 to recover through rates. That's sort of I don't want 0:49:12.000 --> 0:49:14.799 to use the word subsidizes, but maybe that is the 0:49:14.840 --> 0:49:17.960 one that comes first to mind, subsidized PG and e's 0:49:18.000 --> 0:49:20.960 liabilities with the other two. 0:49:21.120 --> 0:49:23.120 But of course it works all ways. 0:49:22.960 --> 0:49:25.040 Right yep, all right, Jamie, thanks so much for joining us. 0:49:25.040 --> 0:49:27.880 We really appreciate you getting some of your analysis here today, 0:49:27.880 --> 0:49:31.399 big news for Hawaiian Electric jam and Pateel, senior fixed 0:49:31.440 --> 0:49:36.400 income strategists for Bloomberg Intelligence, joining us from Bloomberg Princeton Campus. 0:49:38.480 --> 0:49:41.600 Thanks for listening to the Bloomberg Markets podcasts. You can 0:49:41.600 --> 0:49:45.400 subscribe and listen to interviews at Apple Podcasts or whatever 0:49:45.480 --> 0:49:49.200 podcast platform you prefer. I'm Matt Miller. I'm on Twitter 0:49:49.400 --> 0:49:51.319 at Matt Miller nineteen seventy three. 0:49:51.800 --> 0:49:54.160 And I'm Paul Sweeney. I'm on Twitter at pt Sweeney. 0:49:54.280 --> 0:49:56.920 Before the podcast, you can always catch us worldwide at 0:49:56.960 --> 0:49:58.680 Bloomberg Radio