Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. There
Speaker 1: has been a lot of discussion that has led up
Speaker 1: to a story yesterday that was published by the New
Speaker 1: York Times magazine that has garnered a lot of attention
Speaker 1: about the disrepair of the New York City subway system
Speaker 1: and potential catastrophe that could ensue if these problems are
Speaker 1: not fixed. Here to speak with us about that is
Speaker 1: somebody who has intimate knowledge with the m t A
Speaker 1: and the New York City subway system, Richard Ravitch, who
Speaker 1: is the chairman and partner of Ravage, Rice and Co.
Speaker 1: Also though former Lieutenant Governor of New York State and
Speaker 1: head of the Metropolitan Transportation Authority. Thank you so much
Speaker 1: for coming in on this incredibly snowy day. I want
Speaker 1: to start with this story in the New York Times
Speaker 1: magazine that put the bill at a hundred and eleven
Speaker 1: billion dollars conservatively that would be needed to fix the
Speaker 1: New York City subway system. Did you think that the
Speaker 1: tone of it was accurate, that we're kind of at
Speaker 1: a do or die point for the entire subway system. Well,
Speaker 1: there is no instant solution. What has been lacking because
Speaker 1: of the board's failure to fulfill their responsibilities properly, Uh,
Speaker 1: has been There is no analysis of what it would
Speaker 1: take to restore the system. It was stating good repair.
Speaker 1: The number that the author of that article came up
Speaker 1: with was a composite of what other people said. But
Speaker 1: what you need is an analysis of what the replacement
Speaker 1: cost and useful life of every component part of the
Speaker 1: subway system is. Then you decide from that how much
Speaker 1: is necessary. Then you prioritize, and then you look at
Speaker 1: new stations, new new challenges, and you make policy choices.
Speaker 1: But you can't start when you don't have the fundamental knowledge.
Speaker 1: And the board has failed to fulfillix responsibility in a
Speaker 1: very serious manner. They have acted negligently and irresponsibly. So, uh,
Speaker 1: how can this be fixed? The legislature of the State
Speaker 1: of New York it has a responsibility to look into this.
Speaker 1: They are the authors of laws. They pass for Law
Speaker 1: UH in two thousand and nine, making it abundantly clear
Speaker 1: that the fiduciary responsibility of the boards of authorities like
Speaker 1: the m t A is to the purposes of the authority,
Speaker 1: and the legislature has the power to investigate, to hold hearings,
Speaker 1: to bring public's attention UH, to demand that the people
Speaker 1: who will hold these appointments fulfill their responsibility is as
Speaker 1: the law intended that they be fulfilled. Mr Ravitch, I
Speaker 1: understand that back in nineteen seventy nine, cast your mind back.
Speaker 1: You came up with such a plan. You took a
Speaker 1: detailed look at the entire system, and you put together
Speaker 1: a playlist for what needed to happen, even how to
Speaker 1: wear a bulletproof vest. I think at one point it
Speaker 1: didn't work out the way you thought it was. You
Speaker 1: had a call of gentleman named David Rockefeller. I'm wondering
Speaker 1: if you could just didn't you have to call him
Speaker 1: and take him from them at five am in the morning.
Speaker 1: I did because there were upstate Republicans who are reluctant
Speaker 1: to approve all the revenue measures that I had recommended
Speaker 1: to the legislature to provide a stream of revenue that
Speaker 1: we would use to support the borrowing, the capital borrowing
Speaker 1: that we needed to fix the subway system. So I
Speaker 1: needed the support of the business community in New York
Speaker 1: to get the Republican support. But we had the support
Speaker 1: of the governor, the active support of the governor, the
Speaker 1: active support of the New York State Assembly, the active
Speaker 1: support of of the Mayor of the City of New York,
Speaker 1: um and and the unions and the business community, and
Speaker 1: and they got behind this, and they authorized or enacted
Speaker 1: legislation that provided hundreds of millions of dollars of revenue
Speaker 1: which we used to support the indebtedness that enabled me
Speaker 1: to buy three billion dollars of subway cars. Well, but
Speaker 1: I want to sort of broaden out here, because you're
Speaker 1: underscoring fundamental flaws in the management of the subway system
Speaker 1: at a time when more broadly, we're talking about infrastructure
Speaker 1: spending and how much we can invest. Just real quick,
Speaker 1: can we even make these infrastructure investments without a wholesale
Speaker 1: change in the management? Uh. I obviously am no longer
Speaker 1: familiar with the technicians who operate at the m t A.
Speaker 1: But I have to tell you. The professional engineers who
Speaker 1: I've known over the years have very eminently qualified. The
Speaker 1: problem isn't the professional technical management people know how to
Speaker 1: fix this. People know how to buy subway cars. People
Speaker 1: know how to change the signal system to uh triple
Speaker 1: the throughput of so we don't have as many people
Speaker 1: waiting in stations for two or three trains because of
Speaker 1: all we're crowding. Everybody knows how to do it. That's
Speaker 1: not what's missing. What's missing his money, and money requires
Speaker 1: paying for the person was going to pay it. And
Speaker 1: and therefore the question is, in the best sense of
Speaker 1: the word in a democracy, a political question. How do
Speaker 1: you allocate the burden? We are speaking with Richard Ravitch.
Speaker 1: He is the former chairman of the Metropolitan Transportation Authority,
Speaker 1: former Lieutenant Governor of the State of New York, the
Speaker 1: author of the book So Much to Do, A Full
Speaker 1: Life of business, politics and confronting fiscal crises. One crisis
Speaker 1: that we've been following is Puerto Rico, and Mr Ravitch
Speaker 1: has been looking at the situation in the devastated Commonwealth.
Speaker 1: And Mr Ravitch, and maybe you could offer us some
Speaker 1: thoughts about the current conditions and what if you were
Speaker 1: given a clean slate. If you were given a white board,
Speaker 1: what would you suggest be one of the first steps
Speaker 1: that has taken in order to right the ship at
Speaker 1: the first of all the three And they have million
Speaker 1: people and it's unfortunately it's probably closer to three today. UH.
Speaker 1: Our United States citizens and they have not been treated
Speaker 1: the same way that the United States citizens in Houston,
Speaker 1: Texas or New Orleans were treated after devastating hurricanes. Are
Speaker 1: distinguished President through paper towels at them, but has failed
Speaker 1: to make any serious effort to get an amount of
Speaker 1: money to restore the power, to restore the physical infrastructure.
Speaker 1: And as a consequence, people are leaving the island. There
Speaker 1: is no incentive for people to invest. UM. The health
Speaker 1: care system is in jeopardy. Uh. There is still a
Speaker 1: substantial percentage of the population that has to boil the
Speaker 1: water uh to um before they drink it. UM. And
Speaker 1: I talked to a friend of I know was the
Speaker 1: chairman of one of the largest banks in Puerto Rico
Speaker 1: who told me he still doesn't have power in his
Speaker 1: home and it's not because he's not rich and can't
Speaker 1: afford it. You advise the government, correct, I advise the
Speaker 1: government and the U. S. Treasury Department, So you're advising
Speaker 1: no longer h One major issue that was facing the
Speaker 1: government is the pension obligations, and this has been one
Speaker 1: of the most onerous issues apart from the seventy billion
Speaker 1: dollars of debt UM. I'm wondering what lessons we can
Speaker 1: draw from that, you know, what, what sort of the
Speaker 1: rout out is and sort of extract lay out to
Speaker 1: the pension issues that we're seeing across the US right now.
Speaker 1: How how bleak of a situation is this with obligations
Speaker 1: that way outstripped potential income and current current reserves. These
Speaker 1: were not obligations in curtain bad faith. They were incurred
Speaker 1: without a realistic expectation and understanding of how they would
Speaker 1: be ultimately met. So that the underfunding of the pension
Speaker 1: system in Puerto Rico, where it's particularly egregious, they've essentially
Speaker 1: run out of the principal amount of the pension funds,
Speaker 1: and how gonna have to pay whatever benefits they wish
Speaker 1: to pay out of current revenue, which is of course
Speaker 1: diminishing UM. Elsewhere in the United States, uh from Chicago
Speaker 1: to New Jersey to Kentucky to California, I could give
Speaker 1: you a list, Colorado, there's no capacity to meet their
Speaker 1: pension obligations. There are a lot of very serious efforts
Speaker 1: that intellectually. There are four or five major foundations that
Speaker 1: are funding studies on this subject um. And you have
Speaker 1: a very serious moral and political question. If you say
Speaker 1: you want to reduce the pension benefits for somebody who
Speaker 1: worked for govern and for twenty years, why is that
Speaker 1: morally acceptable? But you don't want to cut the interest
Speaker 1: that you're paying this somebody who lent you money they
Speaker 1: shouldn't have lent you because you were solving when you
Speaker 1: borrowed it. And why why people in New York City
Speaker 1: billions of dollars, which is what led to the New
Speaker 1: York City fiscal crisis in all these hedge funds that
Speaker 1: lent Puerto Rico had brought hundreds of or billions and
Speaker 1: billions of dollars of the debt when they were broke,
Speaker 1: when they didn't even have a worded in financial statements,
Speaker 1: they gambled. Why is their entitlement to interest morally superior
Speaker 1: to the payment of the pension to a former public servant. Unfortunately,
Speaker 1: we're gonna have to to leave it there. Richard Ravitch,
Speaker 1: who is the author of So Much to Do as
Speaker 1: well as former Lieutenant Governor of New York and head
Speaker 1: of the m t A. All right, we want to
Speaker 1: learn about Tesla, and we have Liam Denning are a
Speaker 1: Bloomberg Gadfly columnists, to tell us about the Model three. Liam,
Speaker 1: is Tesla really going to be able to meet their
Speaker 1: targets when it comes to that five thousand unit mark?
Speaker 1: And how much is it going to cost for them
Speaker 1: to produce those cars? Well, the question is, well, you know,
Speaker 1: you need to take a step. I can say what
Speaker 1: actually is a target here? Because that five thousand number
Speaker 1: or and other numbers have been thrown around, like the
Speaker 1: old tens thousand a week rate that was spoken of. Um.
Speaker 1: If a target moves over time enough, does it? Is
Speaker 1: it really still a target? I mean, it's it's it's
Speaker 1: fairly certain that Tesla will get to producing five thousand
Speaker 1: Model three a week at some point. UM. But I'm
Speaker 1: not sure we can even call it a target at
Speaker 1: this point because it has been moved around so much.
Speaker 1: We just have to call it an expectation. UM. And
Speaker 1: that was kind of the point of the column that
Speaker 1: I published today. UM. Because the thing is, if you're
Speaker 1: really relying on these targets, um, then it's kind of
Speaker 1: hard to say that you're actually investing on the strength
Speaker 1: of those. What you're really investing on is just a
Speaker 1: general belief that Tesla will get to profitability and volume
Speaker 1: production at some point. But you're not really you're sort
Speaker 1: of trusting them, but you're not really following up with
Speaker 1: the with the verifying bit. In other words, this is
Speaker 1: pure faith and nothing based in particular numbers. I mean,
Speaker 1: I guess that uh, sort of edifying that point is
Speaker 1: Tesla shares today they're down a little bit less than
Speaker 1: one percent. You would expect a much bigger decline with
Speaker 1: yet another disappointment from their actual production when this has
Speaker 1: been one of the key concerns. Also, there's still they're
Speaker 1: still burned through a billion dollars of cash every quarter
Speaker 1: and are probably going to have to raise more money
Speaker 1: now you would expect. So, I mean, if you if
Speaker 1: you think back to when they reported third quarter results,
Speaker 1: which was early November, now those results were, um, you know,
Speaker 1: they missed targets across the board. There a miss forecast
Speaker 1: across the board. Um, they cut the the outlook for
Speaker 1: production of the Model three, which is kind of at
Speaker 1: all that anyone really cares about at this point. Um,
Speaker 1: and the stork did actually fall quite sharply after that,
Speaker 1: went back below three hundred bucks a share, But since
Speaker 1: came back, I mean partly because um, you know, we
Speaker 1: had the launch of the well we call it launch,
Speaker 1: but we had the the sort of demo of of
Speaker 1: the Tesla Electric semitrucks since then, and the stock went
Speaker 1: up a bit on that and it's actually higher now
Speaker 1: than it was in the immediate aftermas of those results. Um.
Speaker 1: But if you look forward to this year, I mean
Speaker 1: what you have a combination of here is Tesla has
Speaker 1: invested already a lot of money into building this production line,
Speaker 1: which isn't working as planned. They haven't reached um, you know,
Speaker 1: smooth mass production of the car yet and they've had
Speaker 1: to scale back um at the pace of growth in
Speaker 1: that And if you think about that, what that means
Speaker 1: is you've invested all the money in this production line,
Speaker 1: but you're still waiting to really produce the cars that
Speaker 1: are going to generate the revenue to pay back on
Speaker 1: that investment. And as we look forward to the rest
Speaker 1: of the year, you know, it does seem likely that
Speaker 1: unless something drastic changes in the pace at which Tesla
Speaker 1: can produce these cars, um, they are probably going to
Speaker 1: have to tap the markets for more financing this year.
Speaker 1: Whether now, whether that comes in the form of equit
Speaker 1: or another bond or a convertible or something else, um,
Speaker 1: that is looking ever more likely. Of course, the flip
Speaker 1: side of that is, as long as the stock doesn't
Speaker 1: react badly to this, you know, consistent missing of targets,
Speaker 1: then Tesla does appear to have a ready way of
Speaker 1: raising that money. Liam Denning, thank you so much for
Speaker 1: joining us. Liam Denning, Energy Mining and Commodities calumnist for
Speaker 1: Bloomberg Gadfly Research. No, forget about it. Meeting chief executive
Speaker 1: officers a waste of time for this fund manager, and
Speaker 1: they've actually done pretty well here to help us understand
Speaker 1: their strategy. As Kurt Kara, he is the chief investment
Speaker 1: strategist for my invest They're based in Copenhagen, Denmark, and
Speaker 1: he joins us on the phone. Kurt, thank you very
Speaker 1: much for being with us. Just described for people your
Speaker 1: strategy and how you came to put this all together
Speaker 1: all right, Well, thank you for letting me call in
Speaker 1: very Briefly, we are very focused on being rational when
Speaker 1: we invest, So we try to be as stringent and
Speaker 1: the rational out of a sort of a moral imperative
Speaker 1: wing invest. So one of the things that we find
Speaker 1: it is very important is to be driven by data
Speaker 1: and rationality and economic understanding of the businesses we invest in.
Speaker 1: So what we do is basically we look for if
Speaker 1: you want to catch some sort of if you want
Speaker 1: to if you want to hunt a dinosaur, you look
Speaker 1: for din dinosaur footprints and then you ask yourself if
Speaker 1: this is a dinosaur, and then you then you go
Speaker 1: for the hunting itself. So so that's basically what we do.
Speaker 1: How many stocks do you invest in at any given time?
Speaker 1: In other words, do you have to kind of concentrate
Speaker 1: your bets with this type of strategies since it requires
Speaker 1: uh profound understanding of the businesses. Yeah, well, it's a
Speaker 1: good question because I think one of the conventional um
Speaker 1: cardinal points of investment is that you should diversify a lot.
Speaker 1: I think that there's a big difference between diversification and diversification.
Speaker 1: If we diversify too much, we actually diversify. We believe
Speaker 1: that twenty five to thirty five names is adequate. Anything
Speaker 1: about thirty five names and we will start to become
Speaker 1: index Haugust, And that's really not what we want to be.
Speaker 1: We want to be active managers, picking the best businesses
Speaker 1: we can find that at attractive prices. And I honestly
Speaker 1: believe that if you look at, for instance, the financial
Speaker 1: crisis in in oh eight, very diversified portfolios didn't do
Speaker 1: much better than less diversified portfolios. So so in theory
Speaker 1: it may work, but in reality, I don't think the
Speaker 1: versification works. Once you're above thirty five forty names, Kurt,
Speaker 1: where do you get the confidence to maintain this level
Speaker 1: of discipline? Oh? Well, yeah, Well, first of all, I
Speaker 1: have some good colleagues and they'll kick me if I
Speaker 1: don't if I'm not discipline. But my confidence in my
Speaker 1: and the discipline comes from I would say, first of all,
Speaker 1: having this system. We have that that sort of looks
Speaker 1: at the marketplace, looks at all the stocks in the marketplace,
Speaker 1: and gives us ideas and scores every single stock out there.
Speaker 1: And that is a very good neutral, objective view on
Speaker 1: the marketplace. And then we have our subjective views and
Speaker 1: our subjective understanding of the businesses we invest in. The discipline, however,
Speaker 1: is obviously something which has to be learned over the years,
Speaker 1: and I believe we have done so. Uh. There is
Speaker 1: a big difference between basically eating the menu and eating
Speaker 1: the menu card, and a lot of investors perhaps eat
Speaker 1: the card more than the menu. So it's easy to
Speaker 1: say your value invest It's easy to say we're active
Speaker 1: investors and we manage risk, but actually doing it requires discipline,
Speaker 1: and this is something we've been working on over the
Speaker 1: years and we still work on it. Maybe just use
Speaker 1: one UH investment idea General Motors as an example, because
Speaker 1: you know when you when you hear about your strategy,
Speaker 1: you think, oh, there's some like super secret company that
Speaker 1: they're going to invest in it, and it turns out
Speaker 1: it may just be that you find a company that
Speaker 1: everybody knows about, but the way you perceive the company
Speaker 1: and the confidence you have in the decision is different. Yeah. Well,
Speaker 1: I guess GM is a great example. I mean, we
Speaker 1: bought GM in September last year. Uh. I believe the
Speaker 1: market value was roughly around fifty billion dollars and they
Speaker 1: the enterprise value is forty billion dollars and GM generates
Speaker 1: ten billion dollars in earnings and and ten billion dollars
Speaker 1: in free cash flow. Uh. It has a female CEO,
Speaker 1: which is quite rare, so she's obviously doing a great
Speaker 1: job in a in a sector which is dominated by males.
Speaker 1: Uh So, Uh, all the things when you look at
Speaker 1: it looked okay because you know, they have autonomus driving.
Speaker 1: They have the Chevallet bowl, the Chevallet bowl, They have
Speaker 1: the Cadillac, which is the only limo priced as a
Speaker 1: as a Mercedes basically. Uh, they have the Camaro and
Speaker 1: you know, you name it they have. They have nine
Speaker 1: percent of lift as far as I understand. So they
Speaker 1: have all these areas. And when you look at GM,
Speaker 1: it's not the old dust covered company that some people
Speaker 1: may believe it is. It is actually a company which
Speaker 1: is up to date technologically speaking. And the price tag
Speaker 1: was very, very attractive, so you could say, you know,
Speaker 1: we don't necessarily buy gold just because it's goal. We
Speaker 1: want to buy gold when it's priced as silver. GM
Speaker 1: is perhaps silver. Priceless bronze are actually more like junk metal,
Speaker 1: whereas some of the more golden stocks in the stock
Speaker 1: market right now, they're priceless diamonds and they're not diamonds.
Speaker 1: So for us, it's all about buying the on the
Speaker 1: valued stuff. And just wanted the breaking because I want
Speaker 1: to come into but just quickly give you ten seconds,
Speaker 1: Mary Barra, as the chairman, chief executive, it's important to
Speaker 1: you explain well, very briefly. I mean it's important because
Speaker 1: if you can make it as a CEO with your
Speaker 1: biometric measures against you and your your biological measures against you,
Speaker 1: in the sense that we know that there is an
Speaker 1: overrepresentation in boardrooms and amongst the CEOs when we look
Speaker 1: at for instance, Caucasian males uh. Tall, slim Caucasian males
Speaker 1: are overrepresented. So if you have a CEO which is
Speaker 1: which doesn't have these features, it must be because they're
Speaker 1: doing some sort of you know, good stuff. As a CEO,
Speaker 1: they have to be outperforming significantly since they can, they
Speaker 1: can get to that position. And I think she's doing
Speaker 1: a great job and I don't have to meet her.
Speaker 1: I mean, we don't have to meet the CEO. We
Speaker 1: we look at the results they generate, uh, and that's
Speaker 1: more important for us. Kurt Kara, thank you so much
Speaker 1: for joining us. Kurt Carra, chief investment strategist at my invest,
Speaker 1: which runs the my Invest Value Act here and which
Speaker 1: has returned on average each year in the past five years,
Speaker 1: better than percent of its peers. Thanks for listening to
Speaker 1: the Bloomberg P and L podcast. You can subscribe and
Speaker 1: listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast
Speaker 1: platform you prefer. I'm pim Fox. I'm on Twitter at
Speaker 1: pim Fox. I'm on Twitter at Lisa Abramo. It's one
Speaker 1: before the podcast. You can always catch us worldwide on
Speaker 1: Bloomberg Radio.