Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you,
Speaker 1: along with my co host Lisa Brahma wits each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money, whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
Speaker 1: podcast or wherever you listen to podcasts, as well as
Speaker 1: at Bloomberg dot com. Well, Tesla reporter results last night.
Speaker 1: I think they're probably best characterized as a mixed bag,
Speaker 1: but there was drama on the conference call, as are
Speaker 1: typically as with Tesla when it was announced that the
Speaker 1: CFO surprisingly is going to depart. The company of stockers
Speaker 1: down about one percent this morning and trading joining us
Speaker 1: a kind of dig through what's going on with Tesla
Speaker 1: is Gordon Johnson. Gordon is a managing director research channels
Speaker 1: covering alternative energy, metals and mining and equipment from Vertical Group.
Speaker 1: He joins us in our Bloomberg Interactive Broker Studios here
Speaker 1: in New York. Gordon, thanks for joining us. Let me
Speaker 1: just start with the c f O news. It just
Speaker 1: seems like I just remember him coming back for a
Speaker 1: second stint. The CFO and now he's leaving. What's going on? Right?
Speaker 1: So I think that when you combine with the CFO leaving,
Speaker 1: which was unexpected um, you've had four vice presidents of
Speaker 1: finance leave since seventeen. You have the chief accounting officer
Speaker 1: at Tessa leave um with just a month on the
Speaker 1: job unexpectedly um. And now you have the CFO leaving
Speaker 1: and effectively the new CFO was just promoted to vice
Speaker 1: president in December and has no specific accounting experience. I
Speaker 1: think this is a huge loss of institutional knowledge UM
Speaker 1: and a concern again given the finance departures we've seen
Speaker 1: at Tesla more recently. So Gordon, you're you're a longtime
Speaker 1: Tesla beer right and you are you maintain a seventy
Speaker 1: two dollar pre share price target, which is a huge
Speaker 1: decline from where we are today, and you said you
Speaker 1: would be aggressively adding to any Tesla short positions here. Correct,
Speaker 1: bondom markets don't agree with you because the bonds are
Speaker 1: actually going up and usually the bottom markets is a
Speaker 1: smart money. Why are they wrong? Right? So? I think
Speaker 1: the reason they're wrong is because Tesla reported a hash
Speaker 1: balance of three point seven billion. However, if you look
Speaker 1: at their interest income in the quarter, and divided by
Speaker 1: that cash balance, you get an annualized return of roughly
Speaker 1: eight or point eight percent, whereas in the in the
Speaker 1: fourth quarter, the three year Treasury bill returned two point
Speaker 1: six percent. So, either they're the most inefficient managers of
Speaker 1: cash we've ever seen, which I think is highly unlikely.
Speaker 1: Are their cash balance is significantly less than what they're reporting.
Speaker 1: So I think that's why the bond investors are reacting
Speaker 1: um uh positively, but we're still quite concerned they're not
Speaker 1: going to be able to pay off that that convertible
Speaker 1: uh in March. Okay, hold on a second. So you're
Speaker 1: saying that they're they're massaging the numbers. Is that the idea.
Speaker 1: I don't want to say they're pressaging the numbers, but
Speaker 1: I think what they do is they delay paying their
Speaker 1: suppliers until days after the quarter to allow them to
Speaker 1: report a cash balance UM at the end of the
Speaker 1: quarter that is much higher than the average cash balance.
Speaker 1: And you can see this in Q three, Q two,
Speaker 1: Q one UM and and it hasn't always been the case.
Speaker 1: So um Again, Either they're the worst managers of cash,
Speaker 1: worse than you know, a retail investor who could just
Speaker 1: park their money in three month treasury bills or their
Speaker 1: cash balance is significantly less than what they're reporting. We
Speaker 1: think it's the latter that sounds a little bit like
Speaker 1: massaging in the numbers to me, UM, I think, let's
Speaker 1: let's move. So how about the underlying fundamentals? Um, is
Speaker 1: you know what did you see in the quarter last night? Uh?
Speaker 1: To give you a sense that you know, they are
Speaker 1: remain challenged to meet some of their either the product
Speaker 1: production goals and or profit goals. Right, So keep in mind,
Speaker 1: we just updated our bottom up model and we projected
Speaker 1: a gap EPs number of seventy nine. Since they came
Speaker 1: in at seventy eight, the street was out of over
Speaker 1: a dollar. Think about this. Tesla built three years of
Speaker 1: backlog via the Model three, and like the Sports Illustrated
Speaker 1: article said today, it was a bait and switch strategy.
Speaker 1: They said it was gonna be twenty seven and a
Speaker 1: half thousand dollars be fully autonomous. I mean you could
Speaker 1: literally crawl on the back, sleep and drive coast to
Speaker 1: coast and you're gonna have free supercharging. None of that's true.
Speaker 1: The car costs fifty five thousand dollars out the gate um. Clearly,
Speaker 1: I don't think anybody in their right mind is going
Speaker 1: to allow Tesla to drive them around without paying attention.
Speaker 1: There's been fifty two deaths reported either associated indirectly or
Speaker 1: directly with Tesla, and clearly the supercharging costs money. So
Speaker 1: what they did in Q three is they took that
Speaker 1: huge mode of backlog and basically in Q three and
Speaker 1: four sold cars to the best part of that backlog,
Speaker 1: i e. The guys who are willing to pay the most.
Speaker 1: So if you look to what they're guiding for next year,
Speaker 1: for this year rather twenty nineteen, they're saying three hundred
Speaker 1: and sixty to four hundred thousand cars sold. If you
Speaker 1: look at their Q four deliveries, multiply that by four
Speaker 1: and use the low end of that guidance, they're actually
Speaker 1: guiding cells unit cells down in twenty nineteen, despite the
Speaker 1: fact that on Q four numbers they're trading out a
Speaker 1: ninety times forward e PE multiple when other car companies
Speaker 1: traded six to five six, five to six times. We
Speaker 1: think there's big risk in the in in the stock. Certainly,
Speaker 1: I think most would agree with you that there's big
Speaker 1: risk in the stock, just based on how much. It's
Speaker 1: been swinging around. But Gordon, I'm wondering, let's say Tesla
Speaker 1: is able to pay off its convertible bond. Uh is
Speaker 1: your pieces wrong? I mean, is that is that going
Speaker 1: to be enough of prolonging any sort of liquidity event
Speaker 1: that Tesla can keep on going trying to make it work. No,
Speaker 1: I mean everybody says if they're able to raise debt,
Speaker 1: you know that's gonna be great for the stock. Look,
Speaker 1: they burn a lot of money. Um keep in mind
Speaker 1: in in in the fourth quarter they had huge demand
Speaker 1: pool in the United States because their tax credit got
Speaker 1: cut in half one one nineteen in in in the Netherlands, right,
Speaker 1: European cells of Tesla and ten were up six percent
Speaker 1: if you assume that that's because Netherlands cells were up
Speaker 1: a hundred and fifty eight percent. Germany was down forty,
Speaker 1: Spain was down like roughly twenty, the UK was down
Speaker 1: roughly thirty. The point is the Netherlands had a big
Speaker 1: tax in centive for for Tesla cars that got cut
Speaker 1: January one. We think Netherlands cells are gonna be down
Speaker 1: eight percent in Q one. So the point is they've
Speaker 1: had a big benefit in Q four that benefit is
Speaker 1: over UM. I think they're guiding to huge decline. We
Speaker 1: think the street numbers for Q one on revenue are
Speaker 1: roughly one point five billion too high given Tesla's guide
Speaker 1: and UM and you have real competition coming in in
Speaker 1: the back half this year. So I think they go
Speaker 1: back into losing money in Q one. I think basically
Speaker 1: that's there, that's effectively their guidance. I think they lose
Speaker 1: more money in Q two and more money in Q
Speaker 1: three and four. UM. So if you give a company
Speaker 1: money who just perpetually burns cash, is that a good thing?
Speaker 1: I don't think so. So. I I just think their
Speaker 1: business model was floor I think Elon Musk's tried to
Speaker 1: change the way you manufacture cars from the car companies
Speaker 1: that have done it before. It hasn't worked, and I
Speaker 1: think the costs are too high. I think they're gonna
Speaker 1: burn a lot of money this year. Gordon Johnson, thank
Speaker 1: you so much for being with us. Gordon Johnson, Managing
Speaker 1: director focused on Alternative Energy, Metals and Mining and Equipment
Speaker 1: UH spaces for the Vertical Group in New York, joining
Speaker 1: us here in our eleven three oh studios. Well, we
Speaker 1: are right in the midst of tech earnings. We had
Speaker 1: Facebook last night, the blowout quarter, that stock is up,
Speaker 1: Microsoft that generally inline quarter stocks off a little bit today,
Speaker 1: and of course after the close tonight, we have Amazon.
Speaker 1: So to help us kind of way through all things tech,
Speaker 1: we have David Garrity joining us. David's the chief market
Speaker 1: strategist at laid Law and Company. He joins us in
Speaker 1: our Bloomberg eleven three oh studios. David, thank you for
Speaker 1: joining us. Let's start with Facebook. Wow, what a quarter,
Speaker 1: I think. Uh, I guess it's just people saying, I
Speaker 1: guess this thing is not going to be rolled over
Speaker 1: by the regulators. Well, one would argue that there are
Speaker 1: signs of life in terms of Facebook, and one has
Speaker 1: to bear in mind also looking at the fourth quarter,
Speaker 1: like other online internet companies, there is a bump in
Speaker 1: the calendar year end um, and certainly they saw that,
Speaker 1: but clearly against the negative news slow scene over the
Speaker 1: course of two thousand and eighteen. Um, you know, there
Speaker 1: are signs that people now think that there's alive and
Speaker 1: well and all clear can be found on Facebook. But
Speaker 1: one has to consider the news that came out just
Speaker 1: recently within the last day or so that Apple had
Speaker 1: decided to basically remove Facebook from the Apple App Store,
Speaker 1: which brings up the basic point that while people may
Speaker 1: be concerned about public sector regulators, when it comes down
Speaker 1: to looking at the structure of the technology industry where
Speaker 1: you have companies like Facebook who depend upon others operating
Speaker 1: system platforms, whether it's Android from Google or whether it's
Speaker 1: iOS from Apple, Facebook really is in a world that
Speaker 1: other people ship set the conditions for and from that standpoint, Facebook,
Speaker 1: for lack of a better term, has to depend on
Speaker 1: the kindness of strangers. Okay, can you just give us
Speaker 1: a sense of how important this really is. I mean,
Speaker 1: if Apple removes Facebook from its app store, can people
Speaker 1: not buy or not download the Facebook app on their iPhones?
Speaker 1: Is that what this is basically saying. Or they just
Speaker 1: have to work a little harder to do so. People
Speaker 1: can still work a little bit harder go through their
Speaker 1: web browsers. But the issue is if there are things
Speaker 1: that are made more difficult for consumers over time, it
Speaker 1: certainly serves to dampen adoption in that regard, and I
Speaker 1: would argue that if we start looking at what Apple
Speaker 1: has been saying in terms of the company's policy towards
Speaker 1: upholding individuals rights to data privacy is that the reason
Speaker 1: why they did this, certainly because what was happening in
Speaker 1: the case of Facebook is that they were essentially misusing
Speaker 1: the app store platform to go out and to pay
Speaker 1: um Facebook subscribers or Facebook users, uh, you know, twenty
Speaker 1: dollars to basically take down all of their data. And
Speaker 1: this was not something that Apple had been made aware
Speaker 1: of when this was being put up on the Apple
Speaker 1: App Store. And again I would just go back and
Speaker 1: say that, you know, Tim cook out of the technology
Speaker 1: sector c e O S has been fairly straightforward and
Speaker 1: and an upright in regarding data privacy as being an
Speaker 1: individual right. And certainly the company in its actions Apple
Speaker 1: is showing that they're going to be taking Facebook on
Speaker 1: in because you know, Jeff Zuckerberg on the earnings call
Speaker 1: last night seemed to suggest that after a year of
Speaker 1: hard work at the company and investment in personnel to
Speaker 1: monitor content and privacy see and investments in technology, that
Speaker 1: the company had in his mind, kind of turned the
Speaker 1: corner on what was a very difficult time for the
Speaker 1: company um and that they've gotten to handle on it
Speaker 1: and they're ready to move forward and go back to
Speaker 1: being the innovative and focus on the business. Do you
Speaker 1: think the company has turned the corner from that regulatory
Speaker 1: overhang type of perspective. Well, I mean, those are wonderful
Speaker 1: comments that go into an earnings conference called script But
Speaker 1: when we start coming up against factors and it's here
Speaker 1: really more in the case of Apple. Not to sort
Speaker 1: of focus in too hard on this, but dealing with
Speaker 1: public sector regulators is one thing. Obviously it takes time
Speaker 1: for them to act. That can be slow. But when
Speaker 1: you have a private sector partner, and I don't know
Speaker 1: to what extent you can really can say Apple is
Speaker 1: a partner, it just happens to be that Facebook is
Speaker 1: operating off of an iOS platform in part to get
Speaker 1: to the subscriber base that Apple has. If a private
Speaker 1: sector company decides to act and clearly act quickly, this
Speaker 1: can be something that I think has far more negative
Speaker 1: impact potentially going down the road the necessar early something
Speaker 1: that might come out of the public sector. But don't
Speaker 1: diminish the fact that the public sector itself may be
Speaker 1: poised from the regulatory standpoint to impose significant finds relative
Speaker 1: to Facebook. All right, so, David, it sounds like you
Speaker 1: have a lot of barishness around the edges about Facebook,
Speaker 1: and yet this is not reflected at all in the
Speaker 1: shares today. Shares of Facebook are up, they're surging, They're
Speaker 1: up at the biggest one day gains in January. So
Speaker 1: do you think that the shares should be much lower
Speaker 1: than where they are today or do you think that
Speaker 1: these are all just potential headwinds that investors need to
Speaker 1: be thinking about, even as UH they go full speed
Speaker 1: into Facebook shares. And clearly, if you look back over
Speaker 1: the last two months, with the market having sold off
Speaker 1: going into Christmas, Facebook down a dollars was probably a
Speaker 1: bye going into the earnings, I would say that what
Speaker 1: we're seeing here with Facebook as a relief rally, if
Speaker 1: we go back and look at the high on the
Speaker 1: stock up of over to twenty back in July, UM,
Speaker 1: I would say that that's probably a level we're still
Speaker 1: not going to get back to. You know, clearly this
Speaker 1: is a trade UH. And from that standpoint, I see
Speaker 1: Facebook is still being in a situation where they don't
Speaker 1: really control their own destiny given the operations and how
Speaker 1: they're structured depending upon these other technology platforms. I mean,
Speaker 1: just to raise an issue and segue over towards Amazon.
Speaker 1: If we start looking at Amazon having gone through and
Speaker 1: looked at various sectors to go into to basically take
Speaker 1: on advertising, advertising revenues for Amazon is a growth area.
Speaker 1: And if Amazon has far better access to an insight
Speaker 1: into what consumers are actually doing, Amazon can sort of say, look,
Speaker 1: we respect people's privacy in terms of their data. We're
Speaker 1: not out basically stepping on all sorts of people's toes
Speaker 1: to get to that data. We can get through it
Speaker 1: with far less complication. They can go in and say,
Speaker 1: will provide you with the targeting that Facebook provides. I
Speaker 1: guess what, We'll do it at a better price. So
Speaker 1: you I'm glad you brought up Amazon. Of course, they
Speaker 1: report earnings after the close tonight. One of the issues
Speaker 1: in the digital advertising space, one of the concerns I
Speaker 1: think for Madison Avenue and from big advertisers is that
Speaker 1: it's effectively a Dwopoli between Google and Facebook, and they've
Speaker 1: been dying for a third party, whether it's Snapchat or
Speaker 1: Twitter or whatever. And but now it appears that Amazon
Speaker 1: is really starting to focus on the advertising side of
Speaker 1: the business um and they're actually putting up a huge
Speaker 1: growth rates and ad spending. Do you think that Amazon
Speaker 1: can in effect become that third major platform for advertisers
Speaker 1: in the digital space. I would say that Amazon, you know,
Speaker 1: has the potential to displace Facebook in terms of the
Speaker 1: significant role to be played in the online advertising market.
Speaker 1: And if I were a Facebook investor, I would certainly
Speaker 1: be concerned about that. You know, Amazon clearly has a
Speaker 1: number of different channels for growth beyond their traditional retail,
Speaker 1: which clearly is going to benefit from the r end
Speaker 1: holiday shopping season. And certainly, if we look at cloud computing,
Speaker 1: Amazon web services the number one leading platform add on
Speaker 1: advertising relative to this, and certainly the prospects for Amazon
Speaker 1: I would say as an investment certainly superior, I would
Speaker 1: say on a relative basis to likes of a Facebook.
Speaker 1: So just real quick on Amazon, what do you think
Speaker 1: is going to be the biggest surprise today? I think
Speaker 1: the biggest surprise may be very well continue to be
Speaker 1: sort of the growth that we've been seeing in terms
Speaker 1: of cloud services. I think the numbers we had out
Speaker 1: of Microsoft last night were very favorable in that regard,
Speaker 1: and this is certainly a transition that continues on a
Speaker 1: secular basis. You know, granted some of the impact we
Speaker 1: saw with regards to Microsoft, as there might have been
Speaker 1: some slowing in terms of some of the data server
Speaker 1: activities things that had impacted Intel previously. But obviously, you know,
Speaker 1: Amazon is not exposed to that. David Garritty, always wonderful
Speaker 1: having you. Thank you so much for being with us.
Speaker 1: Thank you, David Garretty, of course, joining us here in
Speaker 1: our Bloomberg eleven three oh studio's chief market strategist for
Speaker 1: laid Law and Company in New York. Facebook shares up
Speaker 1: thirteen percent on the heels of that revenue beat and
Speaker 1: frank earnings per share beat all around, giving people a
Speaker 1: sense of relief. As David said, there is a big
Speaker 1: question mark when it comes to Venezuela, and it's a
Speaker 1: huge oil reserves. When will it actually start to begin
Speaker 1: pumping those reserves out and putting them into circulation. Joining
Speaker 1: us down to talk about this and its effect on
Speaker 1: global oil prices is Dr ellen Wald, President of Transversal Consulting,
Speaker 1: also a nonresident Senior Fellow at the Atlantic Council's Global
Speaker 1: Energy Center and contributor to Bloomberg Opinion. Uh. Dr ellen Wall,
Speaker 1: thank you so much for being with us. So let's
Speaker 1: start with the effect that so far the political turmoil
Speaker 1: in Venezuela has had an oil markets. It's sent the
Speaker 1: price up. Does this make sense to you? It does
Speaker 1: make sense to me, because Venezuela's oil, even though right
Speaker 1: now Venezuela actually isn't producing all that much. I think
Speaker 1: it's numbers in December where something like one point one
Speaker 1: seven million barrels per day, which is very low for
Speaker 1: a country like Venezuela. But Venezuela produces a heavy sour
Speaker 1: crude type of crude oil that's very much in demand
Speaker 1: and is not really being produced as much. Right now,
Speaker 1: we get a lot of light crude coming from the
Speaker 1: United States, and the refineries are really looking for the
Speaker 1: type of oil Venezuela produces, and that's probably why we're
Speaker 1: seeing oil prices rise just somewhat right now. Well, Dr Wald,
Speaker 1: Venezuela has one of the largest reserves on the planet,
Speaker 1: within roughly three billion barrels. Can they even get it
Speaker 1: out of the ground, Well, that is the big question.
Speaker 1: And Venezuela's oil is actually much more difficult to extract
Speaker 1: than say, Saudi Arabia's oil. So even though Saudi Arabia
Speaker 1: doesn't have as quite as much oil as Venezuela. It
Speaker 1: produces a lot more. Their infrastructure is much better and
Speaker 1: it's much easier to extract. But Venezuela could be producing
Speaker 1: a lot more than it is. In fact, it's produced
Speaker 1: as much as over three million barrels per day, so
Speaker 1: it's really not living up to its potential. Now. The
Speaker 1: question is, right now, they're facing a lot of problems
Speaker 1: with their infrastructure. Uh. There, people are are starving and
Speaker 1: unable to work, and the company is essentially failing. So say, uh,
Speaker 1: we got rid of all the political trouble and they
Speaker 1: got a new government that was really willing to support
Speaker 1: the company in what it needs. Just how fast could
Speaker 1: they ramp up production? And that is the question. I
Speaker 1: think that they actually could do a lot to get
Speaker 1: that oil flowing very quickly. Perhaps not as much as
Speaker 1: as three million barrels a day, but they certainly could
Speaker 1: increase possibly almost to two and that would really help
Speaker 1: their economy get out of the terrible state it's in.
Speaker 1: So let's say there is resume change in the next
Speaker 1: couple of months. Let's say Huang Guido does take over
Speaker 1: Nicholas Maduro's force out of power. This is a huge conjecture. Obviously,
Speaker 1: let's just say that that happens. If Venezuela could get
Speaker 1: their oil production back online, how much would that flood
Speaker 1: the market? What would that do to the price of oil?
Speaker 1: I think it would definitely push prices down. Um, you know,
Speaker 1: there's still part of OPEC, there's still as far as
Speaker 1: we know, you know, OPEC doesn't seem to have any
Speaker 1: intention to get rid of its production uh cuts right now.
Speaker 1: But Venezuela is allowed to produce under that up to
Speaker 1: I think one point nine seven million barrels a day,
Speaker 1: and they really would do well to push themselves up
Speaker 1: to that limit if they can, as quickly as they can.
Speaker 1: So we definitely could see if if they did get
Speaker 1: that oil in the market, it would push prices down. So,
Speaker 1: Dr Wald, what role if any, do you think Russia
Speaker 1: and China are playing or can play in Venezuela. Um,
Speaker 1: whether it's on the political side or more about you know,
Speaker 1: they are interest in the oil reserves in Venezuela. What
Speaker 1: role do you think they are playing and maybe could
Speaker 1: play going forward? Well, this this is a big question,
Speaker 1: and particularly with regards to Russia, because Russia's loaned them,
Speaker 1: loan them money, and in fact, Ross snaffed the run
Speaker 1: of the Russian oil companies actually has a lean on
Speaker 1: SITCO for its loan. So basically, if if PDVSAY does
Speaker 1: not pay the interest on its loans to Russia, then
Speaker 1: Russia can actually take control of forty nine nine percent
Speaker 1: of the Citgo Refining Company in the United States. According
Speaker 1: to they hold that as collateral. Now, of course the
Speaker 1: question would be will the United States permit that. They
Speaker 1: do have measures they can take to say no, We're
Speaker 1: not going to allow that on national security grounds. But
Speaker 1: it really could uh bring this crisis almost into a
Speaker 1: US Russia issue as opposed to just of Venezuela Russia
Speaker 1: China issue. Now, China and Russia are definitely going to
Speaker 1: do all they can to support Venezuela. Uh, first, they
Speaker 1: their money. They've loaned Venezuela money. They want Venezuela to
Speaker 1: pay that interest. If a new government comes into power,
Speaker 1: that government could say, you know what, those loans were
Speaker 1: made under the Madurou government and that government was illegitimate
Speaker 1: and so we're not going to pay you. So they
Speaker 1: definitely have a vested interest in keeping the Madurou government
Speaker 1: in power. Okay, just real quick here. I'm glad that
Speaker 1: you went there because that was going to be my
Speaker 1: next question. Given the fact that China and Rush would
Speaker 1: like to see Nicholas Maduro remain in charge, how much
Speaker 1: does that make it unlikely that we do see a
Speaker 1: regime change. Well, I really think right now things are
Speaker 1: up in the air. It does seem unlikely given the
Speaker 1: fact that there have been attempts in the past and
Speaker 1: Maduro has uh you know, has rebuffed them. He does
Speaker 1: seem to have control over the army. And really, when
Speaker 1: it comes to regime change, when it comes to revolution
Speaker 1: like this, it does seem that control over the army
Speaker 1: is can be a deciding factor. That being said, it's
Speaker 1: very difficult to predict revolution. Um, we did a very
Speaker 1: bad job of it in it with regard to Iran
Speaker 1: in so I don't want to say that it's not possible.
Speaker 1: Dr Ellen Wall, President Transversal Consulting, Thank you so much
Speaker 1: for joining us. She is a nonresident fellow at the
Speaker 1: Atlantic Council's Global Energy Center and a contributor to Bloombergh Opinion.
Speaker 1: Thank you so much for joining us to discuss what
Speaker 1: is going on in Venezuela, and uh, you know the
Speaker 1: instability there on the political side, and what it means
Speaker 1: for their vast energy reserves. Again, over three million barrels
Speaker 1: in the ground in Venezuela, the largest reserve on the planet.
Speaker 1: Clearly a significant driver of global oil prices from a
Speaker 1: supplied demand perspective. How is this going to play out politically?
Speaker 1: How is this going to play out? We will keep
Speaker 1: our watch. The official manufacturing data that came out of
Speaker 1: China overnight showed a bit of stabilization, but the numbers
Speaker 1: that we're getting out of Chinese companies are pretty bleak.
Speaker 1: Just to give you a picture of the more than
Speaker 1: twenty four hundred mainland listed firms that have announced preliminary
Speaker 1: figures for their earnings were issued guidance this season, uh
Speaker 1: nearly four hundred of them said they'll post a loss.
Speaker 1: There has been disappointment after disappointment. Joining us now to
Speaker 1: talk about the Chinese economy and what we're learning about
Speaker 1: it is Leland Miller, chief executive of China Beige Book International,
Speaker 1: joining us here in our Blue brig Interactive Broker Studios. Leland,
Speaker 1: I am so glad to have you here. What is
Speaker 1: The big takeaway for you as you passed through some
Speaker 1: of these numbers that we see from corporations, well, the
Speaker 1: big takeaway is that the numbers that markets are looking
Speaker 1: at buy and large for macro, the g d P numbers,
Speaker 1: some of the manufacturing p m I numbers look weak,
Speaker 1: but they don't look very weak and as a result,
Speaker 1: they're not reflective of what's actually happening across the Chinese
Speaker 1: economy right now. There is not mild weakness. There's not
Speaker 1: the same weakness that you saw earlier in eighteen, which
Speaker 1: I think was relative be mode weakness. You have much
Speaker 1: more substantial weakness right now. And it's it's a problem
Speaker 1: because it's not being uh, it's not being understood by investors.
Speaker 1: They're just seeing the same trends continue. But but these
Speaker 1: are not the same trends there So Leland, I think
Speaker 1: the market feels. I think the market probably would say
Speaker 1: it's probably discounting in certainly a slowing Chinese economy, and
Speaker 1: if they were to put a number on it in
Speaker 1: terms of GDP, it might be six or six and
Speaker 1: a half percent. Yes, that's down from ten. We recognize
Speaker 1: that we're trying to price that into our models. What
Speaker 1: do you think the real underlying growth of the Chinese
Speaker 1: economy is right now for the fourth quarter. I think
Speaker 1: it's it's less than half that it's probably around two. Uh.
Speaker 1: You know, we we try and annualized, so so we
Speaker 1: so what we what we try to um. We try
Speaker 1: not to harp too much on the GDP number because GDP,
Speaker 1: of course doesn't tell most of the story. If you
Speaker 1: build a bridge, we tell the story at the time.
Speaker 1: If you build a bridge and then you tear it down,
Speaker 1: and you build a bridge again, you tear it down,
Speaker 1: you build a bridge tearer, you can get to whatever
Speaker 1: GDP number you want. So it doesn't reflect restructuring and
Speaker 1: reform and other important parts of what the Chinese are doing.
Speaker 1: But the growth right now compared to what we saw
Speaker 1: earlier in seventeen substantially weaker. Uh. And so it's it's
Speaker 1: it's just it's the idea that it's just down a
Speaker 1: tick from six seven and down to six four. It's
Speaker 1: just it's it's it's a it's a lunacy. So is
Speaker 1: this analogous you Well, we've been seeing a lot of parallels.
Speaker 1: So one of the things that we alerted clients to
Speaker 1: back in the fall was that the run up to
Speaker 1: en was looking a lot like the run up to Steen.
Speaker 1: We were seeing a lot of the same problems. Uh,
Speaker 1: there was earlier in the year there was an official
Speaker 1: data that suggested that maybe things were weaker and they weren't,
Speaker 1: and people got a little bit more comfortable with the
Speaker 1: fact that that, uh, you know, our data earlier in
Speaker 1: ten actually showed that some of this official data which
Speaker 1: had you know, twenty year lows in retail or twenty
Speaker 1: year lows and investment whatever it was, Uh it was,
Speaker 1: it was not as it's not as bad, and so
Speaker 1: earlier in the year, you you had a slowdown, but
Speaker 1: I'm not a substantial one, and I think it's been
Speaker 1: building up to that and the problems we're seeing right now.
Speaker 1: The last time we saw ch China Beige Book data
Speaker 1: this week was first quarter, So I think there's there's
Speaker 1: just a lot of parallels from from three years ago.
Speaker 1: So leveland as you talk to your clients and you
Speaker 1: you suggest that they don't focus too much on that
Speaker 1: g d P number because it can in fact be
Speaker 1: manipulated by the government to a certain extent. What data
Speaker 1: is the best data to really look at to get
Speaker 1: a sense of what's going on in China and what
Speaker 1: influences your estimation of a two or two and a
Speaker 1: half GDP growth. So what we're working looking at very
Speaker 1: closely right now our credit data. Uh there's a belief
Speaker 1: now and this is it's well founded because this is
Speaker 1: the way China's works in the past, that they have downturns,
Speaker 1: but then they stimulate the economy, things get better, you know,
Speaker 1: rinse and repeat. Well, the problem right now is that
Speaker 1: China has not been undergoing this credit starvation, this leveraging,
Speaker 1: this intense to leveraging for for as long as as
Speaker 1: people think. So what we've seen in the last three
Speaker 1: quarters is actually very heavy levels of borrowing from corporates.
Speaker 1: Now they have had a shut of finance crackdown, but
Speaker 1: you have seen some heavy levels of borrowing and that's
Speaker 1: not being understood. So you don't just have monetary stimulus
Speaker 1: button you could turn on in early. They're already borrowing,
Speaker 1: but it's not leading to more investment, it's not helping growth.
Speaker 1: Given that, given the fact that we've seen this uh
Speaker 1: substantial weakness, as you've been saying, amid an elevated level
Speaker 1: of borrowing. How much more ammunition does China have to
Speaker 1: juice growth, well beyond what you think is a two
Speaker 1: percent annualized growth rate, well much less than I think
Speaker 1: people think. And what we keep hearing over and over
Speaker 1: is that will they have fiscal stimulus, and you know
Speaker 1: they're about to do a tax cut that will make
Speaker 1: Donald Trump blush. And the reality of fiscal stimulus is
Speaker 1: that fiscal stimulus in China doesn't really mean fiscal stimuls.
Speaker 1: They have never tried large scale fiscal stimulus. What happened
Speaker 1: in two thousand TED was hybrid monetary policy because what
Speaker 1: was happening was it was infrastructure bills and it was
Speaker 1: other things lending that came out through the state banks.
Speaker 1: It wasn't reflected in a higher budget deficit, was reflected
Speaker 1: in a higher monetary base. So you always have a
Speaker 1: monetary element to all everything they call fiscal. Now, corporations
Speaker 1: don't pay most of their taxes. S s don't pay
Speaker 1: hardly any of their taxes. So the idea they could
Speaker 1: just cut taxes and have this massive stimulus. They can
Speaker 1: get a little bump for a quarter or two, but
Speaker 1: it's not the big it's not the big gun that
Speaker 1: they claim they have in the background. So what fiscal
Speaker 1: stimulus means, it's not really tax cuts, it means more
Speaker 1: fiscal spending. And then you get back to the monetary problem.
Speaker 1: So they're in a little bit of a difficult situation
Speaker 1: right now. They don't want to increase the monetary base.
Speaker 1: But that's how that's the only way they know how
Speaker 1: is to is to is to expand credit and to
Speaker 1: build up infrastructure. Uh, and they're they're not getting much
Speaker 1: of return on it anymore. Okay, so this weaker than
Speaker 1: even maybe the market's discounting economic picture in China. How
Speaker 1: much is that influencing how you think China's approaching trade talks,
Speaker 1: not just the two days we're seeing here in Washington,
Speaker 1: but just in general. Do you really believe that's pushing
Speaker 1: them and sending them to make a deal a real deal?
Speaker 1: Oh yeah, massively. It's well not a real deal. They're
Speaker 1: not gonna make a real deal because they're not being
Speaker 1: asked to make a real deal. So what they will
Speaker 1: They want to have a trade truth so they can
Speaker 1: focus inward and fix some of the problems that are
Speaker 1: happening in the economy. Now, what what would really set
Speaker 1: things off is if these trade talks breakdown and you
Speaker 1: don't have a deal and Trump walks away from the table,
Speaker 1: and you have this layered on top of the current weakness,
Speaker 1: you will absolutely see a crisis in China. So just
Speaker 1: real quick, here a crisis in China. If that two
Speaker 1: percent growth rate is sustained in China, what does that
Speaker 1: mean for global markets? Not good things? I mean it's
Speaker 1: all the obviously. So so basically, if you're looking at
Speaker 1: at demand from China being much much less and you're
Speaker 1: saying a trade war hit it overhead, um, you know
Speaker 1: this is China has been able to counteract the tariffs
Speaker 1: that have been put on it so far. You know,
Speaker 1: they've they've depreciated the currency until very recently, they've done
Speaker 1: subsidies to corporations that they're very good at this type
Speaker 1: of work. They can't counteract another tronche of two or
Speaker 1: sixty seven billion of tariffs. They can't counteract tariff rates
Speaker 1: going up to on either this this has troncho the
Speaker 1: next one. So they would be uh in very very
Speaker 1: problematic situation if they were forced to try to deal
Speaker 1: with that on top of the already very low level
Speaker 1: of growth on top of the fact that the monetary
Speaker 1: stimulus isn't being kept in reserve the way they say
Speaker 1: it is. It's already being proven not very effective. Leland Miller,
Speaker 1: wonderful having you here. Thank you so much for being
Speaker 1: with us. Leland Miller is chief executive officer of China
Speaker 1: Beige Book International, which does get an on the ground
Speaker 1: read of the Chinese economy. Thanks for listening to the
Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
Speaker 1: to interviews at Apple Podcasts or whatever podcast platform you prefer.
Speaker 1: Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa
Speaker 1: abram Woy. It's I'm on Twitter at Lisa A. Bramwoit's
Speaker 1: one before the podcast. You can always catch us worldwide
Speaker 1: on Bloomberg Radio.