WEBVTT - Walmart Earnings, Using Data to Combat the Opioid Epidemic, Inside an Arctic Code Vault 0:00:00.440 --> 0:00:02.960 This is Bloomberg Business Week. I'm Carol Masser and I'm 0:00:03.040 --> 0:00:05.480 Jason Kelly. We're here every day bringing you the latest 0:00:05.519 --> 0:00:09.800 news from the world's of business and finance, plus technology, politics, economics, 0:00:09.840 --> 0:00:13.480 all harnessing the power of Bloomberg Business Week reporters and editors, 0:00:13.480 --> 0:00:16.759 not to mention our journalists and analysts more than a 0:00:16.800 --> 0:00:19.520 hundred and twenty countries. You can download Bloomberg Business Week 0:00:19.560 --> 0:00:22.439 on iTunes, SoundCloud, or Bloomberg dot Com. You can also 0:00:22.480 --> 0:00:24.919 listen to our radio show weekdays at two pm Eastern 0:00:25.000 --> 0:00:34.279 only on Bloomberg Radio. All right, well, as you just 0:00:34.400 --> 0:00:38.720 heard it, Doug describe Walmart certainly catching attention because well 0:00:38.840 --> 0:00:41.640 it's Walmart, and we pay attention to what they say 0:00:41.800 --> 0:00:44.800 about the health of the consumer, the health of the world, 0:00:44.840 --> 0:00:49.240 and some of those geo economic, geo political concerns as well. 0:00:49.360 --> 0:00:52.160 Let's get into it with Matthew Boyle, us retail reporter 0:00:52.240 --> 0:00:55.520 for Bloomberg. Key's here with me in the Bloomberg Interactive 0:00:55.520 --> 0:00:59.640 Broker studio. And Jennifer Bartashes, she is senior US retail, 0:00:59.680 --> 0:01:03.760 staple and restaurant analysts for Bloomberg Intelligence. She's on the 0:01:03.760 --> 0:01:07.440 phone from BI headquarters down in Princeton. Matt, let me 0:01:07.560 --> 0:01:10.600 start with you. We got the numbers from Doug. But 0:01:10.720 --> 0:01:14.440 what jumped out at you as you were synthesizing this 0:01:14.600 --> 0:01:17.600 You know this company so well give us the nuance here. Well, 0:01:17.600 --> 0:01:20.360 that's the thing. It's a synthesis that matters here. I mean, 0:01:20.400 --> 0:01:23.119 we first saw the top line numbers, the sales beat, 0:01:23.560 --> 0:01:25.759 they raised guidance for like, Okay, this is gonna be 0:01:25.840 --> 0:01:29.160 another good quarter for Walmart. But as the day war on, 0:01:29.200 --> 0:01:31.960 as you can see now, the shares are down, and 0:01:31.959 --> 0:01:35.320 it's a combination of some old concerns and some new ones. 0:01:35.319 --> 0:01:39.440 The old ones, of course, are gross margins. All these 0:01:39.440 --> 0:01:44.119 wonderful things Walmart's doing online, next day delivery, sending groceries 0:01:44.160 --> 0:01:46.640 even into your house, you know, being delivered in your 0:01:46.640 --> 0:01:48.800 fridge while you're at work. These are all great, but 0:01:48.840 --> 0:01:53.560 they're very expensive, so profitability gross margins were down again 0:01:53.640 --> 0:01:56.120 this quarter. But then there's some new concerns. You've got 0:01:56.320 --> 0:01:59.720 a management reshuffle. You have no leader right now at 0:01:59.760 --> 0:02:03.640 their Sam's Club warehouse division, their cost Co copycat and 0:02:04.040 --> 0:02:07.560 Sam's Club had a really poor quarter. Sales missed, profit 0:02:07.720 --> 0:02:10.360 was down, So you've got some new concerns as well. 0:02:10.560 --> 0:02:13.280 We're heading into the holiday season. You know, everybody needs 0:02:13.280 --> 0:02:15.080 to be at the top of their game, so people 0:02:15.120 --> 0:02:16.840 were looking to poke some holes, and it looks like 0:02:16.880 --> 0:02:20.360 they found some well, Jennifer, while investors might be poking 0:02:20.440 --> 0:02:23.640 some holes, your smart note says that Walmart continues to 0:02:23.680 --> 0:02:26.760 invest in the long run at the expensive near term earnings, 0:02:26.840 --> 0:02:30.639 and this is the right approach in your view. Why yes, so, 0:02:30.639 --> 0:02:33.640 so you know, long term Walmart is is if they 0:02:33.639 --> 0:02:37.400 want to be competitive long term, especially against um rising 0:02:37.440 --> 0:02:40.959 competitors and the Amazon dot Coms of the world, then 0:02:41.120 --> 0:02:44.799 the investment in the structure, in the infrastructure and the 0:02:44.840 --> 0:02:48.839 business to build an e commerce business is a necessary evil. UM. 0:02:48.919 --> 0:02:51.400 And that is weighing down on short term earnings, and 0:02:51.480 --> 0:02:54.720 everybody sort of expected that. Um. You know, Matt makes 0:02:54.720 --> 0:02:57.360 a great point that gross margin, you know, is still 0:02:57.400 --> 0:03:00.600 remains a concern, but it's not a new concern, um. 0:03:00.720 --> 0:03:02.760 And instead, you know, I think one of the other 0:03:03.000 --> 0:03:05.520 things that is coming out of today's earnings is just 0:03:05.600 --> 0:03:08.200 the idea that the e commerce growth at Walmart is 0:03:08.240 --> 0:03:12.559 seeing is right now heavily skewed to food UM, and investors, 0:03:12.800 --> 0:03:15.040 you know, over time would like to see a greater 0:03:15.120 --> 0:03:18.240 dependence on merchandise, which is higher margin, to help make 0:03:18.280 --> 0:03:20.640 that business a little bit less of a drug on 0:03:20.680 --> 0:03:23.679 the rest of the entity. And so, Matt, as you 0:03:24.040 --> 0:03:28.160 look ahead, especially to the next few months, what does 0:03:28.240 --> 0:03:31.280 Walmart need to do? What are the proof points that 0:03:31.560 --> 0:03:34.280 may get investors a little bit more on side. Well, 0:03:34.320 --> 0:03:35.480 it's not just what they need to do, it's what 0:03:35.520 --> 0:03:38.760 they need to stop doing. Um, they've stopped making these 0:03:38.800 --> 0:03:42.600 acquisitions of small, you know, digitally native sites, things like 0:03:42.680 --> 0:03:47.280 Bonobo's Modcloth, moose Jaw that was a key element of 0:03:48.320 --> 0:03:53.480 sound made up some like dystopian science fiction retail. Well, 0:03:53.520 --> 0:03:55.000 the jobs that some of them are seem to be 0:03:55.000 --> 0:03:57.320 made up these days because they're selling They've already sold 0:03:57.360 --> 0:04:01.920 Modcloth jet Black, which was a very expensive experiment in 0:04:02.200 --> 0:04:06.280 uh sort of text based commerce. Um, we've told, we've 0:04:06.480 --> 0:04:09.200 heard is you know on the block. Um, so they're 0:04:09.200 --> 0:04:11.600 going to be stopping making those acquisitions. What they need 0:04:11.640 --> 0:04:15.640 to start doing is selling more apparel, selling more home goods, 0:04:15.720 --> 0:04:18.800 things that target their rival is very very good at 0:04:18.880 --> 0:04:21.080 and it's done for years. Walmart is trying to get 0:04:21.120 --> 0:04:23.360 deeper into those two categories. But it's just but it's 0:04:23.360 --> 0:04:25.760 a stretch. You know, when you think of sheep, you know, 0:04:25.839 --> 0:04:29.280 cheap chek, you think of Target, not Walmart, you know, Jennifer, 0:04:29.360 --> 0:04:32.800 I understand that investors don't like the lower margin E 0:04:33.000 --> 0:04:37.000 grocery business, except this appears to be the one area 0:04:37.200 --> 0:04:40.840 where Walmart is leading Amazon. Amazon has to play catch 0:04:40.920 --> 0:04:43.320 up in the grocery space. They're going out there trying 0:04:43.320 --> 0:04:46.039 to build a brick and mortar grocery store because that 0:04:46.080 --> 0:04:49.080 curbside pickup feels like it's starting to become more popular 0:04:49.440 --> 0:04:53.240 than the grocery delivery that Amazon is known for. Why 0:04:53.320 --> 0:04:56.360 not double down, in Walmart's case, on that e grocery 0:04:56.400 --> 0:04:58.719 delivery because it feels like they're such a leader in 0:04:58.760 --> 0:05:01.839 that space. I will say, I don't think Walmart's really 0:05:01.880 --> 0:05:05.200 slowing down on grocery or e grocery, and they're continuing 0:05:05.240 --> 0:05:07.640 to expand the number of stores where you can do 0:05:07.800 --> 0:05:10.200 click and collect or the number of locations that will 0:05:10.240 --> 0:05:13.279 deliver to people's homes. But you're right, it is a 0:05:13.320 --> 0:05:16.159 competitive advantage that I think they want to be defensive 0:05:16.200 --> 0:05:20.000 about um. And so it's it's great that it's it's 0:05:20.040 --> 0:05:22.080 it's booming so much for them, and when you look 0:05:22.080 --> 0:05:26.120 at Walmart versus Amazon in terms of like geographic distribution. 0:05:26.640 --> 0:05:29.760 The Amazon does does well enough when you're talking about 0:05:29.839 --> 0:05:32.200 urban areas where lots of people don't own cars and 0:05:32.200 --> 0:05:35.080 they wouldn't have things delivered to their house, including groceries. 0:05:35.400 --> 0:05:37.440 But the power of clicking collect is that it really 0:05:37.600 --> 0:05:41.279 uses the store base to really get to mainstream, non 0:05:41.400 --> 0:05:45.279 urban America, and those consumers are responding as well. It's 0:05:45.320 --> 0:05:47.120 just that over time, you'd like to see the the 0:05:47.279 --> 0:05:50.560 overall e commerce balance um pick up a little bit 0:05:50.560 --> 0:05:52.840 more in the non food side as well. All Right, 0:05:52.880 --> 0:05:55.520 we're gonna leave it. There are lots more to look 0:05:55.560 --> 0:05:59.719 at with Walmart. Never an easy heart, straightforward story in 0:05:59.760 --> 0:06:03.839 many ways, owing to its size, scope and importance around 0:06:03.839 --> 0:06:07.960 the world, certainly here in the United States. Jennifer Bartashes 0:06:08.240 --> 0:06:11.440 is senior US retail Staples and Restaurants analysts for b I. 0:06:11.640 --> 0:06:14.839 She joined us on the phone from Bloomberg Intelligence headquarters 0:06:14.880 --> 0:06:18.159 in Princeton, and Matthew Boyle. Matt Boyle, US retail reporter 0:06:18.480 --> 0:06:21.800 for Bloomberg here with me in New York City. All right, 0:06:21.960 --> 0:06:27.120 let's head down to Baltimore. Dr Josh Sharfstein joins us. 0:06:27.120 --> 0:06:29.520 He is weis Stein for Public Health Practice and Community 0:06:29.560 --> 0:06:33.600 Engagement and the director of the Bloomberg American Health Initiative 0:06:33.640 --> 0:06:36.880 at Johns Hopkins University. And as you can probably tell 0:06:36.880 --> 0:06:38.720 by the name of the Bloomberg School of Public Health 0:06:39.000 --> 0:06:41.559 is supported by Michael R. Bloomberg, of course, the founder 0:06:41.560 --> 0:06:44.760 of BLOOMBERGALP and Bloomberg Philanthropies, Bloomberg ALP being the parent 0:06:45.080 --> 0:06:48.880 of Bloomberg News and Bloomberg Radio. Dr Scharstein, thank you 0:06:48.960 --> 0:06:52.000 so much for joining us. Thanks for having me. All right, 0:06:52.080 --> 0:06:55.280 So we talk a lot about the opioid crisis from 0:06:55.279 --> 0:06:58.159 many different angles. It's an economic story, it's obviously a 0:06:58.279 --> 0:07:03.320 very important social and really human story. Give us a 0:07:03.400 --> 0:07:07.280 sense of where we are right now, and as you 0:07:07.320 --> 0:07:11.040 look back, maybe we start there. What could we have 0:07:11.160 --> 0:07:14.840 done to essentially prevent this? In some cases? What's the 0:07:14.920 --> 0:07:18.320 lesson that we learned here? Well, I think there there 0:07:18.320 --> 0:07:20.680 are a few lessons. This is the greatest that is 0:07:20.760 --> 0:07:24.520 now largely responsible for the reduction in life expectancy over 0:07:24.560 --> 0:07:27.040 the last three years, which is the first time that's 0:07:27.040 --> 0:07:30.760 happened since World War One and the Great Influenza, and 0:07:30.800 --> 0:07:33.800 so it's having this enormous impact in communities of all 0:07:33.880 --> 0:07:36.960 kinds across the country. Um, there's probably a few different 0:07:37.000 --> 0:07:39.680 points in time where intervention would have made a difference. 0:07:39.720 --> 0:07:44.160 Most recently, for this current version, the huge increase in 0:07:44.200 --> 0:07:47.400 prescribing of opioids for pain was a major factor, and 0:07:47.440 --> 0:07:50.160 the fact that it took a long time for the 0:07:50.200 --> 0:07:53.040 medical community to wake up to the fact that the 0:07:53.080 --> 0:07:55.600 culture of medicine in a way changed and doctors were 0:07:55.640 --> 0:07:58.800 prescribing four or five times what they've been prescribing before, 0:07:58.840 --> 0:08:02.640 and a lot of patients got trouble. So dr I'm 0:08:02.680 --> 0:08:05.320 out here in San Francisco and we talk about big 0:08:05.440 --> 0:08:09.920 data and data privacy, and it sounds great, but it 0:08:10.040 --> 0:08:12.600 does bring up a lot of concerns. What is your 0:08:12.680 --> 0:08:16.120 solution to fold data into the conversation about how now 0:08:16.280 --> 0:08:19.560 to help the problem? Well, I think there have been 0:08:19.600 --> 0:08:22.640 a couple of great examples of states that are using 0:08:22.720 --> 0:08:26.760 data to identify the risk factors for overdose and more importantly, 0:08:26.800 --> 0:08:30.040 in my mind, the opportunities intervened and help people. So 0:08:30.480 --> 0:08:34.920 I call out Massachusetts and Maryland. Massachusetts did a great 0:08:35.440 --> 0:08:38.760 big data project where they merged in their data from 0:08:38.880 --> 0:08:41.719 corrections with the data from the healthcare as well as 0:08:42.000 --> 0:08:46.720 um data from fatalities from the Corner Medical Examiner, and 0:08:46.760 --> 0:08:50.079 what they found, for example, was that people who have 0:08:50.240 --> 0:08:53.600 been incarcerated were at over a hundred times the risk 0:08:53.640 --> 0:08:55.800 of dying of an overdose when they got out compared 0:08:55.840 --> 0:08:59.079 to the general population. But when those same people were 0:08:59.120 --> 0:09:02.240 given treatment with medications, there was a dramatic drop in 0:09:02.280 --> 0:09:05.680 their risk of death. The Maryland data has found that 0:09:06.280 --> 0:09:09.719 the highest risk individuals for overdose death are people who 0:09:09.720 --> 0:09:13.120 have actually been in the emergency room and the hospital, 0:09:13.800 --> 0:09:16.960 as well as had contact with the criminal justice system. 0:09:17.000 --> 0:09:19.240 And what I think makes both of those findings very 0:09:19.240 --> 0:09:23.640 interesting is that by and large, hospitals, the medical community, 0:09:23.679 --> 0:09:27.440 and jails have failed to provide lifesaving treatment. They often 0:09:27.480 --> 0:09:29.560 don't operate to people who need it. And I think 0:09:30.240 --> 0:09:32.360 big data analyses are sort of a wake up call 0:09:32.480 --> 0:09:35.840 to the medical community and to criminal justice that every 0:09:35.880 --> 0:09:38.360 contact with someone who is an opportunity actually to to 0:09:38.400 --> 0:09:43.120 get people into effective care. Doctor Scharstein, It's interesting, you know, 0:09:43.200 --> 0:09:46.240 as we think about the solutions here. I spent yesterday 0:09:46.280 --> 0:09:49.640 at the nine eleven Memorial and Museum on a security 0:09:49.760 --> 0:09:52.880 and a security summit, and you know, one of the 0:09:53.080 --> 0:09:56.760 continuous themes there was this cooperation between the public side 0:09:57.120 --> 0:09:59.719 and the private sector, and a lot of what it 0:09:59.760 --> 0:10:03.080 sounds like you're talking about does rely on a public 0:10:03.120 --> 0:10:07.920 sector solution in many ways, but also private industry coming in. 0:10:08.360 --> 0:10:11.360 How does that work? How does it happen in your estimation? 0:10:11.960 --> 0:10:15.440 So the Massachusetts analysis I mentioned was actually done with 0:10:15.559 --> 0:10:18.920 in a consortium, a public private consortium. Dr Monica Brell's 0:10:19.160 --> 0:10:23.080 Commissioner of Health in Massachusetts and UM she brought in 0:10:23.440 --> 0:10:25.640 with the governor number of tech companies to help them 0:10:25.640 --> 0:10:28.280 really do the right analysis. I'll be honest with you, 0:10:28.400 --> 0:10:30.720 there are some clouds on the horizon in this big 0:10:30.800 --> 0:10:34.160 data world. There's you know, sometimes I think companies will 0:10:34.240 --> 0:10:36.760 take data and they'll show up and say, you know, 0:10:37.000 --> 0:10:40.720 let's tell the doctor the percentage chance that the person 0:10:40.800 --> 0:10:42.319 right in front of them is going to overdose, and 0:10:42.360 --> 0:10:45.079 maybe they won't prescribe something. Those things I think might 0:10:45.080 --> 0:10:47.000 be a little bit fraught. I'd like to see the 0:10:47.080 --> 0:10:50.880 public private partnership where the public sector can actually pause 0:10:50.920 --> 0:10:53.320 and say, like, is this a good idea? You know, 0:10:53.360 --> 0:10:55.480 will this make the care better or worse? And you 0:10:55.559 --> 0:10:58.719 have sort of the the technology and the skills from 0:10:58.720 --> 0:11:01.600 the private sector, but the judgment in the sense of 0:11:01.640 --> 0:11:04.680 the overall problem that's the public sector brings. What about 0:11:04.800 --> 0:11:09.920 hip of violations and data privacy rules, Well, um, most 0:11:09.960 --> 0:11:14.120 of these analyzes are done at an aggregate level, so 0:11:14.200 --> 0:11:18.520 you're not using the individual's names. Um, there are There 0:11:18.559 --> 0:11:22.120 is the risk though, um, of course, that data systems 0:11:22.120 --> 0:11:24.880 can be compromised, and it's very important that when analyzes 0:11:24.880 --> 0:11:26.839 are being done that you know, there are a lot 0:11:26.840 --> 0:11:30.640 of data security standards. For me, the core question is 0:11:30.640 --> 0:11:33.960 is the analysis that's going to be done, you know, 0:11:34.120 --> 0:11:37.480 conceived of correctly, and is it going to be helpful 0:11:37.520 --> 0:11:40.520 to people? You know? For example, I'm aware of some 0:11:41.440 --> 0:11:43.840 you know ideas where people say like, well, if somebody 0:11:43.840 --> 0:11:47.400 has had a problem, you know with being arrested years 0:11:47.440 --> 0:11:51.360 in the past, then we won't ever give them an opioid. Again, Well, 0:11:52.080 --> 0:11:54.079 that could backfire in a lot of different ways. The 0:11:54.160 --> 0:11:57.480 person may really be in pain and needs treatment or 0:11:57.600 --> 0:11:59.320 and if they don't get it, they may go out 0:11:59.440 --> 0:12:02.040 and how to use you know, drugs on the street 0:12:02.080 --> 0:12:04.280 and be a much greater risk of death. So I 0:12:04.400 --> 0:12:07.440 really think the key is, um, you know, not just 0:12:07.559 --> 0:12:09.960 following the law, but having a really good idea. And 0:12:10.000 --> 0:12:12.320 I think it's a public private partnership there that that 0:12:12.360 --> 0:12:15.079 can make sure that we steer away from the bad idea. 0:12:15.360 --> 0:12:18.040 All right, well, it's a great overview, and we appreciate 0:12:18.080 --> 0:12:21.800 the context so much. Thank you. Dr Josh Sharfstein he 0:12:21.880 --> 0:12:24.840 is weis Stein for Public Health Practice and Community Engagement 0:12:25.200 --> 0:12:27.760 and the director of the Bloomberg American Health Initiative at 0:12:27.840 --> 0:12:31.199 Johns Hopkins University. He joined us on the phone from 0:12:31.400 --> 0:12:38.880 Baltimore to set all right, well, let's talk a little 0:12:38.880 --> 0:12:41.840 bit about the market from a macro level, and then 0:12:41.880 --> 0:12:45.000 we're gonna go down a level with George Schulty. He 0:12:45.080 --> 0:12:47.480 is the founder of Shalty Asset Management. He's based up 0:12:47.520 --> 0:12:51.160 in Rye Brook, New York, just up the New Haven Line, 0:12:51.200 --> 0:12:54.280 I believe, from us here in New York City. He 0:12:54.360 --> 0:12:58.240 joins Taylor Riggs and myself. So, George, great to see you, 0:12:58.440 --> 0:13:00.720 Great to be here again. Thank you. All right, So, 0:13:01.320 --> 0:13:04.640 this market, you know, I feel like we're trying to 0:13:04.760 --> 0:13:07.320 now make some sense of it as we get closer 0:13:07.480 --> 0:13:09.760 to the end of the year. As you sort of 0:13:10.160 --> 0:13:14.679 look back over nineteen, what's your takeaway so far? Well, 0:13:14.720 --> 0:13:17.360 it's been quite a quite a phenomenal amount of growth. 0:13:17.400 --> 0:13:19.200 I mean, this has been going on for eleven years now, 0:13:19.679 --> 0:13:22.880 and so you have, you know, kind of an uncertain situation, 0:13:22.880 --> 0:13:25.719 though I think Powell struggling with it. With extremely low 0:13:25.760 --> 0:13:30.400 interest rates, stubbornly low inflation UM. But there's still quite 0:13:30.400 --> 0:13:34.480 the amount of monetary accommodation going on in the US. 0:13:34.800 --> 0:13:38.360 There's a lot of fiscal policy accommodation as well. UM. 0:13:38.480 --> 0:13:41.640 You have the unemployment rate close to a fifty year 0:13:41.679 --> 0:13:44.520 or low UM at about three point six percent. You 0:13:44.559 --> 0:13:47.960 have growth in the US at about one I guess, 0:13:48.000 --> 0:13:49.880 a little bit soft in the last quarter due to 0:13:49.920 --> 0:13:53.560 the GM strike and some weakness and business investment UM. 0:13:53.640 --> 0:13:56.760 But but again an inflation stubbornly low, still below two 0:13:56.760 --> 0:13:59.319 percent at one point seven percent UM. And I think 0:13:59.360 --> 0:14:02.520 that's why Powell, you know, is continuing to put his 0:14:02.520 --> 0:14:06.320 foot down on the accelerator. You know, George, it's Tailor Riggs. 0:14:06.360 --> 0:14:09.559 I'm out here in San Francisco covering all things technology. 0:14:09.679 --> 0:14:11.840 So what I'm doing is I'm going around and asking 0:14:11.880 --> 0:14:14.520 everyone I know in New York the same pole question 0:14:14.559 --> 0:14:18.440 to try to get my head wrapped around the real 0:14:18.520 --> 0:14:21.800 story I've been covering tech. Let's pretend I've been ignoring 0:14:21.840 --> 0:14:25.240 everything else. Tell me what is driving the markets right now? 0:14:25.360 --> 0:14:30.480 Is it Powell impeachment, earnings? What have I missed? So 0:14:30.520 --> 0:14:32.840 I think one of the big things that's driving tech 0:14:32.960 --> 0:14:35.920 is is just you know, money inflows into the massive 0:14:35.960 --> 0:14:38.320 e t f s that that are forced to buy 0:14:38.360 --> 0:14:42.000 the largest growing companies. UM. I think there's also a 0:14:42.160 --> 0:14:44.840 you know, a wave of new cash still flooding into 0:14:44.840 --> 0:14:47.800 the fixed income market, and I think that is probably 0:14:47.840 --> 0:14:51.240 creating some risks because I think companies are probably borrowing 0:14:51.240 --> 0:14:52.760 a little bit more than they should be at this 0:14:52.760 --> 0:14:54.720 point in the cycle. I think it's a function of 0:14:54.760 --> 0:14:58.560 interest rates being so low and investors desperate for fixed 0:14:58.560 --> 0:15:01.240 income yield. And I think because of that, you're seeing 0:15:01.280 --> 0:15:03.720 some some interesting things in the tech space, Like with 0:15:03.800 --> 0:15:07.040 we Work. I mean, that company probably shouldn't be borrowing money, 0:15:07.080 --> 0:15:09.480 but you know, it's able to, or was able to 0:15:09.600 --> 0:15:12.760 borrow money up until now, even though by all means 0:15:12.800 --> 0:15:16.280 it looks like it's probably an insolvent enterprise. UM. So 0:15:16.320 --> 0:15:19.520 there there's some very unique things happening in the market 0:15:19.560 --> 0:15:22.000 because interest rates are really so low there, as low 0:15:22.040 --> 0:15:24.280 as they've been in the history of the planet. UM. 0:15:24.320 --> 0:15:27.600 And this past summer, of course, we saw negative yielding 0:15:27.680 --> 0:15:31.400 debt reach seventeen trillion dollars. That's never been that's never 0:15:31.440 --> 0:15:33.440 happened before in the history of the world. So I 0:15:33.480 --> 0:15:36.600 think what it's generating is the risk of asset bubbles, 0:15:36.680 --> 0:15:40.440 and hopefully as some of those unwind, you won't have 0:15:40.560 --> 0:15:43.520 systemic risk or systemic you know, fallout that could cause 0:15:43.560 --> 0:15:47.000 a real shock. So I know part of your background 0:15:47.120 --> 0:15:51.800 and you never fully leave this world is special situations. Distress. Uh, 0:15:51.880 --> 0:15:53.920 not a lot of distress, it feels like in the 0:15:53.960 --> 0:15:57.480 world at the moment, but they're always special situations. And 0:15:57.920 --> 0:16:01.160 one of them that I believe you looked at is 0:16:01.280 --> 0:16:03.960 actually right there in Taylor's backyard, which is p g 0:16:04.080 --> 0:16:06.800 n A. Right, how do you look at a name 0:16:06.880 --> 0:16:09.400 like that? So a lot of people say, by the way, 0:16:09.400 --> 0:16:11.440 with regard to distress, that there's not much going on, 0:16:11.480 --> 0:16:13.920 But I think that's a bit of a misnomer because 0:16:13.920 --> 0:16:16.400 if you look at the default rate, which a lot 0:16:16.400 --> 0:16:19.360 of the major investment banks that like to sell high 0:16:19.440 --> 0:16:22.880 yield bonds um it really just measures junk raded debt 0:16:22.920 --> 0:16:27.120 default rates, and that's that's it's below three. But here 0:16:27.160 --> 0:16:29.280 you have pg N E, which is one of the 0:16:29.280 --> 0:16:33.280 ten largest bankruptcies of all time, and it's active right now. UM. 0:16:33.800 --> 0:16:36.040 I think, by the way, just parenthetically, you know, some 0:16:36.080 --> 0:16:38.280 of the other California utilities might be at risk too 0:16:38.280 --> 0:16:41.200 because of you know, the terrible wildfires we've had out there. 0:16:41.520 --> 0:16:42.960 But yeah, the way we look at that is, just 0:16:43.000 --> 0:16:45.680 like any other distress credit, we look at the company's 0:16:45.720 --> 0:16:48.600 capital structure. In this case, because it has so much 0:16:48.680 --> 0:16:52.000 litigation liability, you can throw in about twenty five maybe 0:16:52.000 --> 0:16:54.760 even as highest thirty billion of additional claims into the 0:16:54.800 --> 0:16:57.480 capital structure and then try to value the business on 0:16:57.520 --> 0:17:00.000 an unlevered basis, and and try to figure out where 0:17:00.040 --> 0:17:02.840 air in the pecking order, uh, you know, the lenders 0:17:03.120 --> 0:17:05.320 or maybe even the equity owners would get a recovery 0:17:05.680 --> 0:17:09.200 in this case. We think that ultimately there have been 0:17:09.359 --> 0:17:13.080 you know, a number of plans of reorganizations proposed. Um. 0:17:13.160 --> 0:17:15.240 There's been a lot of litigation back and forth about 0:17:15.240 --> 0:17:18.480 who has control over the case. Recently, the judge gave 0:17:18.520 --> 0:17:21.600 the bond holders approval to file a plan, and their 0:17:21.640 --> 0:17:24.600 plan looks like it dilutes the equity holders down to 0:17:24.720 --> 0:17:28.480 nearly nothing, which is actually typically what happens with bankrupt companies. 0:17:28.680 --> 0:17:32.399 So so we think short selling the PGNI stock just 0:17:32.520 --> 0:17:34.400 under seven dollars a share makes a lot of sense 0:17:34.440 --> 0:17:37.760 for a potential return. That's probably the lowest risk way 0:17:37.800 --> 0:17:41.000 to play this um and and and separately, of course, 0:17:41.440 --> 0:17:43.960 you know the situation in California with forest fires and 0:17:44.040 --> 0:17:47.439 new fires, even after the bankruptcy, it's it's really terrible, 0:17:47.480 --> 0:17:50.480 and you know, we hope they figured it out out there. George, 0:17:50.480 --> 0:17:53.480 reading through your recommendations, you talk about stock buy backs 0:17:53.480 --> 0:17:56.439 and special dividends and or M and A. I'm taking 0:17:56.440 --> 0:17:58.600 a look at a chart here, and it's the invest 0:17:58.680 --> 0:18:02.000 Go buy Back et F. So the investing companies that 0:18:02.040 --> 0:18:04.639 have bought back at least five percent of their shares 0:18:04.680 --> 0:18:07.720 in the last few years, and that's outperforming the dividend 0:18:07.720 --> 0:18:10.480 et F, which invest in companies that have consistently raised 0:18:10.480 --> 0:18:13.600 their dividend over the last ten years. Why are companies 0:18:13.680 --> 0:18:17.119 that are doing share buy backs outperforming companies that are 0:18:17.200 --> 0:18:20.399 raising their dividends. That's a good question, and that's interesting 0:18:20.400 --> 0:18:23.359 observation about it outperforming. I think that that makes sense 0:18:23.600 --> 0:18:28.080 in my view because essentially, you know, companies are making 0:18:28.160 --> 0:18:29.840 the decision to buy back in their own stock when 0:18:29.840 --> 0:18:33.320 they think it's cheap. And the result for remaining shareholders 0:18:33.320 --> 0:18:36.359 who do not sell into that buy back, whether it's 0:18:36.400 --> 0:18:39.240 sort of a program or a special one time buy back, 0:18:39.840 --> 0:18:42.040 is that you reduce the float outstanding and the and 0:18:42.080 --> 0:18:45.440 the smaller universe of shareholders can share the same cash 0:18:45.480 --> 0:18:48.200 flow that you had before, all other things equal. Um. 0:18:48.280 --> 0:18:50.359 So it also happens to you know, it tends to 0:18:50.440 --> 0:18:52.679 put a sort of a bottom on on a on 0:18:52.720 --> 0:18:55.600 the stock that might be volatile. And so I think 0:18:55.640 --> 0:18:58.280 management teams and boards that are deciding to do that 0:18:58.520 --> 0:19:00.960 in many cases it's the right thing because of reducing 0:19:00.960 --> 0:19:03.520 float that uh you know that that really they don't need. 0:19:03.600 --> 0:19:05.600 It's a it's a higher form of or a higher 0:19:05.640 --> 0:19:08.399 cost of capital certainly than you can get in the 0:19:08.400 --> 0:19:10.720 fixed income market these days. And if you're under levered, 0:19:11.320 --> 0:19:14.040 meaning you know, you're not even investment like you have 0:19:14.080 --> 0:19:16.240 hardly any debt at all, this might be a great 0:19:16.240 --> 0:19:18.680 way to use your capital. Right, all right, Always good 0:19:18.680 --> 0:19:20.159 to catch up with you, Thank you so much for 0:19:20.200 --> 0:19:23.560 coming in. George Chelty is founder of Shelty Asset Management, 0:19:23.560 --> 0:19:26.080 based up in Rye Brook, New York. Here with us 0:19:26.080 --> 0:19:35.199 in our Bloomberg Interactive Broker's studio. All right, So the 0:19:35.240 --> 0:19:38.840 cover story this week in Bloomberg Business Week. It's a 0:19:39.040 --> 0:19:42.160 must read and once you read it, I guarantee you're 0:19:42.160 --> 0:19:44.600 going to be talking about it. Ashley Vance wrote it. 0:19:44.720 --> 0:19:48.760 He is a writer, a host, and author so many 0:19:48.800 --> 0:19:52.119 things here at Bloomberg. He joins us on the phone 0:19:52.200 --> 0:19:56.520 from Palo Alto Joel Weber, the editor of Bloomberg Business Week. 0:19:56.520 --> 0:19:59.800 He is here with me in our Bloomberg Interactive Broker's studio. 0:19:59.840 --> 0:20:02.640 And I have to say, Ashley, when I first read 0:20:02.680 --> 0:20:06.879 this story, I did, to quote my co host Carol Masser, 0:20:07.000 --> 0:20:10.399 A wait, what sort of moment? How did this even 0:20:10.480 --> 0:20:14.400 come onto your radar screen? Well, you know, I've been 0:20:14.480 --> 0:20:18.159 covering open source for about twenty years, and uh, and 0:20:18.200 --> 0:20:20.200 I got a call from kid hub, which is is 0:20:20.280 --> 0:20:23.680 kind of the biggest platform to where open source code 0:20:23.720 --> 0:20:26.000 gets me these days, and they told me they have 0:20:26.119 --> 0:20:29.760 this crazy idea to go baring the world's source code 0:20:29.920 --> 0:20:32.600 in in small bud and and I managed to talk 0:20:32.680 --> 0:20:37.320 my way into seeing it. So, Ashley, what was it like? 0:20:37.400 --> 0:20:39.960 I think you told me yesterday was literally like a 0:20:40.080 --> 0:20:43.840 storage shed? Is that right? Yeah? I did. They had 0:20:43.880 --> 0:20:47.159 put us some photos beforehand of artist mock ups and 0:20:47.280 --> 0:20:49.800 what this big would look like. Was there sci fi 0:20:49.840 --> 0:20:52.400 and and fantastic And when I got there now, I mean, 0:20:52.440 --> 0:20:55.840 you know, weird town and abandoned coal mine. They used 0:20:55.840 --> 0:20:58.240 to be owned by a Norwegian company. It was covered 0:20:58.280 --> 0:21:01.159 in preno frost and hid our way. So there are 0:21:01.240 --> 0:21:03.560 then there's this tool sheds that are there um with 0:21:03.640 --> 0:21:10.040 these fancy reels of film and storage. So so actually, uh, 0:21:10.160 --> 0:21:13.280 they're not the only ones who have stashed something in 0:21:13.280 --> 0:21:16.159 in a cave nearby. There's also this followed by a 0:21:16.880 --> 0:21:20.680 global seed vault, where in the event of an apocalypse, hey, 0:21:21.040 --> 0:21:24.639 I'll go there and find some seeds. But the thinking 0:21:24.640 --> 0:21:26.400 here is that, you know, this is a place that 0:21:26.520 --> 0:21:30.280 should anything really really go wrong in the world, we 0:21:30.320 --> 0:21:35.240 can stash things. And why open source? Why why would 0:21:35.240 --> 0:21:37.679