WEBVTT - Facebook’s Business Model Relies On Polarizing Fears: McNamee 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Abramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg P and L 0:00:20.840 --> 0:00:33.120 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Roger McNamee, 0:00:33.240 --> 0:00:36.199 co founder Elevation Partners, also one of the leaders of 0:00:36.200 --> 0:00:39.120 the band Moon Alice, and he joins us here in 0:00:39.200 --> 0:00:43.000 our eleven three oh studios based in Menlo Park, California. 0:00:43.120 --> 0:00:46.120 Roger Pleasure, thanks for being here him. It is always 0:00:46.120 --> 0:00:48.559 fun to be on Bloomberg Radio. All right, are you 0:00:48.600 --> 0:00:52.800 addicted to the Internet. Well, I'm definitely addicted to social 0:00:52.800 --> 0:00:56.560 media and my smartphone. In fact, the realization of that 0:00:56.680 --> 0:01:00.880 fact was one of those incredibly disapp pointing things where 0:01:00.880 --> 0:01:02.960 I went, oh, my gosh, you know, I think of 0:01:03.000 --> 0:01:06.480 myself as self disciplined. I think of myself this being 0:01:06.560 --> 0:01:12.920 fitness oriented and ah. The realization that that this thing 0:01:13.000 --> 0:01:17.520 was controlling my life was not my finest heart. When 0:01:17.520 --> 0:01:20.000 when was this? Uh? And I should also note that 0:01:20.000 --> 0:01:22.160 you're you know, you've got an iPad it in your 0:01:22.200 --> 0:01:25.199 hands right now. I do, and in fact so I. 0:01:25.200 --> 0:01:27.959 I have spent thirty five years as an investor in 0:01:27.959 --> 0:01:31.080 the technology industry, and I've always been an early adopter, 0:01:31.400 --> 0:01:36.160 and I've always felt that technology was a thing, that 0:01:36.240 --> 0:01:38.000 it was a tool, but it was a tool that 0:01:38.120 --> 0:01:40.319 could make my life better in a lot of ways. 0:01:40.520 --> 0:01:45.080 And that has been consistently true. I mean, notwithstanding all 0:01:45.120 --> 0:01:47.280 of the aggravation. If you think thirty five years, you've 0:01:47.280 --> 0:01:51.040 gone back, that's the very beginning of personal computers. And 0:01:51.200 --> 0:01:53.520 God knows a lot of the products along the way 0:01:53.600 --> 0:01:57.680 have delivered less than than their initial promise. The challenge 0:01:57.680 --> 0:02:00.520 that we have with internet platforms on smart phones is that, 0:02:00.680 --> 0:02:03.360 for the first time, we have a device in a 0:02:03.400 --> 0:02:08.240 smartphone that can really deliver any kind of content more 0:02:08.320 --> 0:02:12.840 or less anywhere, Lucien, every moment that you're awake, and 0:02:13.360 --> 0:02:18.160 you know, like everyone else, I did not anticipate how 0:02:18.240 --> 0:02:21.040 that was going to change my life. I mean, the 0:02:21.320 --> 0:02:26.720 good parts were obvious immediately. The dark side became clear, only, 0:02:27.000 --> 0:02:29.680 shall we say, with a lag, and sadly that leg 0:02:29.800 --> 0:02:33.120 was well passed the point at which I was largely 0:02:33.360 --> 0:02:36.639 unable to modify my behavior. So, Roger, you are an 0:02:36.639 --> 0:02:40.720 early investor with both Google and Facebook, and you've been 0:02:40.720 --> 0:02:44.560 writing columns basically bashing them for the past years, so 0:02:44.880 --> 0:02:48.720 basically saying that Facebook and Google threatened public health and democracy. 0:02:49.320 --> 0:02:53.160 I invested early in Google and Facebook. Now they terrify me. 0:02:53.680 --> 0:02:56.160 Have you heard any response from me there of the company? 0:02:56.200 --> 0:02:59.519 I have not. And so the important thing to understand 0:02:59.639 --> 0:03:02.080 is that before I went public on this, I spent 0:03:02.200 --> 0:03:07.720 four months appealing to Facebook directly, starting with Mark Zuckerberg 0:03:07.720 --> 0:03:11.760 and Cheryl Sandberg and then working with other executives that 0:03:11.840 --> 0:03:15.840 they had delegated to deal with this, beginning in October 0:03:16.720 --> 0:03:21.600 before the election UH, and accelerating dramatically on November nine, 0:03:22.520 --> 0:03:25.000 where I tried for four months as a friend of 0:03:25.000 --> 0:03:28.160 the firm to persuade them that I thought that the 0:03:28.320 --> 0:03:31.360 things that we were seeing with respect to Brexit, with 0:03:31.400 --> 0:03:35.520 respect to the U S election, with respect to UM firm, 0:03:35.680 --> 0:03:40.080 financial firms using Facebook tools to discriminate in housing, UH, 0:03:40.240 --> 0:03:42.320 some of the things related to Black Lives Matter, some 0:03:42.360 --> 0:03:44.520 of things that were going on overseas, that I thought 0:03:44.600 --> 0:03:47.320 all of those things had a common route, which was 0:03:47.400 --> 0:03:49.920 to say that the business model of Facebook, the advertising 0:03:49.960 --> 0:03:53.120 business model and the way the algorithms were set up 0:03:53.760 --> 0:03:59.200 created um incentives for bad actors to use the platform, 0:03:59.320 --> 0:04:01.560 and that really terrified me. You know, I just have 0:04:01.640 --> 0:04:04.760 to say we did get Jana Partners and cal Stars, 0:04:04.840 --> 0:04:07.840 the second biggest public pension in the US coming out 0:04:07.920 --> 0:04:11.480 putting a letter out appealing as investors in Apple, appealing 0:04:11.480 --> 0:04:16.040 that they study the effect of iPhones on children. Apple responds, 0:04:16.320 --> 0:04:18.719 We're fine, We're good. We have the protections that we 0:04:18.760 --> 0:04:21.599 need and we're looking at it. I mean, since this 0:04:21.720 --> 0:04:25.679 behavior has gotten so rooted, is there any financial reason 0:04:26.440 --> 0:04:30.880 for Facebook, Google, or Apple to modify anything about their businesses? 0:04:31.240 --> 0:04:33.760 So that is a, I think a great question. Now 0:04:33.800 --> 0:04:36.799 I want to come a little bit to Apple's defense. Apple, 0:04:36.960 --> 0:04:41.320 as the the maker of the iPhone, has an unusual 0:04:41.680 --> 0:04:45.920 market power here, and to their credit, they've exercised that 0:04:46.279 --> 0:04:52.120 very constructively over the last year without any external stimuli. 0:04:52.400 --> 0:04:55.839 The most important thing they did was they've upgraded the 0:04:55.839 --> 0:04:59.760 operating systems over the last few months and they eliminated 0:05:00.360 --> 0:05:03.880 auto play in Internet applications. This is really important for 0:05:04.040 --> 0:05:07.320 video on the Internet, and they essentially made it impossible 0:05:07.360 --> 0:05:13.080 for Facebook and Netflix to have AutoPlay b the default thing, 0:05:13.760 --> 0:05:18.120 and that was a very consumer friendly thing. They've also 0:05:18.320 --> 0:05:21.520 been very good at enabling things like ad blockers and 0:05:21.600 --> 0:05:25.719 tracking blockers to protect your privacy. There's a lot more 0:05:25.760 --> 0:05:30.720 Apple can do, and I welcome shareholders taking a role here. 0:05:30.720 --> 0:05:34.600 I do think shareholder activism is going to matter a 0:05:34.600 --> 0:05:39.240 lot because I'm very concerned that there is no appetite 0:05:39.240 --> 0:05:43.280 for regulation of this in the United States. And realistically, 0:05:43.320 --> 0:05:47.159 we're so early in the process of educating consumers about 0:05:47.160 --> 0:05:49.840 what's going on that it's going to take years. And 0:05:50.279 --> 0:05:52.400 you know, we have an election coming up in November. 0:05:52.880 --> 0:05:56.320 There will for sure be massive attempts to manipulate, just 0:05:56.520 --> 0:05:59.880 as there were in probably coming from people both inside 0:05:59.880 --> 0:06:03.640 the US and outside, left right center, all over the place. 0:06:03.680 --> 0:06:06.200 I mean, essentially, the Russians showed you that you can 0:06:06.279 --> 0:06:09.880 use those tools to produce the outcome of your dreams. 0:06:10.240 --> 0:06:11.880 And we're going to see a lot of people try. 0:06:11.960 --> 0:06:14.040 Many of them will fail, but we're going to see 0:06:14.040 --> 0:06:16.839 a lot of people try. Because it is inherent in 0:06:16.880 --> 0:06:23.440 the design of Facebook that the way they talk about 0:06:23.520 --> 0:06:25.760 bringing people together, but in fact what the product does 0:06:26.279 --> 0:06:30.839 is it it polarizes. It basically tries to um in 0:06:30.960 --> 0:06:34.080 order to service its business models. Business models based on advertising. 0:06:34.120 --> 0:06:37.880 Advertising is based on engagement. Engagement is based on emotion. 0:06:38.200 --> 0:06:41.000 The emotions that cause the highest engagement are the ones 0:06:41.080 --> 0:06:44.440 we call the lizard brain emotions, things like fear and anger. 0:06:45.120 --> 0:06:48.479 And the problem with fear and anger, obviously, is that 0:06:48.520 --> 0:06:52.560 they're asymmetric, and people who want to do harm can 0:06:52.640 --> 0:06:54.840 use fear and anger a lot more effectively than people 0:06:54.880 --> 0:06:57.880 want to do good. And I first observed that during Brexit, 0:06:58.080 --> 0:07:00.719 So when the UK was voting whether to leave the 0:07:00.760 --> 0:07:07.640 European Union, there was the campaign to leave was based 0:07:07.720 --> 0:07:11.040 on two kind of outrageous emotional appeals. One they were 0:07:11.040 --> 0:07:13.760 going to take all the savings and bail out the 0:07:13.880 --> 0:07:18.000 National Health Service, and the one they really focused on 0:07:18.040 --> 0:07:21.760 was terrifying people about the role that immigrants were playing 0:07:21.800 --> 0:07:24.880 in the economy and in the culture. And the leave 0:07:25.320 --> 0:07:28.000 or Sorry the Remain campaign the other side, had a 0:07:28.280 --> 0:07:34.360 very sedate kind of, you know, stay the course, unemotional appeal. 0:07:34.680 --> 0:07:37.760 They were doomed. And we don't know exactly, but we 0:07:37.840 --> 0:07:42.240 suspect that the economic advantage to the leave campaign of 0:07:42.400 --> 0:07:45.960 using products like Facebook was roughly twenty to one. That is, 0:07:46.040 --> 0:07:48.800 if you had a negative you know, tear it down 0:07:48.920 --> 0:07:51.239 kind of thing. I think that appealed to anger and fear. 0:07:51.880 --> 0:07:55.120 You get roughly twenty times the reach for every dollar 0:07:55.240 --> 0:07:59.240 you invest, and that is a prohibitive advantage. And it's 0:07:59.280 --> 0:08:01.920 a symmetric. There is nothing that the people with the 0:08:01.960 --> 0:08:06.200 positive campaign can do because Facebook isn't structured to emphasize 0:08:06.240 --> 0:08:11.160 the positive, is structured to emphasize the negative. That's a choice. 0:08:11.240 --> 0:08:14.800 Real quick twenty seconds. Do you still own any steak 0:08:14.920 --> 0:08:17.160 in Google and Facebook? I do own a steak in 0:08:17.200 --> 0:08:19.400 Facebook because I'm trying to help them get this right. 0:08:19.600 --> 0:08:21.480 I want to work with them. But would you sell 0:08:21.520 --> 0:08:24.520 it if they didn't do it right eventually? Yes, of course, 0:08:24.600 --> 0:08:27.520 but I hold hope. I mean, I think these are 0:08:27.520 --> 0:08:29.120 smart people. I think they're good people. I don't think 0:08:29.120 --> 0:08:32.240 they intended to do this. Roger mcnameee, thank you so 0:08:32.360 --> 0:08:34.920 much for joining us. Always always a pleasure speaking with you. 0:08:35.160 --> 0:08:39.840 Roger McNamee is co founder of Elevation Partners in Menlo Park, California. 0:08:39.920 --> 0:08:43.120 He's also in a band, Muna Alice. He's got the 0:08:43.120 --> 0:08:44.920 callouses on his fingers to show it. We were going 0:08:44.960 --> 0:08:47.440 to ask him to freestyle and he was prepared, So 0:08:47.600 --> 0:08:50.080 maybe the rest of the show will be just that, 0:08:50.280 --> 0:09:08.920 thank you so much for joining us. Tesla the company 0:09:08.960 --> 0:09:12.599 that continues to defy calls for its demise. Tesla is 0:09:12.640 --> 0:09:16.240 burning through about a billion dollars of cash each quarter, 0:09:16.520 --> 0:09:20.920 and now it's having trouble meeting its goals with respect 0:09:21.000 --> 0:09:24.439 to production meeting it's probably going to have to raise 0:09:24.679 --> 0:09:27.720 more money. Here with us to talk about its debt 0:09:27.800 --> 0:09:30.959 profile and how it might meet its financing needs is 0:09:31.080 --> 0:09:34.920 Joel Levington, senior credit analyst for Bloomberg Intelligence who joins 0:09:35.000 --> 0:09:38.240 us at our eleven three oh studios. Joel, Tesla has 0:09:38.280 --> 0:09:42.679 already issued debt. It has fallen in price with yields 0:09:42.920 --> 0:09:46.360 rising since issue ends. What are its options at this 0:09:46.440 --> 0:09:49.640 point for raising money in the debt market? Sure, well, 0:09:49.679 --> 0:09:52.000 I think they have a few options. They've issued both 0:09:52.000 --> 0:09:55.320 senior unsecured notes. They can always go back to that market. UH. 0:09:55.400 --> 0:09:57.679 To me, I think they would be smarter to use 0:09:57.840 --> 0:10:01.360 a convertible instrument. They have several UH convertible bonds that 0:10:01.400 --> 0:10:04.640 are outstanding. Mainly because at this point in time, when 0:10:04.720 --> 0:10:07.959 cash flow is weak, to put on a fixed layer 0:10:08.000 --> 0:10:11.120 of interest EXPANSE on top of that UH really puts 0:10:11.200 --> 0:10:13.080 extra pressure on the on the P and L, and 0:10:13.120 --> 0:10:16.120 also on the balance sheet. So does this also include 0:10:16.160 --> 0:10:19.320 the depth that was incurred by the purchase of Solar City. 0:10:19.800 --> 0:10:21.959 That's exactly right. And one of the interesting things about 0:10:21.960 --> 0:10:25.880 how the rating agencies look at Tesla is that none 0:10:25.880 --> 0:10:29.400 of that Solar City debt is guaranteed, so essentially Tesla 0:10:29.400 --> 0:10:31.720 could walk away from it if they chose to. But 0:10:31.760 --> 0:10:34.520 the rating agencies included in all their calculations as if 0:10:34.520 --> 0:10:37.200 they would never walk away from it. Uh. I find 0:10:37.200 --> 0:10:39.920 that to be interesting simply because the Solar City bonds, 0:10:39.920 --> 0:10:42.200 like you get a twenty nineteen Solar City bond at 0:10:42.200 --> 0:10:44.439 about five and a half percent, not all that different 0:10:44.480 --> 0:10:47.400 than the seven year bond UH the Tesla bond that 0:10:47.640 --> 0:10:50.400 is in the index, So clearly there's some liquidity there, 0:10:50.960 --> 0:10:53.720 but you're also cutting down your term risk by about 0:10:53.720 --> 0:10:57.400 seven years. So I'm looking right now at Tesla bonds, 0:10:57.480 --> 0:11:03.040 the ones that are due in August, currently yielding about 0:11:03.280 --> 0:11:06.480 six percent, priced under don any six cents on the 0:11:06.520 --> 0:11:09.640 dollar on the dollar, and I have to wonder, um, 0:11:09.760 --> 0:11:13.679 this is well below other companies in the high yeal 0:11:13.760 --> 0:11:16.360 bond market as far as the price goes higher yield 0:11:16.960 --> 0:11:20.400 UM our bon us is going to buy this. I mean, honestly, 0:11:20.440 --> 0:11:23.800 Tesla has not proven that they can be profitable or 0:11:23.960 --> 0:11:29.719 come through on its promises. Right, Well, investors will buy 0:11:29.720 --> 0:11:31.640 it because they did buy it. They did buy it, 0:11:31.679 --> 0:11:34.280 and they they punished for it, and they haven't punished 0:11:34.320 --> 0:11:36.880 for it. I think the thing is is that you 0:11:36.920 --> 0:11:40.600 know that the company is very polarizing. People either feel 0:11:40.679 --> 0:11:44.760 very strongly that it's gonna change the world and you know, 0:11:44.760 --> 0:11:46.520 like that would be great if it doesn't. Other people 0:11:46.520 --> 0:11:49.760 feel like it's miserable and will never achieve its goals, 0:11:49.880 --> 0:11:53.000 and a senior unsecured piece of paper doesn't really work 0:11:53.040 --> 0:11:55.800 for either of those cases. If you are feeling strong 0:11:55.840 --> 0:11:59.079 about the company, that's a place where you're saying, I 0:11:59.120 --> 0:12:01.280 should be bullish and that like look to clip a 0:12:01.320 --> 0:12:03.560 five point three percent coupon. I should be in the equity. 0:12:04.160 --> 0:12:06.920 If you feel very against the company, then there then 0:12:06.960 --> 0:12:09.080 you wouldn't be in the bonds or the or the equity. Right. 0:12:09.120 --> 0:12:11.599 So basically you're getting none of the upside with the 0:12:11.640 --> 0:12:13.679 bond and all of the downside risk with the senior 0:12:13.720 --> 0:12:16.839 unsecured bond, whereas convertible you kind of are mixing the two, 0:12:16.840 --> 0:12:19.520 you're giving them financing. You're not diluding shareholders, but you're 0:12:19.520 --> 0:12:23.840 also getting some steak in the potential upside um. So 0:12:23.880 --> 0:12:28.200 you're saying that it's likely or it would be appropriate 0:12:28.400 --> 0:12:31.719 for Tesla to look at convertible bonds for financing. Does 0:12:31.720 --> 0:12:35.840 this mean that the unsecured bond market is I don't 0:12:35.840 --> 0:12:38.520 want to say close to them, but only available to 0:12:38.559 --> 0:12:40.240 them if they're willing to pay up a lot more 0:12:40.280 --> 0:12:42.679 than they did last time around. Right, well, as you 0:12:42.920 --> 0:12:45.520 as you can see now that their bonds are you know, 0:12:45.559 --> 0:12:48.760 somewhere about five and three quarters to six percent, so 0:12:48.800 --> 0:12:50.720 they could issue new bonds. I don't think that would 0:12:50.720 --> 0:12:53.520 be a problem issuing more unsecured bonds if they wanted to. 0:12:53.640 --> 0:12:55.800 I just think strategically it doesn't make a lot of 0:12:55.840 --> 0:12:58.920 sense to go that route, especially when you're equity price 0:12:59.000 --> 0:13:01.480 is so high. Now is the time to you know, 0:13:01.520 --> 0:13:05.320 like worry about getting your business operations together as opposed 0:13:05.320 --> 0:13:09.800 to layer layering in additional financial risk through an unsecured issue. 0:13:10.679 --> 0:13:13.040 I understand that they've got what about four hundred and 0:13:13.160 --> 0:13:16.280 eighteen million that in bond principle that is due this year. 0:13:16.600 --> 0:13:18.640 That's right, and at least based on my math, it 0:13:18.679 --> 0:13:21.200 looks like they'll be free cash flow negative by about 0:13:21.200 --> 0:13:24.120 a billion eight. So, you know, like if they went 0:13:24.200 --> 0:13:26.040 back to the market for somewhere between two and two 0:13:26.080 --> 0:13:29.600 and a half billion dollars this year, I wouldn't be unsurprised. Wait, 0:13:29.679 --> 0:13:32.040 just back up. So in other words, they're going to 0:13:32.160 --> 0:13:35.960 be negative. They're going to earn negative one point eight 0:13:35.960 --> 0:13:39.920 billion dollars this year. In other words, their their capital 0:13:39.960 --> 0:13:42.680 expenditure should be somewhere in the three three three point 0:13:42.679 --> 0:13:45.439 two billion dollars, or their cash flow should be you know, 0:13:45.480 --> 0:13:47.679 about a billion four. So that would give you about 0:13:47.920 --> 0:13:51.559 negative a billion eight, which is not that surprising for 0:13:51.600 --> 0:13:54.600 a company that's in a rapid growth mode. But companies 0:13:54.600 --> 0:13:57.559 in rapid growth modes really shouldn't be playing with unsecured 0:13:57.600 --> 0:14:00.720 debt or or you know, and in either case, whether 0:14:00.760 --> 0:14:03.120 you go to a senior secured piece of paper that 0:14:03.160 --> 0:14:06.120 will prime your bond that's outstanding that's in the Bloomberg 0:14:06.160 --> 0:14:11.000 Barkley's index, or alternatively, if you're doing more converts, uh, 0:14:11.040 --> 0:14:12.560 you know, like that would be a kind of along 0:14:12.559 --> 0:14:15.680 the lines where you're getting a lower coupon issue. If 0:14:16.080 --> 0:14:18.680 TESLA lower to issue a two point two billion dollar 0:14:18.760 --> 0:14:23.160 convertible bond offering. That would be a massive, massive convertible issuance. 0:14:23.520 --> 0:14:25.480 Do you anticipate that they could do the whole thing 0:14:25.560 --> 0:14:28.400 in the convertible bond? They might, And you know, I 0:14:28.440 --> 0:14:30.960 would say that's something that's interesting if you look back 0:14:31.000 --> 0:14:32.920 at the past issue once as the stock has actually 0:14:32.960 --> 0:14:36.560 gone up when they've issued convertible debt, the stock has 0:14:36.560 --> 0:14:39.960 actually gone up because there's the liquidity fear that's in there. 0:14:40.600 --> 0:14:42.640 That's that's bakeing into Tesla. Right, it's a it's a 0:14:42.720 --> 0:14:44.600 very hit or hit or miss. You're either going to 0:14:44.680 --> 0:14:47.120 have a moon shot and it's going to be unbelievably awesome, 0:14:48.040 --> 0:14:50.960 or you have a heavy financial risk so that the 0:14:51.000 --> 0:14:54.520 stock market is actually approved of them issuing converts. Well, 0:14:54.560 --> 0:14:57.200 I mean liquidity risk saying basically, they're burning through cash. 0:14:57.240 --> 0:14:58.720 They're not gonna be able to keep in business if 0:14:58.760 --> 0:15:00.680 they can't raise money. So if they and raise money 0:15:00.880 --> 0:15:04.080 without diluting shareholders and without incurring huge interest payments, that's 0:15:04.080 --> 0:15:08.320 a good thing. That's true. Well, there you go. I 0:15:08.320 --> 0:15:10.000 don't know where to go with this except that they're 0:15:10.000 --> 0:15:12.480 going to have to raise some money pretty quickly, I 0:15:12.520 --> 0:15:15.280 would think. So, you know, if what's the clock on 0:15:15.320 --> 0:15:20.080 this four and eighteen million repayment, Well, the four eighteen 0:15:20.120 --> 0:15:22.840 million dollars shouldn't be that troubling to them. They do. 0:15:23.000 --> 0:15:24.560 They did have three and a half billion dollars of 0:15:24.600 --> 0:15:28.000 cash on the on the balance sheet September. It's really 0:15:28.040 --> 0:15:31.120 more of you know, like, if I'm thinking more strategically 0:15:31.240 --> 0:15:33.360 out for a couple of years, how do I need 0:15:33.400 --> 0:15:37.440 to finance this company until it moves going from a 0:15:37.520 --> 0:15:41.320 cash user, a high growth company, cash burner, into more 0:15:41.320 --> 0:15:43.400 of a cash cow. They kind of get that model 0:15:43.480 --> 0:15:45.480 three out there in the public. Thanks very much for 0:15:45.560 --> 0:15:48.440 joining us. Joel Levington is our senior credit analyst for 0:15:48.600 --> 0:16:07.480 Bloomberg Intelligence telling us all about Tesla. We consult Ira 0:16:07.640 --> 0:16:12.120 Jersey are interest rate strategist for Bloomberg Intelligence for details 0:16:12.200 --> 0:16:15.320 about the economy and interest rates. Ira. I want you 0:16:15.400 --> 0:16:17.240 to begin, if you can, all the way at the 0:16:17.280 --> 0:16:19.840 back end of your latest report, because I found it 0:16:19.960 --> 0:16:23.960 very interesting about household growth in the United States and 0:16:24.120 --> 0:16:26.600 if you could enlighten us a little bit about what 0:16:26.680 --> 0:16:30.840 has happened to household growth and who's actually living at home. Yeah, 0:16:30.920 --> 0:16:34.840 so household growth has been very slow since the sense 0:16:34.880 --> 0:16:37.720 of global financial crisis a couple of almost a decade 0:16:37.720 --> 0:16:40.840 ago now and um and one of the big reasons 0:16:40.840 --> 0:16:43.600 for that. So so we always focus on retirees, and 0:16:43.640 --> 0:16:46.560 we know that there's an aging population in general, but 0:16:46.760 --> 0:16:50.400 that's not necessarily what's holding household growth back. What's holding 0:16:50.440 --> 0:16:54.360 household growth back is young workers. That these are people 0:16:54.960 --> 0:16:57.040 to thirty four who are living at home in the 0:16:57.080 --> 0:17:00.400 greatest numbers ever. And also as a percentage of that 0:17:00.520 --> 0:17:04.440 age group, Uh, it's now six of that age group 0:17:04.480 --> 0:17:07.040 living at home, when it used to be and historically 0:17:07.040 --> 0:17:10.240 between eight and eleven percent. So you're talking about more 0:17:10.960 --> 0:17:13.640 young workers living at home and that has major impacts 0:17:13.640 --> 0:17:16.440 on the economy because these folks aren't buying houses, they're 0:17:16.440 --> 0:17:19.679 not renting apartments, they're not buying refrigerators, they're not getting 0:17:19.680 --> 0:17:25.160 household services. They're basically using the household services um for 0:17:25.160 --> 0:17:27.280 for their parents at their parents house. So so that 0:17:27.440 --> 0:17:29.719 is a constraint on growth right now. And you know 0:17:29.760 --> 0:17:31.840 that's kind of this fiscal situation. That's the kind of 0:17:31.840 --> 0:17:35.960 thing monetary policy can't fix. So ira, can you bring 0:17:36.440 --> 0:17:40.680 that sort of reality into into the market right now 0:17:40.960 --> 0:17:43.760 and what we're seeing with ten uere yields trying to 0:17:43.840 --> 0:17:47.359 break out of this two point six threshold that a 0:17:47.400 --> 0:17:49.359 lot of people say is sort of the tipping point. 0:17:50.119 --> 0:17:55.080 How does this relate, Well, it's not necessarily relating to 0:17:55.560 --> 0:17:57.399 you know, the mood that we're seeing today, or some 0:17:57.480 --> 0:18:00.760 of the um UH or or some of the kind 0:18:00.760 --> 0:18:02.520 of day to day moves. But I think it shows 0:18:02.560 --> 0:18:05.479 that one of the reasons why inflation has been and 0:18:05.520 --> 0:18:08.600 continues to be a bit lower than um people would 0:18:08.640 --> 0:18:11.600 like it to be. It's just that there's a various 0:18:11.600 --> 0:18:15.359 socio economic and demographic factors that are driving inflation to 0:18:15.480 --> 0:18:17.760 be somewhat lower. Now that being said, when you look 0:18:17.800 --> 0:18:20.200 at things like what's going on with oil prices recently 0:18:20.680 --> 0:18:24.159 UM and how high they're going, that's increased helping increase 0:18:24.200 --> 0:18:27.440 inflation expectations at least at the headline level, even even 0:18:27.520 --> 0:18:30.080 if core inflation isn't necessarily going up. So you look 0:18:30.119 --> 0:18:32.879 at what's happened, UM just in the last couple of months, 0:18:32.960 --> 0:18:35.120 the last couple of weeks, I should say, and you've 0:18:35.160 --> 0:18:37.560 seen a good you know, ten basis point move in 0:18:37.600 --> 0:18:40.879 things like five year inflation break even so so the 0:18:41.200 --> 0:18:44.399 Marcus expectation of what inflation is going to average over 0:18:44.440 --> 0:18:47.760 the next five years, and that's coincided quite closely with 0:18:48.160 --> 0:18:51.040 the uptick and oil prices. So I think that's a 0:18:51.520 --> 0:18:54.639 that's one of the several drivers of yields in the 0:18:54.720 --> 0:18:57.520 near term. So the idea that there are all of 0:18:57.520 --> 0:19:00.960 these younger people living at home, is there any evidence 0:19:01.040 --> 0:19:03.480 out there that anything would push them out of their 0:19:03.480 --> 0:19:06.440 parents basements and into their own homes or is it 0:19:06.560 --> 0:19:09.480 just going to be a new a new reality. Yeah, 0:19:09.520 --> 0:19:11.760 that's a good question. UM. I think for that for 0:19:11.880 --> 0:19:14.080 the time being, it has to be. It's probably a 0:19:14.080 --> 0:19:16.640 new reality. I think part of it ends up being 0:19:16.680 --> 0:19:20.359 what happens when, um, you do get more retirees actually 0:19:20.400 --> 0:19:24.120 retiring and creating new new jobs. I think wage pressures 0:19:24.119 --> 0:19:25.960 and wage growth has to pick up. I think once 0:19:26.000 --> 0:19:29.879 you see a significant amount of wage growth, UM, you 0:19:29.880 --> 0:19:32.280 can wind up seeing, um, some of these people move 0:19:32.280 --> 0:19:34.240 out of their their parents homes. I think a big 0:19:34.280 --> 0:19:36.640 part of it is is that that age group now 0:19:36.760 --> 0:19:39.879 as a as a share of income compared to people 0:19:39.920 --> 0:19:42.840 twenty years older than them, their wages are lower than 0:19:42.880 --> 0:19:46.199 they have been UM historically speaking. So I think that 0:19:46.320 --> 0:19:49.200 has to catch up, So it's kind of this distribution 0:19:49.320 --> 0:19:52.119 of of of wages, if you will, that winds up 0:19:52.280 --> 0:19:54.919 mattering somewhat, I think for the market today, though, you know, 0:19:54.960 --> 0:19:58.000 we're looking at things like monetary policy overseas, so things 0:19:58.000 --> 0:20:01.240 like the Bank of Japan hinting that might scale back 0:20:01.280 --> 0:20:03.840 their purchases. UH. The e c B we know is 0:20:03.920 --> 0:20:08.040 Star is already starting to um to buy less bonds 0:20:08.080 --> 0:20:10.960 out there, and that's a non trivial reason why we 0:20:10.960 --> 0:20:13.480 we're seeing some of today's market action with you know, 0:20:13.680 --> 0:20:16.199 thirty year yields back up six basis points, which is 0:20:16.440 --> 0:20:20.639 a relatively substantial moves these days. So if if a 0:20:20.680 --> 0:20:23.160 client were to call and say, why is there this 0:20:23.200 --> 0:20:25.000 big sell off at the long end, why are we 0:20:25.040 --> 0:20:27.320 down one and eight thirty seconds? What's up at that 0:20:27.359 --> 0:20:30.480 two point eight seven yield on the thirty year, what's 0:20:30.480 --> 0:20:33.840 your answer? Yeah, that's all about the the Bank of 0:20:33.920 --> 0:20:37.480 Japan action firstly, and then secondly, just um, you know, 0:20:37.640 --> 0:20:40.240 we we saw the most recent take ups and the 0:20:40.320 --> 0:20:43.720 last two basis points in um in yield moves higher 0:20:43.760 --> 0:20:47.000 after we got the Jolts job opening report at UH 0:20:47.040 --> 0:20:49.399 just a couple of minutes ago, and that showed that 0:20:49.520 --> 0:20:52.600 labor market tightness seems to still be uh still be 0:20:52.640 --> 0:20:55.800 the case. So you have, you know, between monetary policy actions, 0:20:55.840 --> 0:20:59.720 so basically less bond buying globally by central banks, and 0:20:59.760 --> 0:21:02.720 then on top of that an economy that at worst 0:21:02.880 --> 0:21:06.480 is in a steady state of of modest improvement. All 0:21:06.520 --> 0:21:10.720 of those things should lead for to somewhat better some 0:21:10.840 --> 0:21:13.520 of better inflation and UH and growth outcomes, and that 0:21:13.560 --> 0:21:16.080 should mean somewhat higher yields. I think one of the 0:21:16.119 --> 0:21:18.920 things that's that's not likely to persist is the curve stepening, 0:21:18.920 --> 0:21:22.479 because I do think that eventually the Federal reserve um 0:21:22.520 --> 0:21:25.800 if if this continues and we start to get higher inflation, 0:21:25.840 --> 0:21:29.040 the Federal reserve will actually um meet the dot plot, 0:21:29.080 --> 0:21:32.200 which the market isn't yet pricing. And because of that, 0:21:32.240 --> 0:21:35.320 you wind up with with today's stepening probably being on wound, 0:21:35.320 --> 0:21:38.560 and actually additional flattening to two occur later in the year. 0:21:38.680 --> 0:21:41.000 In other words, we're going to get faster rate hikes 0:21:41.000 --> 0:21:43.880 in response. Yeah, well, faster rate hikes than the market 0:21:43.960 --> 0:21:46.080 is currently pricing. The market is still only pricing about 0:21:46.160 --> 0:21:48.600 two rate hikes, and the Fed still thinks that they're 0:21:48.600 --> 0:21:50.000 going to go three. So if the FED worre to 0:21:50.040 --> 0:21:52.960 go three um, that would mean that that the market 0:21:52.960 --> 0:21:55.959 would have to catch up to the FED. Jersey thank 0:21:56.000 --> 0:21:58.080 you so much for joining us. Always a pleasure speaking 0:21:58.119 --> 0:22:01.760 with you. Jersey is chief US interest rate strategist for 0:22:01.960 --> 0:22:20.920 Bloomberg Intelligence. Now that Congress has passed a tax bill, 0:22:21.040 --> 0:22:23.639 are they going to move on to infrastructure and what 0:22:23.840 --> 0:22:27.760 is needed with respect to the infrastructure of the United States. 0:22:27.840 --> 0:22:30.119 Here to talk about that with us is Susan's Story, 0:22:30.240 --> 0:22:34.280 President and chief executive officer of American Waterworks Company, which 0:22:34.320 --> 0:22:37.280 is based in for Key, New Jersey. It is the 0:22:37.359 --> 0:22:41.120 largest publicly traded water utility in the country. Susan, thank 0:22:41.160 --> 0:22:43.560 you so much for joining us. I just want to 0:22:43.600 --> 0:22:47.760 start with asking you about the tax plan. UM. I 0:22:47.800 --> 0:22:51.160