WEBVTT - As Economy Underwhelms, Favor Treasuries Over Stocks: Sri-Kumar 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg pim 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. Following 0:00:33.159 --> 0:00:38.640 the conclusion of the Federal Reserve Open Market Committee meeting today, 0:00:38.800 --> 0:00:41.800 the Central Bank will issue a rate Decision of policy 0:00:41.840 --> 0:00:45.320 statement and updated forecasts on the economy and the path 0:00:45.440 --> 0:00:48.120 of interest rates that'll take place at two pm Wall 0:00:48.159 --> 0:00:51.600 Street time that will be covered live right here on Bloomberg. 0:00:51.880 --> 0:00:55.160 And Jerome Powell, the Chairman of the Federal Reserve, will 0:00:55.400 --> 0:00:58.320 have his first press conference that begins at the half 0:00:58.360 --> 0:01:03.080 past two, also here live on Bloomberg. And surely one 0:01:03.120 --> 0:01:05.600 gentleman who will be listening and watching all of this 0:01:05.680 --> 0:01:08.399 is Kamal Shri Kamara. He is the president and the 0:01:08.440 --> 0:01:13.959 founder of Shri Kamar Global Strategies and he joins us now. Shri, 0:01:14.120 --> 0:01:16.960 thank you very much for being with us. And also 0:01:16.959 --> 0:01:19.840 I should mention that you are a global Bloomberg profit 0:01:19.920 --> 0:01:25.840 and you can be followed on Twitter at shri k Global. Um, 0:01:26.120 --> 0:01:28.200 can you tell us what is going to be the 0:01:28.200 --> 0:01:32.000 most important thing for you as regards today's events and 0:01:32.040 --> 0:01:36.320 the Federal Reserve? Tim Those are great and timely questions. 0:01:36.400 --> 0:01:38.760 First of all, I don't think there is any surprise 0:01:38.920 --> 0:01:42.560 in terms of a quarter point hike. UM. If he 0:01:42.840 --> 0:01:46.480 really wanted to shock the market, Chairman Powell can do 0:01:46.959 --> 0:01:50.800 one of two things, maybe both things. First, if you 0:01:50.880 --> 0:01:54.840 if you haven't a totally unexpected fifty point basis point 0:01:54.920 --> 0:01:58.440 hike that would shock the market, both the bond market 0:01:58.720 --> 0:02:02.320 and the equity market immediately. The second way to do 0:02:02.400 --> 0:02:06.160 it is to give an extremely optimistic view of economic 0:02:06.200 --> 0:02:10.680 growth ahead. His expectations that inflation is likely to quickly 0:02:10.720 --> 0:02:13.320 go to the two percent FED target and go beyond, 0:02:14.040 --> 0:02:17.400 and so that in turn would suggest four or even 0:02:17.520 --> 0:02:21.280 higher a number of rate hikes during the year. My 0:02:21.360 --> 0:02:25.600 expectation is we are going to stay pretty pedestrian in 0:02:25.720 --> 0:02:28.840 terms of what the Chairman would say a twenty five 0:02:28.880 --> 0:02:33.240 basis point hike, and not too optimistic in terms of 0:02:33.280 --> 0:02:36.639 a view because he cannot afford to shock the equity 0:02:36.680 --> 0:02:40.280 market into a big swoon soon after his speech. Yeah, 0:02:40.320 --> 0:02:43.080 you know, it's interesting because the FED has had a 0:02:43.120 --> 0:02:46.359 party line of not wanting to disrupt markets pretty steadily 0:02:46.760 --> 0:02:49.240 for the past number of years. But Stale, I'm wondering 0:02:49.280 --> 0:02:53.720 how much politics is starting to weigh on FED decisions. 0:02:53.760 --> 0:02:58.000 We have a an administration that is cutting taxes, which 0:02:58.040 --> 0:03:00.600 should give a boost to the U. S economy. The 0:03:00.680 --> 0:03:03.320 j Powell could halt if he raises rates too quickly. 0:03:03.320 --> 0:03:06.040 How much is this going to weigh on the decision? Lisa, 0:03:06.160 --> 0:03:09.000 There are two ways in which the politics centers here. 0:03:09.160 --> 0:03:12.120 First of all, as you said, the if do we 0:03:12.240 --> 0:03:15.160 have a big stimulus as a result of the tax package, 0:03:15.720 --> 0:03:19.000 and if you'll recall what happened after the quantitative easing 0:03:19.080 --> 0:03:22.200 program of then FED Chairman Bernanky at the end of 0:03:22.200 --> 0:03:26.600 two thousand eight. It was expected to boost prices substantially, 0:03:26.680 --> 0:03:30.160 interest rates were going to rise, neither of which happened. 0:03:30.560 --> 0:03:34.079 And I've been saying consistently that monetary growth does not 0:03:34.320 --> 0:03:37.720 mean that inflation immediately picks up and that rates would 0:03:37.720 --> 0:03:40.360 go up. I think you're going to have a similar 0:03:40.400 --> 0:03:44.400 reaction now to the fiscal stimulus. Although the stimulus has 0:03:44.560 --> 0:03:48.720 helped the equity markets just as quantitative easing did, I 0:03:48.760 --> 0:03:51.000 don't think it is putting money into the hands of 0:03:51.080 --> 0:03:54.240 people who would actually spend it. It is going more 0:03:54.440 --> 0:03:58.320 into the hands of equity investors who are higher income groups, 0:03:58.360 --> 0:04:01.080 and they typically tend to be more of savers and 0:04:01.160 --> 0:04:06.360 investors rather than spenders. Wages have not increased significantly. We 0:04:06.400 --> 0:04:10.120 saw that also in the most recent wage news. Retail 0:04:10.360 --> 0:04:15.480 sales have fallen recently. This was again contrary to expectations. 0:04:16.000 --> 0:04:20.520 I don't see where all the growth optimism is coming from. Sree. 0:04:20.680 --> 0:04:23.040 What would you like to ask Jerome Powell if you 0:04:23.120 --> 0:04:26.159 were in the room during the press conference, I would 0:04:26.200 --> 0:04:29.960 ask him the second question PIM that comes forth as 0:04:30.000 --> 0:04:33.440 a result of Lisa's point, which is, um, are you 0:04:33.640 --> 0:04:37.320 going to be influenced by President Trump and Secretary minute 0:04:37.400 --> 0:04:41.080 In in terms of future rate hikes? Clearly, the President 0:04:41.120 --> 0:04:44.680 has said several times that he would prefer a week dollar. 0:04:45.760 --> 0:04:50.719 He has also indicated that given his business background, he 0:04:50.880 --> 0:04:54.640 prefers low interest rates. And we have a history in 0:04:55.120 --> 0:04:58.840 the U s. Monetary policy PIM where presidents time and 0:04:58.960 --> 0:05:02.479 time again have interfered with the FED policy. The FED 0:05:02.520 --> 0:05:06.400 has hardly been independent. The question is is power going 0:05:06.440 --> 0:05:09.120 to be different? Is he going to stand up to 0:05:09.240 --> 0:05:11.960 all the job owning that's almost certain to take place 0:05:12.240 --> 0:05:14.640 a tree I was. I thought I was compelling what 0:05:14.680 --> 0:05:17.920 you said, that the optimism about the U. S economy 0:05:18.120 --> 0:05:22.000 was overdone in your in your view, I want to 0:05:22.000 --> 0:05:24.839 talk a little bit about that and another perspective of yours, 0:05:24.880 --> 0:05:28.400 which is that treasuries hold value right now, perhaps even 0:05:28.440 --> 0:05:32.840 more so than equities. Can you explain the reason for 0:05:33.120 --> 0:05:36.720 treasuries coming out to be more attractive, Lisa, is because 0:05:36.960 --> 0:05:42.920 treasury yields are basically dependent on two factors, inflationary expectations 0:05:43.440 --> 0:05:48.159 and economic growth expectations. If you have a continuation of 0:05:48.240 --> 0:05:50.960 the first quarter poor growth, that we're going to have 0:05:51.080 --> 0:05:54.120 about one point eight percent according to the Atlanta Fed. 0:05:54.680 --> 0:05:56.560 Even if it goes up to two to two and 0:05:56.600 --> 0:05:59.680 a half percent in subsequent quarters, you're going to fall 0:06:00.040 --> 0:06:03.320 way shot of three percent. And as I said, I 0:06:03.360 --> 0:06:06.599 don't expect the fiscal stimulus to be helpful for the economy. 0:06:06.640 --> 0:06:10.160 As to the financial market, the second part of it 0:06:10.200 --> 0:06:13.800 is the expectation on inflation. We have not seen that 0:06:13.920 --> 0:06:17.080 go up. And I thought the bound market panic in 0:06:17.120 --> 0:06:20.720 early February was a false alarm, and it was quickly 0:06:20.760 --> 0:06:23.680 reversed and we saw the bond yields come down from 0:06:23.680 --> 0:06:26.000 the highs we reached earlier in the year. Were you 0:06:26.040 --> 0:06:29.160 buying Are you buying? I would be buying. Yes. Did 0:06:29.240 --> 0:06:32.880 you buy back in February? Uh? In terms of again, 0:06:32.960 --> 0:06:36.680 I'm not specifically an investor in terms of the moves 0:06:36.720 --> 0:06:39.080 that I make every time, Lisa, because I'm not a 0:06:39.120 --> 0:06:42.159 short term trader, but I think clearly in terms of 0:06:42.279 --> 0:06:47.159 long term expectations, my investments are built that way. Should 0:06:47.200 --> 0:06:48.960 do you believe that we have entered an era of 0:06:49.040 --> 0:06:52.800 trade wars and tariffs? I think we have. I think 0:06:52.800 --> 0:06:55.600 it's already started, PIM. If you look at what happened 0:06:56.120 --> 0:06:59.680 so far on the exports of soy beans, which by 0:06:59.720 --> 0:07:03.800 the way, is as important and export as aircraft for 0:07:04.000 --> 0:07:08.680 US exports to China, China has increased the restrictions on 0:07:08.720 --> 0:07:11.920 the quality that will be accepted in terms of US 0:07:11.960 --> 0:07:15.320 o beans going to China, and that essentially is a 0:07:15.320 --> 0:07:18.360 form of a tariff. It's a form of trade restriction. 0:07:19.040 --> 0:07:22.960 And if in fact the President imposes a tariff of 0:07:23.040 --> 0:07:26.240 sixty billion dollars as much as this as early as 0:07:26.280 --> 0:07:29.840 this Friday, as has been rumored, you can expect a 0:07:29.920 --> 0:07:33.240 retaliation even by Saturday Sunday in terms of what the 0:07:33.320 --> 0:07:36.080 Chinese would do. And I think you're going to that 0:07:36.240 --> 0:07:39.080 is where I think the big risk to economic growth lies. 0:07:39.560 --> 0:07:43.320 And if that happens. Going back to Lisa's question, the 0:07:43.400 --> 0:07:47.280 fixed income or high the yield and treasuries as where 0:07:47.280 --> 0:07:49.640 you want to hide And just a real quick I'm 0:07:49.640 --> 0:07:51.600 looking at a thirty year yield right now three point 0:07:51.640 --> 0:07:54.320 one two six. Where do you see it going by 0:07:54.360 --> 0:07:57.360 the end of this year three point one to six 0:07:57.440 --> 0:08:01.080 I would see again going down by anywhere from thirty 0:08:01.120 --> 0:08:04.239 to fifty basis points. And if at the same time 0:08:04.760 --> 0:08:08.440 you have a connection in equities, it makes it thirty 0:08:08.720 --> 0:08:12.520 even more attractive. That's a really interesting call. Thank you 0:08:12.560 --> 0:08:14.520 so much for being with us. We always enjoy a 0:08:14.600 --> 0:08:18.800 Camal Street Kumar, President and founder of shriek Kumar Global Strategies, 0:08:18.840 --> 0:08:22.720 also a Bloomberg profit. Perhaps he is recommending people hide 0:08:22.720 --> 0:08:27.000 out in treasuries while growth expectations start to decline, but 0:08:27.040 --> 0:08:29.600 he is hiding out Santa Monica, California, away from the 0:08:29.600 --> 0:08:48.880 snowstorm here in New York City. Twitter and Facebook, as 0:08:48.880 --> 0:08:52.960 well as other social media platforms, have been hit by 0:08:53.000 --> 0:08:56.760 a variety of investigations, and this has to do, of 0:08:56.760 --> 0:09:00.720 course with the information that people are volunteer the offering 0:09:00.960 --> 0:09:03.760 to these organizations. Here to help us understand all this 0:09:03.800 --> 0:09:06.560 is Jim Anderson. He is the chief executive of a 0:09:06.640 --> 0:09:10.120 social Flow and in full disclosure, social Flow is a 0:09:10.200 --> 0:09:15.040 platform that is used by Bloomberg for social media purposes. 0:09:15.360 --> 0:09:17.520 Jim Anderson, thank you very much for being here in 0:09:17.559 --> 0:09:20.920 our eleven three oh studios. How does this kind of 0:09:21.000 --> 0:09:24.480 data mining work, or maybe it's better to say, how 0:09:24.520 --> 0:09:29.120 does it differ from data mining that we hear about 0:09:29.240 --> 0:09:32.120 when it comes to things like the preference that you 0:09:32.240 --> 0:09:36.080 might have for the kind of detergent that your family uses, 0:09:36.240 --> 0:09:40.480 or the kinds of news that you're interested in reading about. Yeah, Pam, 0:09:40.520 --> 0:09:42.520 thanks for having me. There's a lot to unpack here. 0:09:42.520 --> 0:09:45.239 So let's let's first start with the fact that Facebook 0:09:45.320 --> 0:09:47.520 is a social network, right. I mean, we we get 0:09:47.559 --> 0:09:51.080 onto Facebook to share and connect with our friends, and 0:09:51.120 --> 0:09:54.439 so you know, in many ways, privacy and sharing are 0:09:54.520 --> 0:09:58.040 diametrically opposed to each other, and so we do share 0:09:58.120 --> 0:10:01.240 a lot of information with Facebook with our friends. On Facebook, 0:10:01.280 --> 0:10:03.520 Facebook learns a lot about us and exactly what you 0:10:03.600 --> 0:10:06.880 just said. The commercialization of that is really what's at 0:10:06.880 --> 0:10:09.040 heart here. I mean that that information is quite valuable 0:10:09.080 --> 0:10:11.079 to advertisers who want to sell us shaving cream and 0:10:11.120 --> 0:10:13.720 laundry detergent and all the kinds of things that we buy. 0:10:13.840 --> 0:10:15.760 And so that's really the crux of the issue. You 0:10:15.800 --> 0:10:18.080 take that and you put it at the intersection of 0:10:18.120 --> 0:10:20.200 some of the most heated political issues of our days, 0:10:20.320 --> 0:10:23.960 the presidential election, uh, potential Russian interference, and you get 0:10:24.000 --> 0:10:26.360 I think the mails from that we've got right now. Well, 0:10:26.480 --> 0:10:29.080 but Jim, is there a difference between the data that 0:10:29.120 --> 0:10:31.800 you willingly share with your friends, whether it's pictures of 0:10:31.840 --> 0:10:35.480 your kids or what party you've gone to, and uh, 0:10:35.720 --> 0:10:40.440 having data scraped from your emails from other systems that 0:10:40.520 --> 0:10:42.520 you've been using that are not social media, that are 0:10:42.559 --> 0:10:49.600 not public platforms, and using that for say, political advertisements. Yes, there, 0:10:49.600 --> 0:10:51.400 I think there is a difference. Although to be clear, 0:10:51.440 --> 0:10:53.880 and we're all speculating here about what may or may 0:10:53.920 --> 0:10:56.000 not have happened, and I wasn't there, so I don't 0:10:56.040 --> 0:10:58.800 know what Cambridge Analytica did, but what has been reported 0:10:59.240 --> 0:11:03.400 is that they uh sort of unauthorized it took information 0:11:03.440 --> 0:11:05.720 about people's friends. So it wasn't so much that they 0:11:05.720 --> 0:11:08.319 scraped it from their email, It's that they did something 0:11:08.320 --> 0:11:11.959 they weren't supposed to according to Facebook's policies. And then 0:11:12.000 --> 0:11:14.640 the logical question that everybody's asking is, well, Facebook, you 0:11:14.679 --> 0:11:17.199 had those policies, and you knew that some people might 0:11:17.240 --> 0:11:19.760 not comply with them. What was your obligation to make 0:11:19.800 --> 0:11:22.960 sure that Cambridge Analytical or anybody else complied with what 0:11:23.000 --> 0:11:24.719 they were supposed to do? And so that's what I 0:11:24.720 --> 0:11:27.320 think we're really talking about, is your your not only 0:11:27.320 --> 0:11:29.960 your information, but your friends information, and your friends never 0:11:30.040 --> 0:11:33.480 consented to have them do that. So let's say it's 0:11:33.559 --> 0:11:36.880 not scraping. It's not a matter of scraping data from 0:11:37.000 --> 0:11:39.959 other sites. Let's say it's just the information that people 0:11:40.000 --> 0:11:42.679 put out there about themselves on Facebook. Do you know 0:11:42.800 --> 0:11:46.720 anybody who's been upset by disclosure of information that they 0:11:46.760 --> 0:11:49.920 have put out there publicly? Uh, certainly we all know 0:11:49.960 --> 0:11:51.840 people who have been upset. I mean this is a 0:11:51.960 --> 0:11:55.960 very emotional issue for a lot of people. Privacy. Uh, 0:11:56.080 --> 0:11:58.400 you start talking about people's families and their kids. You know, 0:11:58.480 --> 0:12:00.520 my kids information is on face this book and and 0:12:00.559 --> 0:12:01.920 all of us. I think I'm a parent. All of 0:12:02.000 --> 0:12:04.280 us who have kids wrestle with that kind of question 0:12:04.360 --> 0:12:06.880 just by default. How much information do you put about 0:12:06.880 --> 0:12:08.480 your children out? I mean, it's it's one thing for 0:12:08.520 --> 0:12:11.400 your friends and family, uh to know about your children. 0:12:11.440 --> 0:12:14.400 It's quite another for some anonymous third party to have 0:12:14.520 --> 0:12:17.360 taken that information through no action of my own, but 0:12:17.440 --> 0:12:19.760 maybe one of my friends downloaded one of their apps 0:12:19.760 --> 0:12:22.360 and suddenly now they know things about me, my family, 0:12:22.400 --> 0:12:24.240 and my kids. I think that's why you see such 0:12:24.280 --> 0:12:27.319 an emotion here. Is is that information that you put 0:12:27.360 --> 0:12:29.640 out there wasn't being done with the expectation that it 0:12:29.640 --> 0:12:33.160 would be used for marketing or even political purposes. Now 0:12:33.200 --> 0:12:36.040 this is not the first time, though, that Facebook has 0:12:36.160 --> 0:12:40.199 had to deal with issues related to what many describe 0:12:40.240 --> 0:12:45.800 as being genuine news or information that is available via 0:12:45.880 --> 0:12:49.280 their website. They've had a program I believe that really 0:12:49.320 --> 0:12:52.280 affected a lot of what it's called independent journalism in 0:12:52.320 --> 0:12:55.880 many smaller countries such as Guatemala and Sri Lanka. You're 0:12:55.920 --> 0:12:58.600 familiar with this, maybe just enlightened people a little bit 0:12:58.640 --> 0:13:00.760 so that they understand that this is not a brand 0:13:00.760 --> 0:13:04.120 new topic when it comes to Facebook and the information 0:13:04.200 --> 0:13:07.040 that's shared on their network. Yeah, well, again, there's there's 0:13:07.120 --> 0:13:10.280 multiple stories and news threads intersecting here, and so we 0:13:10.320 --> 0:13:11.920 have we really have to untangle it. I think what 0:13:11.960 --> 0:13:14.800 you're referring to is they ran tests in the news 0:13:14.800 --> 0:13:17.319 feed in these some of these smaller countries, which by 0:13:17.360 --> 0:13:20.040 the way, added up to almost exactly one point zero 0:13:20.080 --> 0:13:22.679 percent of the world's population, So you could understand from 0:13:22.840 --> 0:13:26.280 a testing standpoint, they wanted to experiment with the news 0:13:26.320 --> 0:13:29.440 feeds of of people in you know, one point zero 0:13:29.480 --> 0:13:32.000 percent of the world's population, which probably correlates to one 0:13:32.000 --> 0:13:34.880 point zero percent of Facebook users around the world, and 0:13:34.880 --> 0:13:37.839 they're trying to understand how people interact with content and 0:13:37.880 --> 0:13:40.120 their news feed. And so the implication of that in 0:13:40.200 --> 0:13:44.360 the an outcry was, wow, you have severely disadvantaged the 0:13:44.720 --> 0:13:48.079 legitimate news media in those countries by doing your experiment. 0:13:48.600 --> 0:13:50.240 You know, never mind what you think you might have 0:13:50.240 --> 0:13:52.280 been able to accomplish or learn the experiment, did you 0:13:52.320 --> 0:13:54.880 really think through the implications of of what that was 0:13:54.920 --> 0:13:56.960 going to do to journalism and to news outlets in 0:13:56.960 --> 0:13:59.640 those countries. And I think the answer that Facebook uhs 0:13:59.679 --> 0:14:02.240 said itself is well, no, we didn't really think through that, 0:14:02.360 --> 0:14:04.640 and we didn't intend to do that, and so we'll 0:14:04.720 --> 0:14:07.640 we'll stop doing that and our experiment is done. I 0:14:07.679 --> 0:14:10.760 just wanted to bring to the news that Mark Zuckerberg, 0:14:10.880 --> 0:14:14.600 the head of Facebook, will address the public in the 0:14:14.640 --> 0:14:19.000 next twenty four hours aimed at regaining trust. This, according 0:14:19.000 --> 0:14:22.240 to Bloomberg News is Sarah Fryer just confirmed this. What 0:14:22.320 --> 0:14:25.200 do you hope to hear from Mark Zuckerberg? Well, I 0:14:25.240 --> 0:14:29.880 think me and everybody hopes to hear a clear explanation 0:14:30.080 --> 0:14:32.600 of Facebook's position on this, and and and in all 0:14:32.880 --> 0:14:35.880 fairness is an objective you know, observer trying to be 0:14:35.920 --> 0:14:39.080 as objective as I can. It is a very complicated issue. 0:14:39.160 --> 0:14:41.160 Right again, I said right at the at the top 0:14:41.200 --> 0:14:43.320 of this, Uh, you know, Facebook is a social network, 0:14:43.400 --> 0:14:46.160 right wet We put information out there. Every single Facebook 0:14:46.200 --> 0:14:48.600 post has a share button on it even today, and 0:14:48.680 --> 0:14:52.120 so sharing is built into the core of the platform. 0:14:52.240 --> 0:14:55.400 So how does he and how does Facebook more broadly 0:14:55.520 --> 0:14:59.480 view sharing versus privacy and how do they plan to 0:14:59.520 --> 0:15:03.560 reconci aile those really quite contradictory perspectives, and I think 0:15:03.560 --> 0:15:05.880 that's what everybody wants to hear. Jim Anderson, thank you 0:15:05.920 --> 0:15:07.960 so much for being with us. Thank you Jim Anderson, 0:15:08.080 --> 0:15:12.040 chief executive officer of Social Flow in New York, to 0:15:12.120 --> 0:15:15.080 be fully disclosed here. Social Flow as a platform used 0:15:15.080 --> 0:15:19.440 by Bloomberg for social media purposes, and it is confirmed 0:15:19.440 --> 0:15:22.800 that we will be hearing from the previously absent er 0:15:22.880 --> 0:15:27.000 up till now absent, Mark Zuckerberg about Facebook's response to 0:15:27.480 --> 0:15:46.840 this data breach and their path forward. Tesla maybe the 0:15:46.960 --> 0:15:51.200 poster child for this era, a company that burns through cash. 0:15:51.320 --> 0:15:55.080 It has promise of technological prowess that has excited the 0:15:55.120 --> 0:15:58.840 imaginations of many out there. The true story of this company, however, 0:15:59.280 --> 0:16:01.840 may lie with its credit, And here to join us 0:16:01.960 --> 0:16:06.560 is Joel Lovington, Senior credit analyst for Bloomberg Intelligence. You've 0:16:06.560 --> 0:16:11.640 been digging into Tesla's credit. An interesting concept, this company 0:16:11.760 --> 0:16:15.920 borrowing to burn cash. Um, This perhaps is the true 0:16:15.960 --> 0:16:19.080 story and what is it telling us? Well, I think 0:16:19.080 --> 0:16:22.600 what it's telling us is that the company will continue 0:16:22.640 --> 0:16:25.200 to invest much like an Amazon did in trying to 0:16:25.240 --> 0:16:28.240 build out its optionality. And as it does that, it 0:16:28.320 --> 0:16:31.640 needs both costs financing and that's becoming more and more challenging, 0:16:31.760 --> 0:16:35.320 which will make their drivers difficult and will also make 0:16:35.920 --> 0:16:39.520 the ability to for that for their bonds to perform. Well, 0:16:40.120 --> 0:16:44.160 so what kind of collateral would be valuable to an 0:16:44.200 --> 0:16:49.920 investor here? Well, everybody loves receivables and uh, and it 0:16:50.080 --> 0:16:52.920 has a tremendous brand name, and so I think that's 0:16:52.960 --> 0:16:56.800 the concern is that, Uh, this past summer they issued 0:16:57.120 --> 0:17:01.240 a billion aid of debt which is unsecure, and as 0:17:01.320 --> 0:17:04.720 that bond has lagged, it makes it harder to finance. 0:17:04.760 --> 0:17:07.520 So a cheaper way of doing it would be secured debt, 0:17:07.680 --> 0:17:10.200 which would prime the current debt. In other words, it 0:17:10.200 --> 0:17:12.919 would push it down on the capital structure UH and 0:17:12.960 --> 0:17:16.320 make it worth make it less valuable. Well, if it 0:17:16.359 --> 0:17:20.919 makes it less valuable, then what's the likelihood that, unless 0:17:20.920 --> 0:17:23.960 they get these issues resolved, that they can continue to 0:17:24.000 --> 0:17:27.320 go back to the market to borrow more money. Well, 0:17:27.560 --> 0:17:30.639 that's that's the chicken and the egg game. Obviously, they 0:17:30.640 --> 0:17:33.679 could go out and issue equity, it's an as if 0:17:33.720 --> 0:17:36.399 their equity has a low valuation on it, or they 0:17:36.400 --> 0:17:39.720 can use convertibles. I think what's interesting is that what 0:17:39.760 --> 0:17:42.119 they said on their last call is that you know 0:17:42.160 --> 0:17:44.720 that they can they could see cash flow becoming much 0:17:44.720 --> 0:17:47.560 stronger over the next couple of years. And if they 0:17:47.600 --> 0:17:50.679 really believe that using something like bank debt makes a 0:17:50.720 --> 0:17:53.560 lot more sense than going out and issuing more unsecured 0:17:53.600 --> 0:17:57.760 debt or giving away your or giving away your equity. 0:17:58.160 --> 0:18:01.919 So Tesla is about eight and a half billion dollars 0:18:01.960 --> 0:18:05.560 of debt currently. They've burned through more than a billion 0:18:05.600 --> 0:18:09.639 dollars per quarter to sustain itself. They've clearly had a 0:18:09.640 --> 0:18:13.480 lot of issues with respect to production snaff foods, UH. 0:18:13.520 --> 0:18:17.000 They are currently contemplating our shareholders are anyway awarding Elon 0:18:17.080 --> 0:18:22.280 Musk a two point six billion dollar compensation package. Just 0:18:22.320 --> 0:18:26.080 how much more do they have to borrow? And what 0:18:26.280 --> 0:18:30.800 happens if they can't? I mean, is that basically game over? Well, 0:18:31.520 --> 0:18:34.000 I don't think it will be a question of if 0:18:34.000 --> 0:18:35.679 they can or they can't. I think they will be 0:18:35.720 --> 0:18:39.000 able to borrow. H they are fifty four billion dollar 0:18:39.640 --> 0:18:43.719 cap company. It becomes how will they finance and how 0:18:43.800 --> 0:18:46.199 much they'll need to finance? Lisa and I think at 0:18:46.240 --> 0:18:50.919 least our model that we have on the terminal shows 0:18:50.960 --> 0:18:52.960 that it should be about two and a half billion 0:18:53.000 --> 0:18:56.359 dollars that they would that they'll be cash negative this year. 0:18:56.680 --> 0:18:59.359 So if they want to keep their liquidity consistent, they 0:18:59.400 --> 0:19:01.560 would need to you know, issue about two and a 0:19:01.560 --> 0:19:05.280 half billion dollars worth of new debt. You know, it 0:19:05.560 --> 0:19:07.439 doesn't bang. The question though, that if you are going 0:19:07.480 --> 0:19:10.159 to be asked to do a leverage buyout with a 0:19:10.200 --> 0:19:12.800 company like this or take it private, could you do 0:19:12.880 --> 0:19:16.960 it based on the financials as they currently exist. That's 0:19:16.960 --> 0:19:18.919 a great question him and I think the short answer 0:19:18.960 --> 0:19:22.720 is no. The company at least again, like if the 0:19:22.720 --> 0:19:25.240 way that we look at it, if they financed that 0:19:25.320 --> 0:19:27.800 two and a half billion dollars shortfall this year with debt, 0:19:28.080 --> 0:19:30.360 they'll be levered at eleven times, so they already look 0:19:30.440 --> 0:19:34.680 like an extremely levered l b O. Bryan they going private, 0:19:35.440 --> 0:19:38.840 So I don't really think that would be a mechanism, Uh, 0:19:38.880 --> 0:19:41.760 that would be doable in any way. So you talked 0:19:41.800 --> 0:19:44.520 about how it would be more attractive for them to 0:19:44.600 --> 0:19:47.320 issue in the bank debt spaces is the leveraged loan market, 0:19:47.680 --> 0:19:50.720 and I'm wondering, perhaps from Tesla's point of view, it's 0:19:50.760 --> 0:19:55.120 more attractive. What about from an investor's standpoint, would you recommend? 0:19:55.200 --> 0:19:56.680 And I know you can't recommend, so you're going to 0:19:56.760 --> 0:19:59.879 totally punt on this, but uh, you know, our invest 0:20:00.240 --> 0:20:03.840 is adequately compensated. At what point are they adequately compensated 0:20:03.880 --> 0:20:07.679 with yield for buying something like that to finance this 0:20:07.720 --> 0:20:11.120 cash burning car company. Sure? Well, what I would say 0:20:11.320 --> 0:20:14.960 is that if you look at the triple c um 0:20:15.200 --> 0:20:18.879 leverage loan market, UH, if you and you look at 0:20:18.880 --> 0:20:20.560 similar dates to what they have in terms of their 0:20:21.240 --> 0:20:26.080 five mon issue UH, those UH secured bank debt financings 0:20:26.080 --> 0:20:28.440 tend to run between a hundred and a hundred twenty 0:20:28.480 --> 0:20:32.480 five THESS points cheaper or tighter than what you would 0:20:32.480 --> 0:20:35.840 get in the unsecured market, and so that would be 0:20:35.880 --> 0:20:38.840 the cost savings to the company. I think the other 0:20:38.920 --> 0:20:41.919 component of it it becomes that with bank debt you 0:20:41.920 --> 0:20:44.639 can repay it quickly. So if they do believe that 0:20:44.640 --> 0:20:48.679 they're going to be cashlow positive towards twenty nineteen, that 0:20:48.680 --> 0:20:51.040 would give them the optionality of paying down that debt 0:20:51.040 --> 0:20:54.000 without having any sort of call provision or feature in it, 0:20:54.520 --> 0:20:58.119 which is different than a bond, which again would if 0:20:58.119 --> 0:21:00.520 I was sending in the treasure re seat over at Tesla. 0:21:00.960 --> 0:21:02.320 Those are the kinds of things that I would be 0:21:02.359 --> 0:21:05.760 thinking about in how to reduce the cost UH in 0:21:05.840 --> 0:21:08.119 terms of financing. That's gonna say would you would you 0:21:08.160 --> 0:21:10.320 be interested in reducing the cost of the two point 0:21:10.400 --> 0:21:13.159 six billion dollar compensation package that they're going to be 0:21:13.280 --> 0:21:16.840 voting on. Yeah, well, you know, I'm a credit guy. 0:21:16.880 --> 0:21:20.320 I have not. The credit guy says, no way, do 0:21:20.359 --> 0:21:22.960 you expect them to get downgraded because I think that 0:21:23.000 --> 0:21:25.880 they're rated in the single B area at this point. Yeah. 0:21:25.920 --> 0:21:28.480 Let me just add on him that I hope that you, Lisa, 0:21:28.520 --> 0:21:31.240 and I can all get a compensation package similar to that. 0:21:32.280 --> 0:21:36.400 Thank you. But in terms of the ratings, I do 0:21:36.480 --> 0:21:39.480 think that there is a big risk that they get 0:21:39.520 --> 0:21:43.439 downgraded this year. They will not meet rader expectations. And 0:21:43.480 --> 0:21:46.399 the reason that that is important is because as a 0:21:46.440 --> 0:21:50.640 triple C bond, which is where the issue would go, 0:21:51.280 --> 0:21:55.800 those bonds at similar maturities trade about seventy basis points tight, 0:21:56.160 --> 0:21:59.199 seventy basis points wider than where the Tesla bond is. 0:21:59.520 --> 0:22:02.359 That's worth about three points on a ninety two and 0:22:02.359 --> 0:22:05.679 a half dollar bond. Just try to frame what that 0:22:05.800 --> 0:22:08.520 risk might look like. Well done, Thanks very much for 0:22:08.600 --> 0:22:11.840 enlightening us. Joel Levington is our senior credit analyst for 0:22:11.920 --> 0:22:18.160 Bloomberg Intelligence, discussing the I don't know it's a debt picture, 0:22:18.320 --> 0:22:37.920 it seems it's another word at TESLA. New rules from 0:22:37.960 --> 0:22:40.320 the Department of a Labor having to do with tip 0:22:40.600 --> 0:22:44.760 sharing and this of course affecting the restaurant industry. Let's 0:22:44.760 --> 0:22:47.359 bring in Ben Penn. He's a labor reporter for Bloomberg 0:22:47.440 --> 0:22:51.240 Law joining us from Arlington, Virginia. Ben just layout for 0:22:51.280 --> 0:22:54.280 people that are not familiar with, what is the current 0:22:54.359 --> 0:22:58.000 regulatory environment when it comes to tips and what does 0:22:58.040 --> 0:23:01.359 the Labor Department have to say about this? Sure So, 0:23:01.840 --> 0:23:04.920 in two thousand and eleven, the Obama Department of Labor 0:23:04.960 --> 0:23:08.280 issued a regulation that stated what was what the department 0:23:08.280 --> 0:23:12.760 intended to be clarifying it's long standing policy that employees 0:23:13.240 --> 0:23:16.320 own the tips that they receive and that managers can't 0:23:16.359 --> 0:23:20.720 skim those tips. Now, what happened last December is the 0:23:20.720 --> 0:23:24.600