Latest / Bloomberg Intelligence / Facebook’s Business Model Relies On Polarizing Fears: McNamee

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Facebook’s Business Model Relies On Polarizing Fears: McNamee · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg P and L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Roger McNamee,
• 0:33
  Speaker 1: co founder Elevation Partners, also one of the leaders of
• 0:36
  Speaker 1: the band Moon Alice, and he joins us here in
• 0:39
  Speaker 1: our eleven three oh studios based in Menlo Park, California.
• 0:43
  Speaker 1: Roger Pleasure, thanks for being here him. It is always
• 0:46
  Speaker 1: fun to be on Bloomberg Radio. All right, are you
• 0:48
  Speaker 1: addicted to the Internet. Well, I'm definitely addicted to social
• 0:52
  Speaker 1: media and my smartphone. In fact, the realization of that
• 0:56
  Speaker 1: fact was one of those incredibly disapp pointing things where
• 1:00
  Speaker 1: I went, oh, my gosh, you know, I think of
• 1:03
  Speaker 1: myself as self disciplined. I think of myself this being
• 1:06
  Speaker 1: fitness oriented and ah. The realization that that this thing
• 1:13
  Speaker 1: was controlling my life was not my finest heart. When
• 1:17
  Speaker 1: when was this? Uh? And I should also note that
• 1:20
  Speaker 1: you're you know, you've got an iPad it in your
• 1:22
  Speaker 1: hands right now. I do, and in fact so I.
• 1:25
  Speaker 1: I have spent thirty five years as an investor in
• 1:27
  Speaker 1: the technology industry, and I've always been an early adopter,
• 1:31
  Speaker 1: and I've always felt that technology was a thing, that
• 1:36
  Speaker 1: it was a tool, but it was a tool that
• 1:38
  Speaker 1: could make my life better in a lot of ways.
• 1:40
  Speaker 1: And that has been consistently true. I mean, notwithstanding all
• 1:45
  Speaker 1: of the aggravation. If you think thirty five years, you've
• 1:47
  Speaker 1: gone back, that's the very beginning of personal computers. And
• 1:51
  Speaker 1: God knows a lot of the products along the way
• 1:53
  Speaker 1: have delivered less than than their initial promise. The challenge
• 1:57
  Speaker 1: that we have with internet platforms on smart phones is that,
• 2:00
  Speaker 1: for the first time, we have a device in a
• 2:03
  Speaker 1: smartphone that can really deliver any kind of content more
• 2:08
  Speaker 1: or less anywhere, Lucien, every moment that you're awake, and
• 2:13
  Speaker 1: you know, like everyone else, I did not anticipate how
• 2:18
  Speaker 1: that was going to change my life. I mean, the
• 2:21
  Speaker 1: good parts were obvious immediately. The dark side became clear, only,
• 2:27
  Speaker 1: shall we say, with a lag, and sadly that leg
• 2:29
  Speaker 1: was well passed the point at which I was largely
• 2:33
  Speaker 1: unable to modify my behavior. So, Roger, you are an
• 2:36
  Speaker 1: early investor with both Google and Facebook, and you've been
• 2:40
  Speaker 1: writing columns basically bashing them for the past years, so
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  Speaker 1: basically saying that Facebook and Google threatened public health and democracy.
• 2:49
  Speaker 1: I invested early in Google and Facebook. Now they terrify me.
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  Speaker 1: Have you heard any response from me there of the company?
• 2:56
  Speaker 1: I have not. And so the important thing to understand
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  Speaker 1: is that before I went public on this, I spent
• 3:02
  Speaker 1: four months appealing to Facebook directly, starting with Mark Zuckerberg
• 3:07
  Speaker 1: and Cheryl Sandberg and then working with other executives that
• 3:11
  Speaker 1: they had delegated to deal with this, beginning in October
• 3:16
  Speaker 1: before the election UH, and accelerating dramatically on November nine,
• 3:22
  Speaker 1: where I tried for four months as a friend of
• 3:25
  Speaker 1: the firm to persuade them that I thought that the
• 3:28
  Speaker 1: things that we were seeing with respect to Brexit, with
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  Speaker 1: respect to the U S election, with respect to UM firm,
• 3:35
  Speaker 1: financial firms using Facebook tools to discriminate in housing, UH,
• 3:40
  Speaker 1: some of the things related to Black Lives Matter, some
• 3:42
  Speaker 1: of things that were going on overseas, that I thought
• 3:44
  Speaker 1: all of those things had a common route, which was
• 3:47
  Speaker 1: to say that the business model of Facebook, the advertising
• 3:49
  Speaker 1: business model and the way the algorithms were set up
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  Speaker 1: created um incentives for bad actors to use the platform,
• 3:59
  Speaker 1: and that really terrified me. You know, I just have
• 4:01
  Speaker 1: to say we did get Jana Partners and cal Stars,
• 4:04
  Speaker 1: the second biggest public pension in the US coming out
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  Speaker 1: putting a letter out appealing as investors in Apple, appealing
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  Speaker 1: that they study the effect of iPhones on children. Apple responds,
• 4:16
  Speaker 1: We're fine, We're good. We have the protections that we
• 4:18
  Speaker 1: need and we're looking at it. I mean, since this
• 4:21
  Speaker 1: behavior has gotten so rooted, is there any financial reason
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  Speaker 1: for Facebook, Google, or Apple to modify anything about their businesses?
• 4:31
  Speaker 1: So that is a, I think a great question. Now
• 4:33
  Speaker 1: I want to come a little bit to Apple's defense. Apple,
• 4:36
  Speaker 1: as the the maker of the iPhone, has an unusual
• 4:41
  Speaker 1: market power here, and to their credit, they've exercised that
• 4:46
  Speaker 1: very constructively over the last year without any external stimuli.
• 4:52
  Speaker 1: The most important thing they did was they've upgraded the
• 4:55
  Speaker 1: operating systems over the last few months and they eliminated
• 5:00
  Speaker 1: auto play in Internet applications. This is really important for
• 5:04
  Speaker 1: video on the Internet, and they essentially made it impossible
• 5:07
  Speaker 1: for Facebook and Netflix to have AutoPlay b the default thing,
• 5:13
  Speaker 1: and that was a very consumer friendly thing. They've also
• 5:18
  Speaker 1: been very good at enabling things like ad blockers and
• 5:21
  Speaker 1: tracking blockers to protect your privacy. There's a lot more
• 5:25
  Speaker 1: Apple can do, and I welcome shareholders taking a role here.
• 5:30
  Speaker 1: I do think shareholder activism is going to matter a
• 5:34
  Speaker 1: lot because I'm very concerned that there is no appetite
• 5:39
  Speaker 1: for regulation of this in the United States. And realistically,
• 5:43
  Speaker 1: we're so early in the process of educating consumers about
• 5:47
  Speaker 1: what's going on that it's going to take years. And
• 5:50
  Speaker 1: you know, we have an election coming up in November.
• 5:52
  Speaker 1: There will for sure be massive attempts to manipulate, just
• 5:56
  Speaker 1: as there were in probably coming from people both inside
• 5:59
  Speaker 1: the US and outside, left right center, all over the place.
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  Speaker 1: I mean, essentially, the Russians showed you that you can
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  Speaker 1: use those tools to produce the outcome of your dreams.
• 6:10
  Speaker 1: And we're going to see a lot of people try.
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  Speaker 1: Many of them will fail, but we're going to see
• 6:14
  Speaker 1: a lot of people try. Because it is inherent in
• 6:16
  Speaker 1: the design of Facebook that the way they talk about
• 6:23
  Speaker 1: bringing people together, but in fact what the product does
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  Speaker 1: is it it polarizes. It basically tries to um in
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  Speaker 1: order to service its business models. Business models based on advertising.
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  Speaker 1: Advertising is based on engagement. Engagement is based on emotion.
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  Speaker 1: The emotions that cause the highest engagement are the ones
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  Speaker 1: we call the lizard brain emotions, things like fear and anger.
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  Speaker 1: And the problem with fear and anger, obviously, is that
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  Speaker 1: they're asymmetric, and people who want to do harm can
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  Speaker 1: use fear and anger a lot more effectively than people
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  Speaker 1: want to do good. And I first observed that during Brexit,
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  Speaker 1: So when the UK was voting whether to leave the
• 7:00
  Speaker 1: European Union, there was the campaign to leave was based
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  Speaker 1: on two kind of outrageous emotional appeals. One they were
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  Speaker 1: going to take all the savings and bail out the
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  Speaker 1: National Health Service, and the one they really focused on
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  Speaker 1: was terrifying people about the role that immigrants were playing
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  Speaker 1: in the economy and in the culture. And the leave
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  Speaker 1: or Sorry the Remain campaign the other side, had a
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  Speaker 1: very sedate kind of, you know, stay the course, unemotional appeal.
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  Speaker 1: They were doomed. And we don't know exactly, but we
• 7:37
  Speaker 1: suspect that the economic advantage to the leave campaign of
• 7:42
  Speaker 1: using products like Facebook was roughly twenty to one. That is,
• 7:46
  Speaker 1: if you had a negative you know, tear it down
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  Speaker 1: kind of thing. I think that appealed to anger and fear.
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  Speaker 1: You get roughly twenty times the reach for every dollar
• 7:55
  Speaker 1: you invest, and that is a prohibitive advantage. And it's
• 7:59
  Speaker 1: a symmetric. There is nothing that the people with the
• 8:01
  Speaker 1: positive campaign can do because Facebook isn't structured to emphasize
• 8:06
  Speaker 1: the positive, is structured to emphasize the negative. That's a choice.
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  Speaker 1: Real quick twenty seconds. Do you still own any steak
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  Speaker 1: in Google and Facebook? I do own a steak in
• 8:17
  Speaker 1: Facebook because I'm trying to help them get this right.
• 8:19
  Speaker 1: I want to work with them. But would you sell
• 8:21
  Speaker 1: it if they didn't do it right eventually? Yes, of course,
• 8:24
  Speaker 1: but I hold hope. I mean, I think these are
• 8:27
  Speaker 1: smart people. I think they're good people. I don't think
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  Speaker 1: they intended to do this. Roger mcnameee, thank you so
• 8:32
  Speaker 1: much for joining us. Always always a pleasure speaking with you.
• 8:35
  Speaker 1: Roger McNamee is co founder of Elevation Partners in Menlo Park, California.
• 8:39
  Speaker 1: He's also in a band, Muna Alice. He's got the
• 8:43
  Speaker 1: callouses on his fingers to show it. We were going
• 8:44
  Speaker 1: to ask him to freestyle and he was prepared, So
• 8:47
  Speaker 1: maybe the rest of the show will be just that,
• 8:50
  Speaker 1: thank you so much for joining us. Tesla the company
• 9:08
  Speaker 1: that continues to defy calls for its demise. Tesla is
• 9:12
  Speaker 1: burning through about a billion dollars of cash each quarter,
• 9:16
  Speaker 1: and now it's having trouble meeting its goals with respect
• 9:21
  Speaker 1: to production meeting it's probably going to have to raise
• 9:24
  Speaker 1: more money. Here with us to talk about its debt
• 9:27
  Speaker 1: profile and how it might meet its financing needs is
• 9:31
  Speaker 1: Joel Levington, senior credit analyst for Bloomberg Intelligence who joins
• 9:35
  Speaker 1: us at our eleven three oh studios. Joel, Tesla has
• 9:38
  Speaker 1: already issued debt. It has fallen in price with yields
• 9:42
  Speaker 1: rising since issue ends. What are its options at this
• 9:46
  Speaker 1: point for raising money in the debt market? Sure, well,
• 9:49
  Speaker 1: I think they have a few options. They've issued both
• 9:52
  Speaker 1: senior unsecured notes. They can always go back to that market. UH.
• 9:55
  Speaker 1: To me, I think they would be smarter to use
• 9:57
  Speaker 1: a convertible instrument. They have several UH convertible bonds that
• 10:01
  Speaker 1: are outstanding. Mainly because at this point in time, when
• 10:04
  Speaker 1: cash flow is weak, to put on a fixed layer
• 10:08
  Speaker 1: of interest EXPANSE on top of that UH really puts
• 10:11
  Speaker 1: extra pressure on the on the P and L, and
• 10:13
  Speaker 1: also on the balance sheet. So does this also include
• 10:16
  Speaker 1: the depth that was incurred by the purchase of Solar City.
• 10:19
  Speaker 1: That's exactly right. And one of the interesting things about
• 10:21
  Speaker 1: how the rating agencies look at Tesla is that none
• 10:25
  Speaker 1: of that Solar City debt is guaranteed, so essentially Tesla
• 10:29
  Speaker 1: could walk away from it if they chose to. But
• 10:31
  Speaker 1: the rating agencies included in all their calculations as if
• 10:34
  Speaker 1: they would never walk away from it. Uh. I find
• 10:37
  Speaker 1: that to be interesting simply because the Solar City bonds,
• 10:39
  Speaker 1: like you get a twenty nineteen Solar City bond at
• 10:42
  Speaker 1: about five and a half percent, not all that different
• 10:44
  Speaker 1: than the seven year bond UH the Tesla bond that
• 10:47
  Speaker 1: is in the index, So clearly there's some liquidity there,
• 10:50
  Speaker 1: but you're also cutting down your term risk by about
• 10:53
  Speaker 1: seven years. So I'm looking right now at Tesla bonds,
• 10:57
  Speaker 1: the ones that are due in August, currently yielding about
• 11:03
  Speaker 1: six percent, priced under don any six cents on the
• 11:06
  Speaker 1: dollar on the dollar, and I have to wonder, um,
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  Speaker 1: this is well below other companies in the high yeal
• 11:13
  Speaker 1: bond market as far as the price goes higher yield
• 11:16
  Speaker 1: UM our bon us is going to buy this. I mean, honestly,
• 11:20
  Speaker 1: Tesla has not proven that they can be profitable or
• 11:23
  Speaker 1: come through on its promises. Right, Well, investors will buy
• 11:29
  Speaker 1: it because they did buy it. They did buy it,
• 11:31
  Speaker 1: and they they punished for it, and they haven't punished
• 11:34
  Speaker 1: for it. I think the thing is is that you
• 11:36
  Speaker 1: know that the company is very polarizing. People either feel
• 11:40
  Speaker 1: very strongly that it's gonna change the world and you know,
• 11:44
  Speaker 1: like that would be great if it doesn't. Other people
• 11:46
  Speaker 1: feel like it's miserable and will never achieve its goals,
• 11:49
  Speaker 1: and a senior unsecured piece of paper doesn't really work
• 11:53
  Speaker 1: for either of those cases. If you are feeling strong
• 11:55
  Speaker 1: about the company, that's a place where you're saying, I
• 11:59
  Speaker 1: should be bullish and that like look to clip a
• 12:01
  Speaker 1: five point three percent coupon. I should be in the equity.
• 12:04
  Speaker 1: If you feel very against the company, then there then
• 12:06
  Speaker 1: you wouldn't be in the bonds or the or the equity. Right.
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  Speaker 1: So basically you're getting none of the upside with the
• 12:11
  Speaker 1: bond and all of the downside risk with the senior
• 12:13
  Speaker 1: unsecured bond, whereas convertible you kind of are mixing the two,
• 12:16
  Speaker 1: you're giving them financing. You're not diluding shareholders, but you're
• 12:19
  Speaker 1: also getting some steak in the potential upside um. So
• 12:23
  Speaker 1: you're saying that it's likely or it would be appropriate
• 12:28
  Speaker 1: for Tesla to look at convertible bonds for financing. Does
• 12:31
  Speaker 1: this mean that the unsecured bond market is I don't
• 12:35
  Speaker 1: want to say close to them, but only available to
• 12:38
  Speaker 1: them if they're willing to pay up a lot more
• 12:40
  Speaker 1: than they did last time around. Right, well, as you
• 12:42
  Speaker 1: as you can see now that their bonds are you know,
• 12:45
  Speaker 1: somewhere about five and three quarters to six percent, so
• 12:48
  Speaker 1: they could issue new bonds. I don't think that would
• 12:50
  Speaker 1: be a problem issuing more unsecured bonds if they wanted to.
• 12:53
  Speaker 1: I just think strategically it doesn't make a lot of
• 12:55
  Speaker 1: sense to go that route, especially when you're equity price
• 12:59
  Speaker 1: is so high. Now is the time to you know,
• 13:01
  Speaker 1: like worry about getting your business operations together as opposed
• 13:05
  Speaker 1: to layer layering in additional financial risk through an unsecured issue.
• 13:10
  Speaker 1: I understand that they've got what about four hundred and
• 13:13
  Speaker 1: eighteen million that in bond principle that is due this year.
• 13:16
  Speaker 1: That's right, and at least based on my math, it
• 13:18
  Speaker 1: looks like they'll be free cash flow negative by about
• 13:21
  Speaker 1: a billion eight. So, you know, like if they went
• 13:24
  Speaker 1: back to the market for somewhere between two and two
• 13:26
  Speaker 1: and a half billion dollars this year, I wouldn't be unsurprised. Wait,
• 13:29
  Speaker 1: just back up. So in other words, they're going to
• 13:32
  Speaker 1: be negative. They're going to earn negative one point eight
• 13:35
  Speaker 1: billion dollars this year. In other words, their their capital
• 13:39
  Speaker 1: expenditure should be somewhere in the three three three point
• 13:42
  Speaker 1: two billion dollars, or their cash flow should be you know,
• 13:45
  Speaker 1: about a billion four. So that would give you about
• 13:47
  Speaker 1: negative a billion eight, which is not that surprising for
• 13:51
  Speaker 1: a company that's in a rapid growth mode. But companies
• 13:54
  Speaker 1: in rapid growth modes really shouldn't be playing with unsecured
• 13:57
  Speaker 1: debt or or you know, and in either case, whether
• 14:00
  Speaker 1: you go to a senior secured piece of paper that
• 14:03
  Speaker 1: will prime your bond that's outstanding that's in the Bloomberg
• 14:06
  Speaker 1: Barkley's index, or alternatively, if you're doing more converts, uh,
• 14:11
  Speaker 1: you know, like that would be a kind of along
• 14:12
  Speaker 1: the lines where you're getting a lower coupon issue. If
• 14:16
  Speaker 1: TESLA lower to issue a two point two billion dollar
• 14:18
  Speaker 1: convertible bond offering. That would be a massive, massive convertible issuance.
• 14:23
  Speaker 1: Do you anticipate that they could do the whole thing
• 14:25
  Speaker 1: in the convertible bond? They might, And you know, I
• 14:28
  Speaker 1: would say that's something that's interesting if you look back
• 14:31
  Speaker 1: at the past issue once as the stock has actually
• 14:32
  Speaker 1: gone up when they've issued convertible debt, the stock has
• 14:36
  Speaker 1: actually gone up because there's the liquidity fear that's in there.
• 14:40
  Speaker 1: That's that's bakeing into Tesla. Right, it's a it's a
• 14:42
  Speaker 1: very hit or hit or miss. You're either going to
• 14:44
  Speaker 1: have a moon shot and it's going to be unbelievably awesome,
• 14:48
  Speaker 1: or you have a heavy financial risk so that the
• 14:51
  Speaker 1: stock market is actually approved of them issuing converts. Well,
• 14:54
  Speaker 1: I mean liquidity risk saying basically, they're burning through cash.
• 14:57
  Speaker 1: They're not gonna be able to keep in business if
• 14:58
  Speaker 1: they can't raise money. So if they and raise money
• 15:00
  Speaker 1: without diluting shareholders and without incurring huge interest payments, that's
• 15:04
  Speaker 1: a good thing. That's true. Well, there you go. I
• 15:08
  Speaker 1: don't know where to go with this except that they're
• 15:10
  Speaker 1: going to have to raise some money pretty quickly, I
• 15:12
  Speaker 1: would think. So, you know, if what's the clock on
• 15:15
  Speaker 1: this four and eighteen million repayment, Well, the four eighteen
• 15:20
  Speaker 1: million dollars shouldn't be that troubling to them. They do.
• 15:23
  Speaker 1: They did have three and a half billion dollars of
• 15:24
  Speaker 1: cash on the on the balance sheet September. It's really
• 15:28
  Speaker 1: more of you know, like, if I'm thinking more strategically
• 15:31
  Speaker 1: out for a couple of years, how do I need
• 15:33
  Speaker 1: to finance this company until it moves going from a
• 15:37
  Speaker 1: cash user, a high growth company, cash burner, into more
• 15:41
  Speaker 1: of a cash cow. They kind of get that model
• 15:43
  Speaker 1: three out there in the public. Thanks very much for
• 15:45
  Speaker 1: joining us. Joel Levington is our senior credit analyst for
• 15:48
  Speaker 1: Bloomberg Intelligence telling us all about Tesla. We consult Ira
• 16:07
  Speaker 1: Jersey are interest rate strategist for Bloomberg Intelligence for details
• 16:12
  Speaker 1: about the economy and interest rates. Ira. I want you
• 16:15
  Speaker 1: to begin, if you can, all the way at the
• 16:17
  Speaker 1: back end of your latest report, because I found it
• 16:19
  Speaker 1: very interesting about household growth in the United States and
• 16:24
  Speaker 1: if you could enlighten us a little bit about what
• 16:26
  Speaker 1: has happened to household growth and who's actually living at home. Yeah,
• 16:30
  Speaker 1: so household growth has been very slow since the sense
• 16:34
  Speaker 1: of global financial crisis a couple of almost a decade
• 16:37
  Speaker 1: ago now and um and one of the big reasons
• 16:40
  Speaker 1: for that. So so we always focus on retirees, and
• 16:43
  Speaker 1: we know that there's an aging population in general, but
• 16:46
  Speaker 1: that's not necessarily what's holding household growth back. What's holding
• 16:50
  Speaker 1: household growth back is young workers. That these are people
• 16:54
  Speaker 1: to thirty four who are living at home in the
• 16:57
  Speaker 1: greatest numbers ever. And also as a percentage of that
• 17:00
  Speaker 1: age group, Uh, it's now six of that age group
• 17:04
  Speaker 1: living at home, when it used to be and historically
• 17:07
  Speaker 1: between eight and eleven percent. So you're talking about more
• 17:10
  Speaker 1: young workers living at home and that has major impacts
• 17:13
  Speaker 1: on the economy because these folks aren't buying houses, they're
• 17:16
  Speaker 1: not renting apartments, they're not buying refrigerators, they're not getting
• 17:19
  Speaker 1: household services. They're basically using the household services um for
• 17:25
  Speaker 1: for their parents at their parents house. So so that
• 17:27
  Speaker 1: is a constraint on growth right now. And you know
• 17:29
  Speaker 1: that's kind of this fiscal situation. That's the kind of
• 17:31
  Speaker 1: thing monetary policy can't fix. So ira, can you bring
• 17:36
  Speaker 1: that sort of reality into into the market right now
• 17:40
  Speaker 1: and what we're seeing with ten uere yields trying to
• 17:43
  Speaker 1: break out of this two point six threshold that a
• 17:47
  Speaker 1: lot of people say is sort of the tipping point.
• 17:50
  Speaker 1: How does this relate, Well, it's not necessarily relating to
• 17:55
  Speaker 1: you know, the mood that we're seeing today, or some
• 17:57
  Speaker 1: of the um UH or or some of the kind
• 18:00
  Speaker 1: of day to day moves. But I think it shows
• 18:02
  Speaker 1: that one of the reasons why inflation has been and
• 18:05
  Speaker 1: continues to be a bit lower than um people would
• 18:08
  Speaker 1: like it to be. It's just that there's a various
• 18:11
  Speaker 1: socio economic and demographic factors that are driving inflation to
• 18:15
  Speaker 1: be somewhat lower. Now that being said, when you look
• 18:17
  Speaker 1: at things like what's going on with oil prices recently
• 18:20
  Speaker 1: UM and how high they're going, that's increased helping increase
• 18:24
  Speaker 1: inflation expectations at least at the headline level, even even
• 18:27
  Speaker 1: if core inflation isn't necessarily going up. So you look
• 18:30
  Speaker 1: at what's happened, UM just in the last couple of months,
• 18:32
  Speaker 1: the last couple of weeks, I should say, and you've
• 18:35
  Speaker 1: seen a good you know, ten basis point move in
• 18:37
  Speaker 1: things like five year inflation break even so so the
• 18:41
  Speaker 1: Marcus expectation of what inflation is going to average over
• 18:44
  Speaker 1: the next five years, and that's coincided quite closely with
• 18:48
  Speaker 1: the uptick and oil prices. So I think that's a
• 18:51
  Speaker 1: that's one of the several drivers of yields in the
• 18:54
  Speaker 1: near term. So the idea that there are all of
• 18:57
  Speaker 1: these younger people living at home, is there any evidence
• 19:01
  Speaker 1: out there that anything would push them out of their
• 19:03
  Speaker 1: parents basements and into their own homes or is it
• 19:06
  Speaker 1: just going to be a new a new reality. Yeah,
• 19:09
  Speaker 1: that's a good question. UM. I think for that for
• 19:11
  Speaker 1: the time being, it has to be. It's probably a
• 19:14
  Speaker 1: new reality. I think part of it ends up being
• 19:16
  Speaker 1: what happens when, um, you do get more retirees actually
• 19:20
  Speaker 1: retiring and creating new new jobs. I think wage pressures
• 19:24
  Speaker 1: and wage growth has to pick up. I think once
• 19:26
  Speaker 1: you see a significant amount of wage growth, UM, you
• 19:29
  Speaker 1: can wind up seeing, um, some of these people move
• 19:32
  Speaker 1: out of their their parents homes. I think a big
• 19:34
  Speaker 1: part of it is is that that age group now
• 19:36
  Speaker 1: as a as a share of income compared to people
• 19:39
  Speaker 1: twenty years older than them, their wages are lower than
• 19:42
  Speaker 1: they have been UM historically speaking. So I think that
• 19:46
  Speaker 1: has to catch up, So it's kind of this distribution
• 19:49
  Speaker 1: of of of wages, if you will, that winds up
• 19:52
  Speaker 1: mattering somewhat, I think for the market today, though, you know,
• 19:54
  Speaker 1: we're looking at things like monetary policy overseas, so things
• 19:58
  Speaker 1: like the Bank of Japan hinting that might scale back
• 20:01
  Speaker 1: their purchases. UH. The e c B we know is
• 20:03
  Speaker 1: Star is already starting to um to buy less bonds
• 20:08
  Speaker 1: out there, and that's a non trivial reason why we
• 20:10
  Speaker 1: we're seeing some of today's market action with you know,
• 20:13
  Speaker 1: thirty year yields back up six basis points, which is
• 20:16
  Speaker 1: a relatively substantial moves these days. So if if a
• 20:20
  Speaker 1: client were to call and say, why is there this
• 20:23
  Speaker 1: big sell off at the long end, why are we
• 20:25
  Speaker 1: down one and eight thirty seconds? What's up at that
• 20:27
  Speaker 1: two point eight seven yield on the thirty year, what's
• 20:30
  Speaker 1: your answer? Yeah, that's all about the the Bank of
• 20:33
  Speaker 1: Japan action firstly, and then secondly, just um, you know,
• 20:37
  Speaker 1: we we saw the most recent take ups and the
• 20:40
  Speaker 1: last two basis points in um in yield moves higher
• 20:43
  Speaker 1: after we got the Jolts job opening report at UH
• 20:47
  Speaker 1: just a couple of minutes ago, and that showed that
• 20:49
  Speaker 1: labor market tightness seems to still be uh still be
• 20:52
  Speaker 1: the case. So you have, you know, between monetary policy actions,
• 20:55
  Speaker 1: so basically less bond buying globally by central banks, and
• 20:59
  Speaker 1: then on top of that an economy that at worst
• 21:02
  Speaker 1: is in a steady state of of modest improvement. All
• 21:06
  Speaker 1: of those things should lead for to somewhat better some
• 21:10
  Speaker 1: of better inflation and UH and growth outcomes, and that
• 21:13
  Speaker 1: should mean somewhat higher yields. I think one of the
• 21:16
  Speaker 1: things that's that's not likely to persist is the curve stepening,
• 21:18
  Speaker 1: because I do think that eventually the Federal reserve um
• 21:22
  Speaker 1: if if this continues and we start to get higher inflation,
• 21:25
  Speaker 1: the Federal reserve will actually um meet the dot plot,
• 21:29
  Speaker 1: which the market isn't yet pricing. And because of that,
• 21:32
  Speaker 1: you wind up with with today's stepening probably being on wound,
• 21:35
  Speaker 1: and actually additional flattening to two occur later in the year.
• 21:38
  Speaker 1: In other words, we're going to get faster rate hikes
• 21:41
  Speaker 1: in response. Yeah, well, faster rate hikes than the market
• 21:43
  Speaker 1: is currently pricing. The market is still only pricing about
• 21:46
  Speaker 1: two rate hikes, and the Fed still thinks that they're
• 21:48
  Speaker 1: going to go three. So if the FED worre to
• 21:50
  Speaker 1: go three um, that would mean that that the market
• 21:52
  Speaker 1: would have to catch up to the FED. Jersey thank
• 21:56
  Speaker 1: you so much for joining us. Always a pleasure speaking
• 21:58
  Speaker 1: with you. Jersey is chief US interest rate strategist for
• 22:01
  Speaker 1: Bloomberg Intelligence. Now that Congress has passed a tax bill,
• 22:21
  Speaker 1: are they going to move on to infrastructure and what
• 22:23
  Speaker 1: is needed with respect to the infrastructure of the United States.
• 22:27
  Speaker 1: Here to talk about that with us is Susan's Story,
• 22:30
  Speaker 1: President and chief executive officer of American Waterworks Company, which
• 22:34
  Speaker 1: is based in for Key, New Jersey. It is the
• 22:37
  Speaker 1: largest publicly traded water utility in the country. Susan, thank
• 22:41
  Speaker 1: you so much for joining us. I just want to
• 22:43
  Speaker 1: start with asking you about the tax plan. UM. I
• 22:47
  Speaker 1: know that you had noted that the extra money that
• 22:51
  Speaker 1: you get you will put back into your infrastructure. Do
• 22:54
  Speaker 1: you view this as possibly being a little bit of
• 22:57
  Speaker 1: an infrastructure plan in the fact that you get more money. Well,
• 23:00
  Speaker 1: thank you, Lisa, first of all for the invitation to participate,
• 23:03
  Speaker 1: and absolutely the interesting thing for regulated utilities is that
• 23:08
  Speaker 1: this tax cuts and Job Acts actually is an infrastructure plan.
• 23:12
  Speaker 1: And let me explain that just quickly. In the regulatory environment.
• 23:16
  Speaker 1: Whenever we pay taxes, if it's prudently incurred, we get
• 23:19
  Speaker 1: a pass through to customers dollar for dollar. So the
• 23:22
  Speaker 1: less taxes we pay, the more money then that goes
• 23:25
  Speaker 1: back to our customers, the less they have to pay.
• 23:28
  Speaker 1: So for every dollar of O and M we saved,
• 23:30
  Speaker 1: like taxes or interest, we get to put eight dollars
• 23:33
  Speaker 1: of infrastructure in the ground at no impact on the
• 23:37
  Speaker 1: customer bills. So when you have decades needs of capital
• 23:42
  Speaker 1: and you have a situation where you can take those
• 23:44
  Speaker 1: O M dollars and translate those into capital investment, it's
• 23:48
  Speaker 1: good for everybody. Um, susan story, And what if you
• 23:52
  Speaker 1: could just give us an update on any of the
• 23:54
  Speaker 1: active rate cases that you are currently involved And I
• 23:58
  Speaker 1: know that at least you were focused on Pennsylvania, New
• 24:01
  Speaker 1: Jersey and Missouri. Maybe just give us an update if
• 24:04
  Speaker 1: you can. Yes, sure, So Pennsylvania was resolved at the
• 24:08
  Speaker 1: end of we are currently in rate cases in New
• 24:11
  Speaker 1: Jersey and Missouri and looking to hopefully have those resolved
• 24:14
  Speaker 1: this year. And will that effect or is that part
• 24:18
  Speaker 1: of your five year strategic plan? I understand that you're
• 24:21
  Speaker 1: going to be spending about eight billion dollars. So our
• 24:25
  Speaker 1: capital plan is based on the needs of the business,
• 24:27
  Speaker 1: and in many of our states we have what's called
• 24:30
  Speaker 1: future test years where they look at the capital plans
• 24:32
  Speaker 1: up front. But as long as we can show that
• 24:34
  Speaker 1: we need to make this investment, which we do. You know,
• 24:37
  Speaker 1: in this country, of water pipe is near the end
• 24:41
  Speaker 1: of life. Now, our replacement rate is about twice as
• 24:45
  Speaker 1: good as a national average. But even we are at
• 24:48
  Speaker 1: a replacement of equal to every one d and twenty years.
• 24:51
  Speaker 1: So when it comes to pipes, plants, pumps, and cyber
• 24:55
  Speaker 1: there's a tremendous need for capital investment, and this tax
• 24:59
  Speaker 1: act is going to allow was to do more of
• 25:00
  Speaker 1: that while keeping the customer bills low. Susan, what would
• 25:03
  Speaker 1: you say to people who say that the tax plan
• 25:05
  Speaker 1: as drafted, the fact that it will likely add trillions
• 25:09
  Speaker 1: of dollars to the deficit, or more than a trillion
• 25:11
  Speaker 1: dollars I should say, to the deficit over the next
• 25:14
  Speaker 1: ten years, that that actually reduces the chance that Congress
• 25:18
  Speaker 1: is going to pass or or really make progress on
• 25:21
  Speaker 1: a real, true infrastructure bill. Are you concerned about that?
• 25:25
  Speaker 1: Do you feel like this is maybe one step forward,
• 25:27
  Speaker 1: two steps back? You know that that's a great question, Lisa,
• 25:31
  Speaker 1: and I think that you know, I've mentioned for regulated
• 25:33
  Speaker 1: utilities that they're wanting the same. I do think for
• 25:36
  Speaker 1: the country that we need an infrastructure package that fully
• 25:40
  Speaker 1: leverages private investment and also partners with public entities. And
• 25:46
  Speaker 1: one of the things Price waterhouse Coopers looked at just
• 25:48
  Speaker 1: the water utility industry, and what they found is if
• 25:52
  Speaker 1: you look at public water, which is of all water,
• 25:55
  Speaker 1: for example, that if that we could, by doing some
• 25:59
  Speaker 1: simple stuff, unleash forty three to sixty three billion dollars
• 26:03
  Speaker 1: in private money, and that if under Wastewater fifteen. And
• 26:08
  Speaker 1: these are things like when a municipality decides to sell
• 26:11
  Speaker 1: a system, if they have any tax um uh bonds
• 26:17
  Speaker 1: that were tax exempt, they have to pay those off
• 26:20
  Speaker 1: before they can sell their system. They can't even keep those.
• 26:22
  Speaker 1: So there's certain things that we think an infrastructure bill
• 26:26
  Speaker 1: can contain that will further leverage private money and not
• 26:30
  Speaker 1: require that the federal government fund the entire cost. But
• 26:34
  Speaker 1: now you concerned that the prospects for that kind of
• 26:37
  Speaker 1: bill are getting dimmer given the passage of the tax legislation.
• 26:43
  Speaker 1: I think it's going to be interesting. Given your comment
• 26:47
  Speaker 1: about the projections for the deficit and how that will
• 26:51
  Speaker 1: play out. I do know, however, that both sides of
• 26:54
  Speaker 1: the I'll understand that we have an infrastructure problem in
• 26:58
  Speaker 1: this country. I think how what the solutions look like
• 27:01
  Speaker 1: will be impacted by that. But I hope for the
• 27:04
  Speaker 1: sake of the country that we can come together and
• 27:07
  Speaker 1: do something to incentivize the construction of more roads and
• 27:11
  Speaker 1: bridges and the replacement of water and wastewater and other
• 27:14
  Speaker 1: infrastructure that we so desperately need for the economy. One
• 27:17
  Speaker 1: of the big winds I think for your company was
• 27:20
  Speaker 1: the Right Patterson Base Air Force Base UH to take
• 27:24
  Speaker 1: over their their water, wastewater and the water facilities. How
• 27:29
  Speaker 1: long does it usually take after a contract when for
• 27:33
  Speaker 1: any changes in rates or predetermination of rates to take
• 27:37
  Speaker 1: place PM That's a great question. So with Right Patterson UM,
• 27:41
  Speaker 1: we are projected to take over operations in July of
• 27:44
  Speaker 1: this year, so typically after two years. As you just said,
• 27:49
  Speaker 1: there's price redeterminations that if there are changes in laws,
• 27:53
  Speaker 1: that if for example, if there's an environmental law that
• 27:56
  Speaker 1: requires more costs, we can increase the amount of O
• 27:58
  Speaker 1: and M. The tag changes will eventually over the life
• 28:01
  Speaker 1: of these price reydeterminations bring those costs down, but that
• 28:05
  Speaker 1: will allow us to do more capital upgrades on the
• 28:07
  Speaker 1: military basis that we serve all thirteen of them across
• 28:10
  Speaker 1: the country. And just further, if you could speak about
• 28:13
  Speaker 1: some of the natural disasters that the country has has
• 28:17
  Speaker 1: been hit by in the last twelve months. You've been
• 28:20
  Speaker 1: affected not only in California, but in Louisiana and other
• 28:24
  Speaker 1: areas of the country. Give us an update if you can.
• 28:26
  Speaker 1: That's exactly right. We are spread across the entire country,
• 28:30
  Speaker 1: so typically when there's a natural disaster, it affects either
• 28:33
  Speaker 1: our regulated business or our market based business. Our focus
• 28:38
  Speaker 1: is on building resilience systems that can withstand hurricanes, ice storms, flooding,
• 28:45
  Speaker 1: the fires in California, for example. So part of that
• 28:49
  Speaker 1: infrastructure investment is on resiliency if critical assets. We've identified
• 28:54
  Speaker 1: fifty critical assets that serve eight percent of our country,
• 28:57
  Speaker 1: our customers across the country, and we have a plan
• 29:00
  Speaker 1: to ensure that we build resiliency. For example, a floodwall
• 29:03
  Speaker 1: in a water plant in New Jersey that serves a
• 29:06
  Speaker 1: million people. We've just finished a sixty five million dollar
• 29:09
  Speaker 1: project that we're protected against a five hundred year flood
• 29:12
  Speaker 1: because we had three one hundred year floods in the
• 29:14
  Speaker 1: period of seven years. So the issue of resiliency of
• 29:18
  Speaker 1: our system is a critical one and again a reason
• 29:21
  Speaker 1: that we have to get serious about infrastructure investment in
• 29:24
  Speaker 1: this country. Just real quick, Susan. When when analysts come
• 29:28
  Speaker 1: on our investors who invest in the stock market come
• 29:30
  Speaker 1: on our show, they always talk about utilities as being
• 29:33
  Speaker 1: a bond proxy, and utilities are falling now in the
• 29:37
  Speaker 1: stock market is a response to falling bond prices rising yields?
• 29:41
  Speaker 1: Does that frustrate you? We know, it's interesting and and
• 29:45
  Speaker 1: we did fall in eight k in December. That said,
• 29:47
  Speaker 1: because we had offered guidance on December eleventh that we
• 29:50
  Speaker 1: need to re look at everything that the Tax Act
• 29:53
  Speaker 1: will do to make sure that we you know, UM
• 29:56
  Speaker 1: can at our year end call a firm not a firm,
• 29:59
  Speaker 1: or any changes we need to. But with that said,
• 30:02
  Speaker 1: in the past, you know, we've enjoyed an EPs growth
• 30:05
  Speaker 1: of seven to ten percent, and we have had a
• 30:09
  Speaker 1: dividend yield and a dividend increase that's been above ten
• 30:13
  Speaker 1: um over a keger over the past five years. So
• 30:16
  Speaker 1: when you talk about a bond proxy. You're talking about
• 30:18
  Speaker 1: a return that equivocates a bond and at list for
• 30:22
  Speaker 1: American Water, we don't fit that profile. Thank you very
• 30:25
  Speaker 1: much for being with us. Susan Story is the chief
• 30:27
  Speaker 1: executive of American Water. Thanks for listening to the Bloomberg
• 30:34
  Speaker 1: p m L podcast. You can subscribe and listen to
• 30:37
  Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 30:42
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 30:45
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 30:49
  Speaker 1: You can always catch us worldwide on Bloomberg Radio