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Michael Cohen Is A Much Bigger Risk To Trump Than Manafort · 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 Bramowitz. Each day we
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Speaker 1: bring you the most important, noteworthy, and useful interviews for
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Speaker 1: you and your money, whether you're at the grocery store
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Speaker 1: or the trading floor. Find the Bloomberg P M L
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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Well,
0:32
Speaker 1: we've gotten a lot of news having to do peripherally
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Speaker 1: with President Trump. Michael Cohen, former attorney to the President,
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Speaker 1: pleaded guilty to a number of charges including campaign finance misuse,
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Speaker 1: lack of reporting, as well as tax fraud. We also
0:51
Speaker 1: are hearing about Paul Manafort, who was convicted of a
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Speaker 1: number of different things, including also tax fraud but also
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Speaker 1: potentially money laundering. Paul Manafort was former campaign campaign advisor
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Speaker 1: to President Trump. Joining us down to break this all
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Speaker 1: down as Joe Marino Partner, White Collar Defense and Investigations
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Speaker 1: Group member at Cadwalader in Washington, d C. He also
1:12
Speaker 1: is a former prosecutor with the Department of Justice working
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Speaker 1: for the United States in the National Security Division. Also
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Speaker 1: a decorated veteran and a former law attorney with the
1:24
Speaker 1: Securities and Exchange Commission. Joe, I want to start just
1:27
Speaker 1: giving you a pretty a pretty broad question, which is,
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Speaker 1: you've seen the coverage of both Paul Manaford as well
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Speaker 1: as Michael Cohen. What are people getting wrong or what
1:36
Speaker 1: are we focusing on, uh that we shouldn't be and
1:40
Speaker 1: what should we be focusing on? Hey, Belisa, Hey, thanks, thanks,
1:43
Speaker 1: thanks for having me on. Really appreciate it. And uh,
1:46
Speaker 1: just one caveat, I was actually not with the Securities
1:48
Speaker 1: and Exchange Commission, but the rest of that interest had
1:50
Speaker 1: absolutely right. Just want to put that out there. But
1:53
Speaker 1: but you're right, I mean a lot happened yesterday afternoon
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Speaker 1: in terms of Paul Manafort, Michael Cohen, and even Duncan Hunter,
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Speaker 1: a Republican wristman from California being indicted. So to kind
2:03
Speaker 1: of mix through what to focus on going forward and
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Speaker 1: what is sort of gonna you know, is significant, but
2:08
Speaker 1: it's going to blow past us. Uh. Paul Manifests trial
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Speaker 1: generated a lot of attention. I mean, I'm here in Washington,
2:15
Speaker 1: d C. Alexandria is five miles away, and people have
2:18
Speaker 1: been waiting, waiting with bated breath to figure out what's
2:20
Speaker 1: going to happen. So now we know. But the reality is,
2:25
Speaker 1: aside from Mr Manafort's probably potentially significant sentence and his
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Speaker 1: second trial in DC on money laundering charges next month,
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Speaker 1: he may not have a lot of impact on the
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Speaker 1: White House directly. It does not seem like he's going
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Speaker 1: to crack. He might not have anything that's helpful to
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Speaker 1: the Special Counsel in terms of Russia collusion. So while
2:45
Speaker 1: it's headline generating and it's fascinating to see the fall
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Speaker 1: of this person um, in terms of the longer picture
2:52
Speaker 1: and impact on the administration, it might not be that significant. Now.
2:56
Speaker 1: Michael Collen, on the other hand, could be very potentially significant,
3:00
Speaker 1: and you honed in on it in your intro, which
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Speaker 1: is that he's facing well, he's pled now to several
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Speaker 1: different charges, but the ones that really have the potential
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Speaker 1: for some further impact have to do with campaign finance
3:12
Speaker 1: violations and specifically the fact that he indicated that he
3:16
Speaker 1: he he conducted these offenses at the behest of another person,
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Speaker 1: and the you know, the implication is that person was
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Speaker 1: the candidate for presidency, Donald Trump. So wait, wait, you're
3:28
Speaker 1: absolutely glossing over this one. If you read the the
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Speaker 1: actual charging documents, you know, with person number one who
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Speaker 1: was candidate for president of the United States, it's pretty
3:37
Speaker 1: clear cut that is talking about President Trump. Yes, yes,
3:41
Speaker 1: it could be no one else. So while you know,
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Speaker 1: the while the president is not not indicated by names,
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Speaker 1: certainly that's you know, that's the exposures here. And so
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Speaker 1: the question will be very focused now in those two
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Speaker 1: charges count seven and eight, that Michael Cohen has now
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Speaker 1: pled guilty to, and what are the implications for other people,
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Speaker 1: specifically the president. And so this goes to, you know,
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Speaker 1: what exactly was the offense. And it's not the kind
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Speaker 1: of campaign finance violation we often think of right where
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Speaker 1: we have donations from individuals that are meant to be
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Speaker 1: used for legitimate campaign expenses and instead they're used for
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Speaker 1: vacations or personal kind of use, or sports cars or
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Speaker 1: completely inappropriate things. That's the case that's being built against
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Speaker 1: Duncan Hunter. In this case, it's not so much use
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Speaker 1: of campaign funds. It's a contribution allegedly to the campaign
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Speaker 1: that was used to benefit the campaign and so and
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Speaker 1: it was done in this circuitous way of going through
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Speaker 1: Michael Cohen reimbursed in a kind of a strange way
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Speaker 1: through invoices to the Trump a Trump organization compensated as
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Speaker 1: lawyers fees, when instead it appears that this was money
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Speaker 1: paid to advance the campaign by keeping individual silent about
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Speaker 1: information negative information about candidate Trump. So the scheme that
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Speaker 1: Michael Cohen has pled to is a little unusual and
5:05
Speaker 1: it could be a little complicated, and there are experts
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Speaker 1: on both sides that would argue whether or not this
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Speaker 1: in fact is a violation because the campaign finance rules
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Speaker 1: and the laws are complicated, and this is not a
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Speaker 1: case that's been brought in the past. So there's a
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Speaker 1: bit of a leap here. But in terms of what
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Speaker 1: the president's legal team is hunkering down now to think about,
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Speaker 1: this has got to be their focus and it'll be
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Speaker 1: really instructive in the coming days. And we've already seen
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Speaker 1: some tweets this morning about how the president's legal team
5:34
Speaker 1: is going to address this. Are they going to take
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Speaker 1: it head on and say Michael Cohen is just he's
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Speaker 1: out of his mind, he's lying it didn't happen, or
5:42
Speaker 1: are they going to take a more nuanced approach and say, well,
5:46
Speaker 1: maybe it didn't go down exactly this way, but even
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Speaker 1: if it did it's a technicality, and that seems clear violation.
5:53
Speaker 1: To be honest. That seems to be the tax that
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Speaker 1: they're taking, based in the fact that he said that
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Speaker 1: this was not breaking the law, President Trump, I'm talking
5:59
Speaker 1: about in a Twitter post today, So that seems to
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Speaker 1: be the tax, sort of honing in on the fact
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Speaker 1: that this is a non traditional, uh and non usual
6:07
Speaker 1: sort of use of this particular provision. Correct, correct, And
6:11
Speaker 1: so you know, that's the approach I would take, right,
6:13
Speaker 1: I would. It's gonna be hard to say it didn't
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Speaker 1: happen if, in fact, Michael Cohen has tapes and and
6:20
Speaker 1: his one testimony and other evidence he may or may
6:22
Speaker 1: not have. So to kind of take the nuanced approach
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Speaker 1: and say, well, it's not quite a clear violation, and
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Speaker 1: even if it is, it's a technicality at the slap
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Speaker 1: on the wrist. Others done this. You point to other
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Speaker 1: cases like John Edwards and say, you know, it's not
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Speaker 1: a clear violation, and hope that that flies both with
6:42
Speaker 1: the American people and with Congress. Well, Joe, you know,
6:44
Speaker 1: there's one aspect of this whole thing that I find
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Speaker 1: incredibly confusing, and that is that Michael Cohen is pleaded
6:50
Speaker 1: to a non cooperation agreement. In other words, he hasn't
6:54
Speaker 1: he hasn't been recognized for his cooperation with federal prosecutors.
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Speaker 1: This is confusing to me because he's out there and
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Speaker 1: his attorneys are out there basically begging to give as
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Speaker 1: much information as they can to whoever will listen. What
7:05
Speaker 1: how did you interpret that? Well, you're not the only
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Speaker 1: one who's confused. This is this is a kind of
7:10
Speaker 1: a nuance in the Southern District of New York. There's
7:13
Speaker 1: effectively two ways he could have pled. One was what
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Speaker 1: he did, which was a straight plea. Basically, he says,
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Speaker 1: I'm owning up to it. I'm not going to fight
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Speaker 1: the charges. I take responsibility for these counts, and I
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Speaker 1: plead guilty, and I throw myself at the mercy of
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Speaker 1: the court. The other one would have been through a
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Speaker 1: cooperation agreement where he was obligated to give to give
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Speaker 1: some kind of assistance to the FBI and the prosecutors
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Speaker 1: in New York. Now, there could be a couple of
7:38
Speaker 1: reasons why he didn't go that route. One could be
7:41
Speaker 1: that he doesn't have anything that's particularly helpful to them.
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Speaker 1: Either he's not credible or what he said to them
7:47
Speaker 1: was not especially helpful. Uh, the other possibilities, they have
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Speaker 1: what they need. They you know, the SDN Y was
7:54
Speaker 1: looking at Michael Cohen specifically. They built their case around him.
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Speaker 1: They had with the evidence that they needed, and they're
8:00
Speaker 1: not really concerned about ancillary people. And so the person
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Speaker 1: who could be concerned about ancillary people, of course the
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Speaker 1: Special Counsel Mueller. So that's why there's certainly a possibility
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Speaker 1: and this has been sort of intimated by Michael Collen's
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Speaker 1: lawyer already that he is eager to help Special Council
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Speaker 1: Muller anyway he can. So, yeah, perhaps that will be
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Speaker 1: the way for him to get a deal. Unfortunately, have
8:24
Speaker 1: to leave it there. Joe Moreno, thank you so much
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Speaker 1: for taking the time. Joe Moreno is partner with Goodwalader
8:29
Speaker 1: in the White Collar Defense and Investigations Group, former federal prosecutor,
8:33
Speaker 1: also a veteran of the United States Army. Well, today,
8:50
Speaker 1: aside from the Washington d C drama, you are seeing
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Speaker 1: a little bit of drama in oil markets among others,
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Speaker 1: where you are seeing uh significant gain after the US
9:02
Speaker 1: government report showed the biggest decline in crede inventories since
9:05
Speaker 1: late July Hugh Johnson joining US now chairman and chief
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Speaker 1: investment officer of Hugh Johnson Advisers. I want to start
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Speaker 1: with oil because my sense is, uh that your life
9:15
Speaker 1: is not being very significantly impacted by what's going on
9:18
Speaker 1: with Washington. D c AM. I correct, Yeah, you're absolutely correct.
9:21
Speaker 1: On we're not paying attention to what Washington. D see
9:24
Speaker 1: what's going on there, and it doesn't appear is so
9:27
Speaker 1: it's going to impact the things that really tried the markets,
9:29
Speaker 1: which of course are interest rates and earnings. Since so
9:32
Speaker 1: right now we're not we're we're not completely ignoring it,
9:35
Speaker 1: but we're not changing our investment strategy because of what's
9:39
Speaker 1: going on in Washington. All right, So given that, I
9:41
Speaker 1: do want to just home in a little bit on oil,
9:43
Speaker 1: just because commodity markets have had kind of an uncertain
9:47
Speaker 1: outlook for the past couple of weeks, in particular with
9:49
Speaker 1: the plunge in metals oil also declining UM, but now
9:54
Speaker 1: you're seeing a little bit of a gain. I'm curious
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Speaker 1: about how much you think about the price of oil
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Speaker 1: and how that factor into what you what you buy.
10:02
Speaker 1: We think about oil all the time, and it's very
10:04
Speaker 1: volatile and it would be grandiose of me Lesa to
10:07
Speaker 1: say that I could forecast what's going to happen to
10:09
Speaker 1: the price of oil, but quite frankly, we do work
10:13
Speaker 1: hard on forecasting it. In a price for West Texas
10:16
Speaker 1: intermediate around sixty five dollars, prepare more accurately reflects global
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Speaker 1: supply and demand conditions, but you'll get a lot of
10:24
Speaker 1: volatility around that, so you get a decline from sixty
10:28
Speaker 1: dollars down to fifty dollars. Paths very unusual, but not
10:31
Speaker 1: in a volatile environment. Most of that decline, in fact,
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Speaker 1: I would say just about all of that decline is
10:37
Speaker 1: largely a function of the fact that the dollar has
10:40
Speaker 1: been so strong, which really means to every other country
10:43
Speaker 1: around the world, the price of oil has gone up
10:46
Speaker 1: and gone up significantly as a result of that, and
10:49
Speaker 1: it's not in today's report, but as a result of that,
10:53
Speaker 1: over time, what we've seen is a significant increase in inventories,
10:57
Speaker 1: and basically what that has done is has caused a
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Speaker 1: very sharp decline below with the sixty five dollars or
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Speaker 1: equilibrium level, which you know, I think we're going to
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Speaker 1: return to that level even when we get the sanctions
11:12
Speaker 1: on oil and around in November, but it's it looks
11:16
Speaker 1: like we're headed in that direction. So I think oil
11:18
Speaker 1: is very undervalued right now. Okay, but I'm looking right
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Speaker 1: now at a sixty seven dollars and thirty barrel for
11:24
Speaker 1: oil and w c I barrel of oils. So I'm
11:27
Speaker 1: just wondering. I mean, you're saying it's going to go
11:28
Speaker 1: down to sixty five barrel. Yeah, well, I think it's
11:31
Speaker 1: I think it's gonna Basically, if we're at sixty sixty
11:34
Speaker 1: seven today, then I think it will probably stabilize around
11:38
Speaker 1: current current levels. But believe me, I think that more
11:43
Speaker 1: accurately reflects supply and demand conditions as they exist today.
11:47
Speaker 1: All right, So given that, how do you use that
11:50
Speaker 1: thesis in your investments? Mean, do you buy equities in
11:55
Speaker 1: the big oil companies? Do you look for shell opportunities
11:58
Speaker 1: and MLPs? What's what sort of your strategy there? Okay?
12:02
Speaker 1: The strategy and energy is, first of all, I think
12:04
Speaker 1: I balanced either market weight maybe even a little bit
12:07
Speaker 1: overweighted in a sector, in the energy sector in a portfolio. Remember,
12:11
Speaker 1: you want to be diversified. You want to exposure to
12:14
Speaker 1: all eleven sectors of the market. And then within the
12:17
Speaker 1: energy sector, you want to have things that work well
12:20
Speaker 1: when the price of oil goes up and things that
12:22
Speaker 1: work well when the price of oil goes down. That
12:24
Speaker 1: means you want to own production companies. We own production
12:28
Speaker 1: companies conticles an example, but you also want to own
12:31
Speaker 1: companies like Valero and again we own that one, and
12:34
Speaker 1: the Valerios of course a refiner, and that really benefits
12:38
Speaker 1: from a decline in the price of oil. So it's
12:40
Speaker 1: not just owning energy. You want to have a market
12:43
Speaker 1: weight or a slight overweight, but also within the oil sector,
12:47
Speaker 1: make sure you have a sensibly put together portfolio, and
12:50
Speaker 1: that means production companies and also refiners. How much does
12:55
Speaker 1: the price of oil, in your view, hinge on an
12:59
Speaker 1: escal leastion of trade tensions or a lack thereof. You know,
13:05
Speaker 1: that largely depends on the dollar and what happens to
13:08
Speaker 1: the dollar as a result of trade tensions and what
13:11
Speaker 1: we've seen more recently. And it's important because what the
13:14
Speaker 1: dollar has been doing is very important. And we've seen
13:17
Speaker 1: the dollar go up and we've seen foreign currencies go down,
13:20
Speaker 1: and that's got good news for it because it attracts
13:24
Speaker 1: a lot of capital to our markets, which in my
13:26
Speaker 1: judgment is very important because domestic money conditions are are
13:30
Speaker 1: are really not that good. We're not getting enough growth
13:32
Speaker 1: and the money supply to drive the economy and earnings.
13:35
Speaker 1: And fortunately the dollar has been strong attacted attracted foreign
13:39
Speaker 1: capital to our markets, and that's all set the domestic
13:42
Speaker 1: liquidity shortfall. So sort of, kind of indirectly, I would
13:46
Speaker 1: say that the escalation of trade tensions has to some
13:50
Speaker 1: extent benefit us, and thankfully we've got a stronger dollar,
13:54
Speaker 1: and thankfully we've got uh the international flow of capital
13:58
Speaker 1: to to our markets and off set at that domestic
14:01
Speaker 1: liquidity shortfall. It's a little technical leasa. I's apologized for that,
14:05
Speaker 1: but at the same time it's an extremely important concept.
14:08
Speaker 1: So I'm not worried too much about the trade trade
14:12
Speaker 1: problem right now. One one last thing just quickly here.
14:16
Speaker 1: President Trump has come out and said that he wishes
14:18
Speaker 1: that the dollar we're weaker, also accused China and the
14:21
Speaker 1: European Union of manipulating their currencies. I'm wondering, how much
14:24
Speaker 1: is it, portfolio manager, do you care? You know? Um
14:28
Speaker 1: right now? And I'd say it's really right now. And
14:30
Speaker 1: that's where I would emphasize is right now because of
14:33
Speaker 1: the domestic liquidity shortfall, a strong dollar is extremely important.
14:38
Speaker 1: It's important for the reasons that I just mentioned attracting
14:42
Speaker 1: foreign capital to our markets when we need it the most.
14:45
Speaker 1: So a week dollar young. I know that's supposed to
14:47
Speaker 1: help a lot of US companies compete in international markets,
14:51
Speaker 1: and and there are times when you have to have that,
14:54
Speaker 1: but not right now. Right now, with liquidity conditions as
14:57
Speaker 1: weak as they are, a strong dollar is extreme, really important,
15:00
Speaker 1: and we all ought to be very thankful we've got it.
15:03
Speaker 1: Hugh Johnson, thank you so much for being here. It's
15:05
Speaker 1: really interesting to speak with you. Hugh H. Johnson is
15:08
Speaker 1: chairman and chief investment officer and Hugh Johnson Advisers, which
15:12
Speaker 1: overseas more than a billion dollars from Albany, New York.
15:16
Speaker 1: Talking about that dollar, which actually is weakening a little
15:20
Speaker 1: bit today. Mexican pasto climbing is there are there is
15:24
Speaker 1: speculation that a NAFTA agreement will come up shortly. If
15:43
Speaker 1: you haven't gotten your Tesla fix today, have no fear
15:46
Speaker 1: we're gonna be talking about that company right now, because
15:49
Speaker 1: it is the drama that just keeps on giving. But
15:52
Speaker 1: We're gonna take a little bit different of attack here.
15:54
Speaker 1: We're gonna take a look at the debt aspect of
15:57
Speaker 1: this story. The company has basically financed itself with a
16:02
Speaker 1: debt and I guess to some degree equity, but more
16:05
Speaker 1: debt as it burns through cash. And there's a question
16:09
Speaker 1: if this company does go private, as Elon Musk seems
16:12
Speaker 1: to want to see it do. So what happens to
16:15
Speaker 1: all that debt? And joining us now is Joel Lovington,
16:18
Speaker 1: senior credit analyst for Bloomberg Intelligence and just general credit guru.
16:22
Speaker 1: If you have a question about credit, you called Joel Lovington. Joel, So,
16:25
Speaker 1: what's your take on this? I mean, what could potentially
16:27
Speaker 1: happen to this debt? Not a lot. I think it's
16:30
Speaker 1: gonna be sticking out there, particularly the bonds, the senior
16:34
Speaker 1: insecure bonds that we often talk about that are in
16:35
Speaker 1: the Bloomberg indussees. I think it becomes a game of
16:38
Speaker 1: will they be structurally subordinated and to what degree will
16:42
Speaker 1: be the issue, and that will determine where the bonds
16:44
Speaker 1: are going. Okay, so today we had a story on
16:47
Speaker 1: the Bloomberg Tesla bonds may see doomsday and private deal,
16:52
Speaker 1: don't don't And it was sort of. It was citing
16:55
Speaker 1: this UM blog post by twenty four Asset Management chief
16:58
Speaker 1: executive Mark Coleman say, secure debt funding to take Tesla
17:01
Speaker 1: private may become practically impossible. Do you agree? Well, taking
17:07
Speaker 1: a private and putting a lot of debt on it
17:10
Speaker 1: our two different things cannot be taken private? Yes. I
17:13
Speaker 1: think the math in my models tell me that you
17:16
Speaker 1: need roughly about sixty billion dollars of equity to have
17:19
Speaker 1: that done, meaning that you can at a at a
17:22
Speaker 1: maximum probably put about ten billion dollars of additional debt
17:26
Speaker 1: on the company today and I take private scenario and
17:29
Speaker 1: still make it work. Um, you know, from a rational
17:33
Speaker 1: uh capital structure standpoint. Okay, I guess that one question
17:39
Speaker 1: that I have is we talk about Tesla and going private.
17:42
Speaker 1: Morgan Stanley perhaps coming in on this, UM, I have
17:46
Speaker 1: to wonder when does the Tesla run out of cash?
17:48
Speaker 1: When are we sort of done with this? Uh sort
17:51
Speaker 1: of when will they do? What will they do? Kind
17:53
Speaker 1: of discussion to how long can they survive? Discussion? Right, well,
17:57
Speaker 1: that might be never ending until they go p of it. Um.
18:01
Speaker 1: You know, the company had said that it would be
18:04
Speaker 1: as early as the third quarter, where they would be
18:06
Speaker 1: free cash flow neutral. Uh, the mathematics that I do
18:09
Speaker 1: tell me that it would be really, really difficult for
18:12
Speaker 1: that to happen in the third quarter or in the
18:14
Speaker 1: fourth quarter. And you know, with all of the challenges
18:17
Speaker 1: that are going on now with Elon Musk and the
18:20
Speaker 1: issues that I'm sure are taking up much more of
18:23
Speaker 1: his time than he ever imagined. Uh, the odds are
18:26
Speaker 1: they're probably taking the ball, their eye off the ball
18:28
Speaker 1: a little bit, and uh, I think they'll struggle into
18:32
Speaker 1: which may eventually be a mechanism which will preclude them
18:36
Speaker 1: from going into a private scenario. All right, So you know,
18:40
Speaker 1: I want to use Tesla as an example of the
18:42
Speaker 1: broader phile debt market because right now we talk about Tesla,
18:47
Speaker 1: it's burning through cash, it has an erotic CEO, their
18:51
Speaker 1: questions about executive leadership, their questions about the board oversight,
18:55
Speaker 1: especially with some of the tweets that are now being
18:57
Speaker 1: investigated by the SEC for possible market manipulation, and Tesla
19:01
Speaker 1: bonds that are doing certainly trying to get a discounted
19:04
Speaker 1: a little bit more than eighty seven cents on the dollar.
19:08
Speaker 1: But that isn't that much. I mean the yield to
19:10
Speaker 1: maturity there is seven point six, not as much as
19:13
Speaker 1: you would think, given the fact that over the past
19:16
Speaker 1: two decades that's been very average, if not below the
19:19
Speaker 1: average of high out bonds. I mean, just in general,
19:21
Speaker 1: when you look around the speculative grade universe, do you
19:25
Speaker 1: feel like things are really overvalued at this point or
19:28
Speaker 1: you think that it sort of is in line with
19:30
Speaker 1: what we've seen elsewhere. Well, I think for the broader
19:33
Speaker 1: universe that I cover, which are industrials and autos, I
19:35
Speaker 1: don't particularly think that it's overvalued. I think, um, in
19:39
Speaker 1: many cases, it becomes hard to find an upside case
19:42
Speaker 1: for some of these bonds. That doesn't mean that they're
19:43
Speaker 1: going down. I just think, particularly on the auto side,
19:47
Speaker 1: it's hard to make cases that autos are going to
19:49
Speaker 1: get better in any way. So I think there are
19:52
Speaker 1: definitely spots where it becomes more challenging to find a
19:55
Speaker 1: balanced upside downside case. UM. But in aggregate, I think
19:59
Speaker 1: you're you're fine because there's very low default risk. If
20:02
Speaker 1: you're talking about the foot level, yeah, so from the
20:05
Speaker 1: foot level, it doesn't seem like you're gonna necessarily see
20:08
Speaker 1: some kind of wave of bankruptcies. But that said, if
20:11
Speaker 1: you've got very little upside, does that mean that people
20:13
Speaker 1: are just basically buying for for the carry and that's
20:16
Speaker 1: basically the trade at this point? I think so. I
20:18
Speaker 1: think so in many cases, is the carry enough to
20:21
Speaker 1: justify especially as treasuries gets treasure yields get higher. Uh, Well,
20:25
Speaker 1: you know, treasuries and high yield don't necessarily correlate all
20:29
Speaker 1: that well together. If you think about, you know, why
20:31
Speaker 1: reachs would be rising to slow growth? Uh, that implies
20:35
Speaker 1: that growth is pretty good and smaller companies, when you
20:38
Speaker 1: have smaller numbers like EBNAH and sales, they go up
20:43
Speaker 1: exponentially relative to large caps. So in some ways, uh,
20:48
Speaker 1: a rising rate environment is indicative of a strong economic
20:52
Speaker 1: backdrop for the for high yield monds to perform well.
20:56
Speaker 1: And one thing that I'm wondering is, you know, are
21:00
Speaker 1: do you think that there could be a substantial hit
21:01
Speaker 1: to some of these companies if borrowing costs rise? You know,
21:04
Speaker 1: if you do see treasure yields continue to rise, because
21:06
Speaker 1: that people haven't been talking about that that much since
21:08
Speaker 1: treasure yields haven't risen all that much in the past
21:11
Speaker 1: few months. But I'm just wondering, you know, is that
21:13
Speaker 1: still on the radar here? Yeah. I mean I don't
21:15
Speaker 1: think it's a twenty nineteen event, but I think if
21:16
Speaker 1: you look at to twenty let's say one, as a
21:19
Speaker 1: spot where debt maturities will start to elevat again and
21:23
Speaker 1: you'll be resetting at higher rates. I definitely do think
21:26
Speaker 1: that there is risk, but I think there's been enough
21:28
Speaker 1: refinancing activity that's taken place over the last couple of
21:31
Speaker 1: years that the cand has been kicked down the road
21:32
Speaker 1: a little bit longer. Joel Levington, thank you so much
21:35
Speaker 1: for being with me. I love speaking with you. Joel Lovington,
21:37
Speaker 1: senior credit analyst for Bloomberg Intelligence, joining us here in
21:41
Speaker 1: our eleven three oh studios. Just want to bring you
21:43
Speaker 1: up to speed on the markets. Sp NAZDAC both have
21:46
Speaker 1: turned green since a somewhat saggy open Dow Jones still down,
21:51
Speaker 1: but just barely less than one tenth of one percent.
21:54
Speaker 1: If we switch up the boards and we get a
21:56
Speaker 1: sense of what's going on in the bond market, well
21:58
Speaker 1: you're getting a little bit of actually uh decline in
22:01
Speaker 1: yield so rally there as well as people try to
22:04
Speaker 1: understand what the political implications are from a too close
22:08
Speaker 1: uh close contacts with President Trump face legal consequences to
22:14
Speaker 1: a number of actions that may or may not have
22:16
Speaker 1: had anything to do with him. We're gonna be speaking
22:19
Speaker 1: about that more coming op. We're always gonna be speaking
22:22
Speaker 1: just in general about how much investment managers care because
22:26
Speaker 1: so far markets kind of aren't reacting that much. Let's
22:44
Speaker 1: talk safe havens at a time when the SMP five
22:46
Speaker 1: hundred is reaching a new record high and is climbing
22:50
Speaker 1: to a new record with respect to a bowlmarket length.
22:54
Speaker 1: Joining us now, John Bartlett, vice President, co portfolio manager
22:57
Speaker 1: of the Reeves Utilities e t F for Reeves Asset Management,
23:01
Speaker 1: overseeing more than three billion dollars. Based in New Jersey,
23:04
Speaker 1: he joins me here in New York. John, thank you
23:06
Speaker 1: so much for being here. I'm wondering, is it a
23:09
Speaker 1: hard sell right now to convince investors to try to
23:12
Speaker 1: even look for a haven at a time when the
23:14
Speaker 1: best bet has been just US equities. Well, it really
23:17
Speaker 1: depends on the investor um and I would say that
23:20
Speaker 1: utilities offer a lot of different things to a lot
23:23
Speaker 1: of different types of of of folks out there, you know,
23:25
Speaker 1: generally speaking utilities have been having a great summer. The
23:28
Speaker 1: weather is warm. We've been making making more power and
23:32
Speaker 1: generous disgusting go on. But anyway, you know, utilities earnings
23:36
Speaker 1: have been coming through UM and we expect earnings to
23:39
Speaker 1: be growing in the five to six percent range for
23:41
Speaker 1: these for these companies, and the dividend in the in
23:43
Speaker 1: the three to five sorry, in the in the dividend
23:46
Speaker 1: yield in the three and a half percent range UM.
23:48
Speaker 1: But to your question, you know, there are When we
23:52
Speaker 1: started UM the Reeves Utility e t F about three
23:56
Speaker 1: years ago, there were lots of different concerns then and
23:58
Speaker 1: there maybe some different cerns now. And you know, the
24:02
Speaker 1: question we always get is really about interest rates. Now. Clearly,
24:05
Speaker 1: utilities are wonderful because their safe haven for you know,
24:09
Speaker 1: geopolitical risk and things like that. You need to pay
24:12
Speaker 1: your bills. That's absolutely right, and these companies can be
24:16
Speaker 1: counted on to grow their earnings year in and year
24:18
Speaker 1: out UM. But by and large, you know, if you
24:21
Speaker 1: kind of go back those last three years, everybody was
24:24
Speaker 1: convinced that that interest rates were going to go up
24:26
Speaker 1: and they were all absolutely right. Um. You know, if
24:29
Speaker 1: you look back, the Fed is raised rates by a
24:31
Speaker 1: hundred and seventy five basis points the ten years gone
24:34
Speaker 1: from to fifteen to eighty five. But our little level
24:38
Speaker 1: e t F is chugged along at fourteen point two
24:40
Speaker 1: percent a year. And yeah, and that's actually even versus
24:44
Speaker 1: the index has been up about twelve point two. So
24:46
Speaker 1: the question is how does that happen? And the answer
24:49
Speaker 1: really lies in the steady growth of these companies and
24:52
Speaker 1: the very conservative revenue trajectory that they all have. Alright,
24:55
Speaker 1: So steady growth is this? What kind of utilities are these?
24:59
Speaker 1: I mean, they're more study growth in particular types that
25:02
Speaker 1: rely on different types of energy and different locations around
25:05
Speaker 1: the country. How do you identify the the best utilities? Well,
25:09
Speaker 1: it's you know, it's a it's a great question because
25:11
Speaker 1: it's so important to remember that every utility is different.
25:13
Speaker 1: We've got fifty one different regulatory jurisdictions in the country,
25:16
Speaker 1: one of which being the federal government, the rest being
25:18
Speaker 1: the states, and so start you have to start with regulation, um,
25:22
Speaker 1: but you also have to look at the you know,
25:25
Speaker 1: utilities need to earn the right to grow, and the
25:28
Speaker 1: ability to grow is really a very important component in this.
25:32
Speaker 1: And I would say that utilities are really the only, um,
25:36
Speaker 1: the only segment of industrial America where investors tend to
25:39
Speaker 1: underpay for growth. And the answer the reason for that
25:41
Speaker 1: is they tend to overpay for yield and they think
25:44
Speaker 1: that they're you know, getting a compelling total return story
25:47
Speaker 1: by buying. You know that the companies with the highest yield.
25:50
Speaker 1: But what we found is the companies that have been
25:52
Speaker 1: able to deliver consistent earnings growth continue to be able
25:55
Speaker 1: to do so. Although in fairness, I mean, if if
25:57
Speaker 1: a utility is growing profits too quickly, then because of
26:01
Speaker 1: the fifty one different regulatory regime, you're gonna have an
26:04
Speaker 1: outcry and the regulators are going to swoop in and say, hey, whoa, whoa, whoa,
26:08
Speaker 1: lower those bills. People shouldn't be paying as much if
26:10
Speaker 1: you're being that profitable. That's right. And you know, we
26:12
Speaker 1: look for we look for companies that can provide their regulator,
26:15
Speaker 1: their regulators political victories. And you know, you have to,
26:19
Speaker 1: like I said, you have to earn the right to grow.
26:21
Speaker 1: Earning the right to grow doesn't mean um, you know,
26:24
Speaker 1: growing having uh really ridiculous profits. What it means is
26:28
Speaker 1: being able to grow your investment base, you know, give
26:31
Speaker 1: give customers something a little bit better for the spending.
26:34
Speaker 1: All right, So let's talk specific regions. I mean, right now,
26:36
Speaker 1: we're dealing with California's wildfires. Uh that I don't know
26:39
Speaker 1: if that's good or bad for utilities because it could
26:41
Speaker 1: take them out and cause a lot of problems they
26:43
Speaker 1: then have to rebuild. But you are dealing with the
26:45
Speaker 1: heat wave that is leaving people absolutely begging for air conditioning,
26:49
Speaker 1: certainly on the on the East coast. So where are
26:52
Speaker 1: you seeing the opportunities? Well, I think it's worth talking
26:54
Speaker 1: about California for a second, because California really is its
26:57
Speaker 1: own unique animal um. And it's important to remember that
26:59
Speaker 1: the lines that you see about utilities in California really
27:02
Speaker 1: don't affect utilities in the other states. The the California
27:05
Speaker 1: utilities right now are really in a tangle um regarding
27:09
Speaker 1: the liability from all of these wildfires in California, Pacific
27:13
Speaker 1: Gas and Electric has caused the most damage. They have
27:15
Speaker 1: a potential liability that could be as much as fifteen
27:17
Speaker 1: billion dollars UM. And in California, no matter what happens
27:22
Speaker 1: um as a consequence of you know, an act of God,
27:26
Speaker 1: if it's if the fire is caused by utility equipment.
27:29
Speaker 1: If somebody runs their car off the road and into
27:31
Speaker 1: a utility poll, knocks the utility poll over and it
27:33
Speaker 1: starts to fire. The utilities on the hook for the
27:36
Speaker 1: for for for the liability. Now, they are supposed to
27:39
Speaker 1: be able to collect that in rates, but the California
27:42
Speaker 1: Commission has to this point said that they don't have
27:45
Speaker 1: the legal authority to pass those costs along. So authority
27:49
Speaker 1: who does? That's correct? Um, Well, it's that's what's getting
27:53
Speaker 1: getting worked right now right now. So again, you have
27:55
Speaker 1: to be very cognizant of what's going on with regulation.
27:58
Speaker 1: You we try to avoid really some of the hot points.
28:01
Speaker 1: That's a bad pun in this case. But u um anyway,
28:05
Speaker 1: uh So again it's it's something that we we we
28:07
Speaker 1: pay a lot of attention to. All right, So, um,
28:10
Speaker 1: I'm just wondering just here, we've got a little bit
28:12
Speaker 1: less in a minute. What are the biggest risks to
28:14
Speaker 1: your thesis right now? Well, you know, everybody has to
28:16
Speaker 1: take their own counsel um on on where interest rates
28:19
Speaker 1: are going. That's what I quote sort of see is
28:21
Speaker 1: as as as the biggest quote unquote risk to these
28:23
Speaker 1: companies that's really more of a statement of how low
28:25
Speaker 1: risk they are as opposed to anything else. Frankly, UM,
28:29
Speaker 1: I personally believe that we've been in a fairly benign
28:31
Speaker 1: interest rate environment and we're going to to kind of
28:33
Speaker 1: stay that way for the foreseeable future. Um. The good
28:37
Speaker 1: news is that utilities remain better than bonds. Right, So
28:39
Speaker 1: if you have a long duration bond and interest rates
28:41
Speaker 1: really move against you, there's really no way to catch up. Um.
28:44
Speaker 1: You know, we're in an environment where people are buying
28:46
Speaker 1: corporate bonds. You can't buy corporate bonds below par anymore
28:49
Speaker 1: and hope for some sort of price reset, right, and
28:52
Speaker 1: utilities you have at least the tailwind of five percent
28:54
Speaker 1: earnings growth. John Bartlett, really interesting. Thank you so much
28:57
Speaker 1: for being with us today. John Bartlet, Vice Press president
29:00
Speaker 1: and co portfolio manager of the Reeves Utilities E t
29:03
Speaker 1: F trades under the ticker u T e S. It's
29:06
Speaker 1: up five point four percent so far year to date.
29:09
Speaker 1: Reeves Asset Management overseas more than three billion dollars based
29:12
Speaker 1: in New Jersey. Interesting to think about that fifty one
29:16
Speaker 1: state and federal government regulatory web overseeing just how much
29:20
Speaker 1: you pay every month to have that blessed air conditioning.
29:26
Speaker 1: Thanks for listening to the Bloomberg p m L podcast.
29:29
Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
29:33
Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
29:36
Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
29:40
Speaker 1: It's one before the podcast. You can always catch us
29:43
Speaker 1: worldwide on Bloomberg Radio