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Tesla May Have Much Less Cash Than Reported: Johnson (Podcast) · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you,
• 0:05
  Speaker 1: along with my co host Lisa Brahma wits each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
• 0:10
  Speaker 1: you and your money, whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
• 0:15
  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. Well, Tesla reporter results last night.
• 0:22
  Speaker 1: I think they're probably best characterized as a mixed bag,
• 0:25
  Speaker 1: but there was drama on the conference call, as are
• 0:27
  Speaker 1: typically as with Tesla when it was announced that the
• 0:29
  Speaker 1: CFO surprisingly is going to depart. The company of stockers
• 0:33
  Speaker 1: down about one percent this morning and trading joining us
• 0:36
  Speaker 1: a kind of dig through what's going on with Tesla
• 0:38
  Speaker 1: is Gordon Johnson. Gordon is a managing director research channels
• 0:42
  Speaker 1: covering alternative energy, metals and mining and equipment from Vertical Group.
• 0:46
  Speaker 1: He joins us in our Bloomberg Interactive Broker Studios here
• 0:49
  Speaker 1: in New York. Gordon, thanks for joining us. Let me
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  Speaker 1: just start with the c f O news. It just
• 0:54
  Speaker 1: seems like I just remember him coming back for a
• 0:57
  Speaker 1: second stint. The CFO and now he's leaving. What's going on? Right?
• 1:00
  Speaker 1: So I think that when you combine with the CFO leaving,
• 1:03
  Speaker 1: which was unexpected um, you've had four vice presidents of
• 1:07
  Speaker 1: finance leave since seventeen. You have the chief accounting officer
• 1:11
  Speaker 1: at Tessa leave um with just a month on the
• 1:15
  Speaker 1: job unexpectedly um. And now you have the CFO leaving
• 1:18
  Speaker 1: and effectively the new CFO was just promoted to vice
• 1:22
  Speaker 1: president in December and has no specific accounting experience. I
• 1:26
  Speaker 1: think this is a huge loss of institutional knowledge UM
• 1:30
  Speaker 1: and a concern again given the finance departures we've seen
• 1:34
  Speaker 1: at Tesla more recently. So Gordon, you're you're a longtime
• 1:37
  Speaker 1: Tesla beer right and you are you maintain a seventy
• 1:41
  Speaker 1: two dollar pre share price target, which is a huge
• 1:44
  Speaker 1: decline from where we are today, and you said you
• 1:46
  Speaker 1: would be aggressively adding to any Tesla short positions here. Correct,
• 1:50
  Speaker 1: bondom markets don't agree with you because the bonds are
• 1:52
  Speaker 1: actually going up and usually the bottom markets is a
• 1:55
  Speaker 1: smart money. Why are they wrong? Right? So? I think
• 1:57
  Speaker 1: the reason they're wrong is because Tesla reported a hash
• 2:00
  Speaker 1: balance of three point seven billion. However, if you look
• 2:03
  Speaker 1: at their interest income in the quarter, and divided by
• 2:06
  Speaker 1: that cash balance, you get an annualized return of roughly
• 2:09
  Speaker 1: eight or point eight percent, whereas in the in the
• 2:12
  Speaker 1: fourth quarter, the three year Treasury bill returned two point
• 2:16
  Speaker 1: six percent. So, either they're the most inefficient managers of
• 2:19
  Speaker 1: cash we've ever seen, which I think is highly unlikely.
• 2:22
  Speaker 1: Are their cash balance is significantly less than what they're reporting.
• 2:25
  Speaker 1: So I think that's why the bond investors are reacting
• 2:28
  Speaker 1: um uh positively, but we're still quite concerned they're not
• 2:31
  Speaker 1: going to be able to pay off that that convertible
• 2:33
  Speaker 1: uh in March. Okay, hold on a second. So you're
• 2:35
  Speaker 1: saying that they're they're massaging the numbers. Is that the idea.
• 2:38
  Speaker 1: I don't want to say they're pressaging the numbers, but
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  Speaker 1: I think what they do is they delay paying their
• 2:43
  Speaker 1: suppliers until days after the quarter to allow them to
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  Speaker 1: report a cash balance UM at the end of the
• 2:49
  Speaker 1: quarter that is much higher than the average cash balance.
• 2:52
  Speaker 1: And you can see this in Q three, Q two,
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  Speaker 1: Q one UM and and it hasn't always been the case.
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  Speaker 1: So um Again, Either they're the worst managers of cash,
• 3:01
  Speaker 1: worse than you know, a retail investor who could just
• 3:04
  Speaker 1: park their money in three month treasury bills or their
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  Speaker 1: cash balance is significantly less than what they're reporting. We
• 3:08
  Speaker 1: think it's the latter that sounds a little bit like
• 3:10
  Speaker 1: massaging in the numbers to me, UM, I think, let's
• 3:13
  Speaker 1: let's move. So how about the underlying fundamentals? Um, is
• 3:17
  Speaker 1: you know what did you see in the quarter last night? Uh?
• 3:20
  Speaker 1: To give you a sense that you know, they are
• 3:22
  Speaker 1: remain challenged to meet some of their either the product
• 3:25
  Speaker 1: production goals and or profit goals. Right, So keep in mind,
• 3:28
  Speaker 1: we just updated our bottom up model and we projected
• 3:31
  Speaker 1: a gap EPs number of seventy nine. Since they came
• 3:34
  Speaker 1: in at seventy eight, the street was out of over
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  Speaker 1: a dollar. Think about this. Tesla built three years of
• 3:39
  Speaker 1: backlog via the Model three, and like the Sports Illustrated
• 3:43
  Speaker 1: article said today, it was a bait and switch strategy.
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  Speaker 1: They said it was gonna be twenty seven and a
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  Speaker 1: half thousand dollars be fully autonomous. I mean you could
• 3:50
  Speaker 1: literally crawl on the back, sleep and drive coast to
• 3:51
  Speaker 1: coast and you're gonna have free supercharging. None of that's true.
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  Speaker 1: The car costs fifty five thousand dollars out the gate um. Clearly,
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  Speaker 1: I don't think anybody in their right mind is going
• 3:59
  Speaker 1: to allow Tesla to drive them around without paying attention.
• 4:03
  Speaker 1: There's been fifty two deaths reported either associated indirectly or
• 4:06
  Speaker 1: directly with Tesla, and clearly the supercharging costs money. So
• 4:09
  Speaker 1: what they did in Q three is they took that
• 4:11
  Speaker 1: huge mode of backlog and basically in Q three and
• 4:14
  Speaker 1: four sold cars to the best part of that backlog,
• 4:18
  Speaker 1: i e. The guys who are willing to pay the most.
• 4:20
  Speaker 1: So if you look to what they're guiding for next year,
• 4:23
  Speaker 1: for this year rather twenty nineteen, they're saying three hundred
• 4:25
  Speaker 1: and sixty to four hundred thousand cars sold. If you
• 4:28
  Speaker 1: look at their Q four deliveries, multiply that by four
• 4:32
  Speaker 1: and use the low end of that guidance, they're actually
• 4:34
  Speaker 1: guiding cells unit cells down in twenty nineteen, despite the
• 4:38
  Speaker 1: fact that on Q four numbers they're trading out a
• 4:40
  Speaker 1: ninety times forward e PE multiple when other car companies
• 4:43
  Speaker 1: traded six to five six, five to six times. We
• 4:45
  Speaker 1: think there's big risk in the in in the stock. Certainly,
• 4:49
  Speaker 1: I think most would agree with you that there's big
• 4:51
  Speaker 1: risk in the stock, just based on how much. It's
• 4:52
  Speaker 1: been swinging around. But Gordon, I'm wondering, let's say Tesla
• 4:55
  Speaker 1: is able to pay off its convertible bond. Uh is
• 4:59
  Speaker 1: your pieces wrong? I mean, is that is that going
• 5:02
  Speaker 1: to be enough of prolonging any sort of liquidity event
• 5:05
  Speaker 1: that Tesla can keep on going trying to make it work. No,
• 5:09
  Speaker 1: I mean everybody says if they're able to raise debt,
• 5:11
  Speaker 1: you know that's gonna be great for the stock. Look,
• 5:13
  Speaker 1: they burn a lot of money. Um keep in mind
• 5:17
  Speaker 1: in in in the fourth quarter they had huge demand
• 5:20
  Speaker 1: pool in the United States because their tax credit got
• 5:22
  Speaker 1: cut in half one one nineteen in in in the Netherlands, right,
• 5:26
  Speaker 1: European cells of Tesla and ten were up six percent
• 5:29
  Speaker 1: if you assume that that's because Netherlands cells were up
• 5:32
  Speaker 1: a hundred and fifty eight percent. Germany was down forty,
• 5:34
  Speaker 1: Spain was down like roughly twenty, the UK was down
• 5:37
  Speaker 1: roughly thirty. The point is the Netherlands had a big
• 5:40
  Speaker 1: tax in centive for for Tesla cars that got cut
• 5:43
  Speaker 1: January one. We think Netherlands cells are gonna be down
• 5:46
  Speaker 1: eight percent in Q one. So the point is they've
• 5:49
  Speaker 1: had a big benefit in Q four that benefit is
• 5:52
  Speaker 1: over UM. I think they're guiding to huge decline. We
• 5:55
  Speaker 1: think the street numbers for Q one on revenue are
• 5:57
  Speaker 1: roughly one point five billion too high given Tesla's guide
• 5:59
  Speaker 1: and UM and you have real competition coming in in
• 6:02
  Speaker 1: the back half this year. So I think they go
• 6:04
  Speaker 1: back into losing money in Q one. I think basically
• 6:07
  Speaker 1: that's there, that's effectively their guidance. I think they lose
• 6:09
  Speaker 1: more money in Q two and more money in Q
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  Speaker 1: three and four. UM. So if you give a company
• 6:14
  Speaker 1: money who just perpetually burns cash, is that a good thing?
• 6:17
  Speaker 1: I don't think so. So. I I just think their
• 6:19
  Speaker 1: business model was floor I think Elon Musk's tried to
• 6:22
  Speaker 1: change the way you manufacture cars from the car companies
• 6:24
  Speaker 1: that have done it before. It hasn't worked, and I
• 6:27
  Speaker 1: think the costs are too high. I think they're gonna
• 6:28
  Speaker 1: burn a lot of money this year. Gordon Johnson, thank
• 6:30
  Speaker 1: you so much for being with us. Gordon Johnson, Managing
• 6:33
  Speaker 1: director focused on Alternative Energy, Metals and Mining and Equipment
• 6:37
  Speaker 1: UH spaces for the Vertical Group in New York, joining
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  Speaker 1: us here in our eleven three oh studios. Well, we
• 6:57
  Speaker 1: are right in the midst of tech earnings. We had
• 6:59
  Speaker 1: Facebook last night, the blowout quarter, that stock is up,
• 7:02
  Speaker 1: Microsoft that generally inline quarter stocks off a little bit today,
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  Speaker 1: and of course after the close tonight, we have Amazon.
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  Speaker 1: So to help us kind of way through all things tech,
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  Speaker 1: we have David Garrity joining us. David's the chief market
• 7:14
  Speaker 1: strategist at laid Law and Company. He joins us in
• 7:16
  Speaker 1: our Bloomberg eleven three oh studios. David, thank you for
• 7:19
  Speaker 1: joining us. Let's start with Facebook. Wow, what a quarter,
• 7:23
  Speaker 1: I think. Uh, I guess it's just people saying, I
• 7:26
  Speaker 1: guess this thing is not going to be rolled over
• 7:27
  Speaker 1: by the regulators. Well, one would argue that there are
• 7:30
  Speaker 1: signs of life in terms of Facebook, and one has
• 7:32
  Speaker 1: to bear in mind also looking at the fourth quarter,
• 7:35
  Speaker 1: like other online internet companies, there is a bump in
• 7:38
  Speaker 1: the calendar year end um, and certainly they saw that,
• 7:41
  Speaker 1: but clearly against the negative news slow scene over the
• 7:44
  Speaker 1: course of two thousand and eighteen. Um, you know, there
• 7:47
  Speaker 1: are signs that people now think that there's alive and
• 7:49
  Speaker 1: well and all clear can be found on Facebook. But
• 7:52
  Speaker 1: one has to consider the news that came out just
• 7:55
  Speaker 1: recently within the last day or so that Apple had
• 7:58
  Speaker 1: decided to basically remove Facebook from the Apple App Store,
• 8:03
  Speaker 1: which brings up the basic point that while people may
• 8:05
  Speaker 1: be concerned about public sector regulators, when it comes down
• 8:09
  Speaker 1: to looking at the structure of the technology industry where
• 8:12
  Speaker 1: you have companies like Facebook who depend upon others operating
• 8:16
  Speaker 1: system platforms, whether it's Android from Google or whether it's
• 8:20
  Speaker 1: iOS from Apple, Facebook really is in a world that
• 8:23
  Speaker 1: other people ship set the conditions for and from that standpoint, Facebook,
• 8:28
  Speaker 1: for lack of a better term, has to depend on
• 8:30
  Speaker 1: the kindness of strangers. Okay, can you just give us
• 8:32
  Speaker 1: a sense of how important this really is. I mean,
• 8:34
  Speaker 1: if Apple removes Facebook from its app store, can people
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  Speaker 1: not buy or not download the Facebook app on their iPhones?
• 8:43
  Speaker 1: Is that what this is basically saying. Or they just
• 8:45
  Speaker 1: have to work a little harder to do so. People
• 8:47
  Speaker 1: can still work a little bit harder go through their
• 8:48
  Speaker 1: web browsers. But the issue is if there are things
• 8:51
  Speaker 1: that are made more difficult for consumers over time, it
• 8:55
  Speaker 1: certainly serves to dampen adoption in that regard, and I
• 8:58
  Speaker 1: would argue that if we start looking at what Apple
• 9:01
  Speaker 1: has been saying in terms of the company's policy towards
• 9:04
  Speaker 1: upholding individuals rights to data privacy is that the reason
• 9:08
  Speaker 1: why they did this, certainly because what was happening in
• 9:11
  Speaker 1: the case of Facebook is that they were essentially misusing
• 9:15
  Speaker 1: the app store platform to go out and to pay
• 9:19
  Speaker 1: um Facebook subscribers or Facebook users, uh, you know, twenty
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  Speaker 1: dollars to basically take down all of their data. And
• 9:26
  Speaker 1: this was not something that Apple had been made aware
• 9:28
  Speaker 1: of when this was being put up on the Apple
• 9:31
  Speaker 1: App Store. And again I would just go back and
• 9:33
  Speaker 1: say that, you know, Tim cook out of the technology
• 9:36
  Speaker 1: sector c e O S has been fairly straightforward and
• 9:39
  Speaker 1: and an upright in regarding data privacy as being an
• 9:43
  Speaker 1: individual right. And certainly the company in its actions Apple
• 9:47
  Speaker 1: is showing that they're going to be taking Facebook on
• 9:50
  Speaker 1: in because you know, Jeff Zuckerberg on the earnings call
• 9:53
  Speaker 1: last night seemed to suggest that after a year of
• 9:55
  Speaker 1: hard work at the company and investment in personnel to
• 9:58
  Speaker 1: monitor content and privacy see and investments in technology, that
• 10:02
  Speaker 1: the company had in his mind, kind of turned the
• 10:04
  Speaker 1: corner on what was a very difficult time for the
• 10:07
  Speaker 1: company um and that they've gotten to handle on it
• 10:10
  Speaker 1: and they're ready to move forward and go back to
• 10:12
  Speaker 1: being the innovative and focus on the business. Do you
• 10:14
  Speaker 1: think the company has turned the corner from that regulatory
• 10:18
  Speaker 1: overhang type of perspective. Well, I mean, those are wonderful
• 10:21
  Speaker 1: comments that go into an earnings conference called script But
• 10:24
  Speaker 1: when we start coming up against factors and it's here
• 10:28
  Speaker 1: really more in the case of Apple. Not to sort
• 10:30
  Speaker 1: of focus in too hard on this, but dealing with
• 10:32
  Speaker 1: public sector regulators is one thing. Obviously it takes time
• 10:36
  Speaker 1: for them to act. That can be slow. But when
• 10:38
  Speaker 1: you have a private sector partner, and I don't know
• 10:40
  Speaker 1: to what extent you can really can say Apple is
• 10:42
  Speaker 1: a partner, it just happens to be that Facebook is
• 10:44
  Speaker 1: operating off of an iOS platform in part to get
• 10:48
  Speaker 1: to the subscriber base that Apple has. If a private
• 10:50
  Speaker 1: sector company decides to act and clearly act quickly, this
• 10:54
  Speaker 1: can be something that I think has far more negative
• 10:57
  Speaker 1: impact potentially going down the road the necessar early something
• 11:00
  Speaker 1: that might come out of the public sector. But don't
• 11:02
  Speaker 1: diminish the fact that the public sector itself may be
• 11:05
  Speaker 1: poised from the regulatory standpoint to impose significant finds relative
• 11:09
  Speaker 1: to Facebook. All right, so, David, it sounds like you
• 11:12
  Speaker 1: have a lot of barishness around the edges about Facebook,
• 11:16
  Speaker 1: and yet this is not reflected at all in the
• 11:18
  Speaker 1: shares today. Shares of Facebook are up, they're surging, They're
• 11:21
  Speaker 1: up at the biggest one day gains in January. So
• 11:27
  Speaker 1: do you think that the shares should be much lower
• 11:30
  Speaker 1: than where they are today or do you think that
• 11:33
  Speaker 1: these are all just potential headwinds that investors need to
• 11:35
  Speaker 1: be thinking about, even as UH they go full speed
• 11:39
  Speaker 1: into Facebook shares. And clearly, if you look back over
• 11:41
  Speaker 1: the last two months, with the market having sold off
• 11:43
  Speaker 1: going into Christmas, Facebook down a dollars was probably a
• 11:47
  Speaker 1: bye going into the earnings, I would say that what
• 11:49
  Speaker 1: we're seeing here with Facebook as a relief rally, if
• 11:52
  Speaker 1: we go back and look at the high on the
• 11:53
  Speaker 1: stock up of over to twenty back in July, UM,
• 11:56
  Speaker 1: I would say that that's probably a level we're still
• 11:58
  Speaker 1: not going to get back to. You know, clearly this
• 12:00
  Speaker 1: is a trade UH. And from that standpoint, I see
• 12:03
  Speaker 1: Facebook is still being in a situation where they don't
• 12:06
  Speaker 1: really control their own destiny given the operations and how
• 12:09
  Speaker 1: they're structured depending upon these other technology platforms. I mean,
• 12:13
  Speaker 1: just to raise an issue and segue over towards Amazon.
• 12:16
  Speaker 1: If we start looking at Amazon having gone through and
• 12:20
  Speaker 1: looked at various sectors to go into to basically take
• 12:23
  Speaker 1: on advertising, advertising revenues for Amazon is a growth area.
• 12:28
  Speaker 1: And if Amazon has far better access to an insight
• 12:32
  Speaker 1: into what consumers are actually doing, Amazon can sort of say, look,
• 12:36
  Speaker 1: we respect people's privacy in terms of their data. We're
• 12:40
  Speaker 1: not out basically stepping on all sorts of people's toes
• 12:43
  Speaker 1: to get to that data. We can get through it
• 12:46
  Speaker 1: with far less complication. They can go in and say,
• 12:49
  Speaker 1: will provide you with the targeting that Facebook provides. I
• 12:52
  Speaker 1: guess what, We'll do it at a better price. So
• 12:55
  Speaker 1: you I'm glad you brought up Amazon. Of course, they
• 12:58
  Speaker 1: report earnings after the close tonight. One of the issues
• 13:01
  Speaker 1: in the digital advertising space, one of the concerns I
• 13:03
  Speaker 1: think for Madison Avenue and from big advertisers is that
• 13:06
  Speaker 1: it's effectively a Dwopoli between Google and Facebook, and they've
• 13:10
  Speaker 1: been dying for a third party, whether it's Snapchat or
• 13:13
  Speaker 1: Twitter or whatever. And but now it appears that Amazon
• 13:16
  Speaker 1: is really starting to focus on the advertising side of
• 13:19
  Speaker 1: the business um and they're actually putting up a huge
• 13:22
  Speaker 1: growth rates and ad spending. Do you think that Amazon
• 13:25
  Speaker 1: can in effect become that third major platform for advertisers
• 13:29
  Speaker 1: in the digital space. I would say that Amazon, you know,
• 13:32
  Speaker 1: has the potential to displace Facebook in terms of the
• 13:36
  Speaker 1: significant role to be played in the online advertising market.
• 13:40
  Speaker 1: And if I were a Facebook investor, I would certainly
• 13:42
  Speaker 1: be concerned about that. You know, Amazon clearly has a
• 13:45
  Speaker 1: number of different channels for growth beyond their traditional retail,
• 13:50
  Speaker 1: which clearly is going to benefit from the r end
• 13:52
  Speaker 1: holiday shopping season. And certainly, if we look at cloud computing,
• 13:55
  Speaker 1: Amazon web services the number one leading platform add on
• 13:59
  Speaker 1: advertising relative to this, and certainly the prospects for Amazon
• 14:03
  Speaker 1: I would say as an investment certainly superior, I would
• 14:06
  Speaker 1: say on a relative basis to likes of a Facebook.
• 14:10
  Speaker 1: So just real quick on Amazon, what do you think
• 14:12
  Speaker 1: is going to be the biggest surprise today? I think
• 14:15
  Speaker 1: the biggest surprise may be very well continue to be
• 14:17
  Speaker 1: sort of the growth that we've been seeing in terms
• 14:19
  Speaker 1: of cloud services. I think the numbers we had out
• 14:21
  Speaker 1: of Microsoft last night were very favorable in that regard,
• 14:24
  Speaker 1: and this is certainly a transition that continues on a
• 14:28
  Speaker 1: secular basis. You know, granted some of the impact we
• 14:31
  Speaker 1: saw with regards to Microsoft, as there might have been
• 14:33
  Speaker 1: some slowing in terms of some of the data server
• 14:35
  Speaker 1: activities things that had impacted Intel previously. But obviously, you know,
• 14:39
  Speaker 1: Amazon is not exposed to that. David Garritty, always wonderful
• 14:43
  Speaker 1: having you. Thank you so much for being with us.
• 14:44
  Speaker 1: Thank you, David Garretty, of course, joining us here in
• 14:48
  Speaker 1: our Bloomberg eleven three oh studio's chief market strategist for
• 14:51
  Speaker 1: laid Law and Company in New York. Facebook shares up
• 14:56
  Speaker 1: thirteen percent on the heels of that revenue beat and
• 14:59
  Speaker 1: frank earnings per share beat all around, giving people a
• 15:03
  Speaker 1: sense of relief. As David said, there is a big
• 15:23
  Speaker 1: question mark when it comes to Venezuela, and it's a
• 15:25
  Speaker 1: huge oil reserves. When will it actually start to begin
• 15:29
  Speaker 1: pumping those reserves out and putting them into circulation. Joining
• 15:33
  Speaker 1: us down to talk about this and its effect on
• 15:35
  Speaker 1: global oil prices is Dr ellen Wald, President of Transversal Consulting,
• 15:40
  Speaker 1: also a nonresident Senior Fellow at the Atlantic Council's Global
• 15:43
  Speaker 1: Energy Center and contributor to Bloomberg Opinion. Uh. Dr ellen Wall,
• 15:47
  Speaker 1: thank you so much for being with us. So let's
• 15:49
  Speaker 1: start with the effect that so far the political turmoil
• 15:54
  Speaker 1: in Venezuela has had an oil markets. It's sent the
• 15:56
  Speaker 1: price up. Does this make sense to you? It does
• 16:00
  Speaker 1: make sense to me, because Venezuela's oil, even though right
• 16:03
  Speaker 1: now Venezuela actually isn't producing all that much. I think
• 16:07
  Speaker 1: it's numbers in December where something like one point one
• 16:09
  Speaker 1: seven million barrels per day, which is very low for
• 16:13
  Speaker 1: a country like Venezuela. But Venezuela produces a heavy sour
• 16:17
  Speaker 1: crude type of crude oil that's very much in demand
• 16:20
  Speaker 1: and is not really being produced as much. Right now,
• 16:24
  Speaker 1: we get a lot of light crude coming from the
• 16:26
  Speaker 1: United States, and the refineries are really looking for the
• 16:30
  Speaker 1: type of oil Venezuela produces, and that's probably why we're
• 16:33
  Speaker 1: seeing oil prices rise just somewhat right now. Well, Dr Wald,
• 16:39
  Speaker 1: Venezuela has one of the largest reserves on the planet,
• 16:43
  Speaker 1: within roughly three billion barrels. Can they even get it
• 16:46
  Speaker 1: out of the ground, Well, that is the big question.
• 16:49
  Speaker 1: And Venezuela's oil is actually much more difficult to extract
• 16:53
  Speaker 1: than say, Saudi Arabia's oil. So even though Saudi Arabia
• 16:57
  Speaker 1: doesn't have as quite as much oil as Venezuela. It
• 17:00
  Speaker 1: produces a lot more. Their infrastructure is much better and
• 17:03
  Speaker 1: it's much easier to extract. But Venezuela could be producing
• 17:07
  Speaker 1: a lot more than it is. In fact, it's produced
• 17:10
  Speaker 1: as much as over three million barrels per day, so
• 17:13
  Speaker 1: it's really not living up to its potential. Now. The
• 17:16
  Speaker 1: question is, right now, they're facing a lot of problems
• 17:19
  Speaker 1: with their infrastructure. Uh. There, people are are starving and
• 17:23
  Speaker 1: unable to work, and the company is essentially failing. So say, uh,
• 17:28
  Speaker 1: we got rid of all the political trouble and they
• 17:30
  Speaker 1: got a new government that was really willing to support
• 17:33
  Speaker 1: the company in what it needs. Just how fast could
• 17:36
  Speaker 1: they ramp up production? And that is the question. I
• 17:39
  Speaker 1: think that they actually could do a lot to get
• 17:42
  Speaker 1: that oil flowing very quickly. Perhaps not as much as
• 17:46
  Speaker 1: as three million barrels a day, but they certainly could
• 17:49
  Speaker 1: increase possibly almost to two and that would really help
• 17:52
  Speaker 1: their economy get out of the terrible state it's in.
• 17:55
  Speaker 1: So let's say there is resume change in the next
• 17:59
  Speaker 1: couple of months. Let's say Huang Guido does take over
• 18:02
  Speaker 1: Nicholas Maduro's force out of power. This is a huge conjecture. Obviously,
• 18:06
  Speaker 1: let's just say that that happens. If Venezuela could get
• 18:11
  Speaker 1: their oil production back online, how much would that flood
• 18:14
  Speaker 1: the market? What would that do to the price of oil?
• 18:17
  Speaker 1: I think it would definitely push prices down. Um, you know,
• 18:20
  Speaker 1: there's still part of OPEC, there's still as far as
• 18:23
  Speaker 1: we know, you know, OPEC doesn't seem to have any
• 18:25
  Speaker 1: intention to get rid of its production uh cuts right now.
• 18:29
  Speaker 1: But Venezuela is allowed to produce under that up to
• 18:33
  Speaker 1: I think one point nine seven million barrels a day,
• 18:35
  Speaker 1: and they really would do well to push themselves up
• 18:39
  Speaker 1: to that limit if they can, as quickly as they can.
• 18:43
  Speaker 1: So we definitely could see if if they did get
• 18:45
  Speaker 1: that oil in the market, it would push prices down. So,
• 18:48
  Speaker 1: Dr Wald, what role if any, do you think Russia
• 18:52
  Speaker 1: and China are playing or can play in Venezuela. Um,
• 18:56
  Speaker 1: whether it's on the political side or more about you know,
• 18:59
  Speaker 1: they are interest in the oil reserves in Venezuela. What
• 19:03
  Speaker 1: role do you think they are playing and maybe could
• 19:05
  Speaker 1: play going forward? Well, this this is a big question,
• 19:08
  Speaker 1: and particularly with regards to Russia, because Russia's loaned them,
• 19:13
  Speaker 1: loan them money, and in fact, Ross snaffed the run
• 19:16
  Speaker 1: of the Russian oil companies actually has a lean on
• 19:19
  Speaker 1: SITCO for its loan. So basically, if if PDVSAY does
• 19:23
  Speaker 1: not pay the interest on its loans to Russia, then
• 19:26
  Speaker 1: Russia can actually take control of forty nine nine percent
• 19:30
  Speaker 1: of the Citgo Refining Company in the United States. According
• 19:34
  Speaker 1: to they hold that as collateral. Now, of course the
• 19:37
  Speaker 1: question would be will the United States permit that. They
• 19:40
  Speaker 1: do have measures they can take to say no, We're
• 19:43
  Speaker 1: not going to allow that on national security grounds. But
• 19:45
  Speaker 1: it really could uh bring this crisis almost into a
• 19:49
  Speaker 1: US Russia issue as opposed to just of Venezuela Russia
• 19:54
  Speaker 1: China issue. Now, China and Russia are definitely going to
• 19:56
  Speaker 1: do all they can to support Venezuela. Uh, first, they
• 20:00
  Speaker 1: their money. They've loaned Venezuela money. They want Venezuela to
• 20:03
  Speaker 1: pay that interest. If a new government comes into power,
• 20:06
  Speaker 1: that government could say, you know what, those loans were
• 20:09
  Speaker 1: made under the Madurou government and that government was illegitimate
• 20:12
  Speaker 1: and so we're not going to pay you. So they
• 20:14
  Speaker 1: definitely have a vested interest in keeping the Madurou government
• 20:18
  Speaker 1: in power. Okay, just real quick here. I'm glad that
• 20:21
  Speaker 1: you went there because that was going to be my
• 20:22
  Speaker 1: next question. Given the fact that China and Rush would
• 20:25
  Speaker 1: like to see Nicholas Maduro remain in charge, how much
• 20:28
  Speaker 1: does that make it unlikely that we do see a
• 20:31
  Speaker 1: regime change. Well, I really think right now things are
• 20:34
  Speaker 1: up in the air. It does seem unlikely given the
• 20:37
  Speaker 1: fact that there have been attempts in the past and
• 20:40
  Speaker 1: Maduro has uh you know, has rebuffed them. He does
• 20:42
  Speaker 1: seem to have control over the army. And really, when
• 20:45
  Speaker 1: it comes to regime change, when it comes to revolution
• 20:48
  Speaker 1: like this, it does seem that control over the army
• 20:52
  Speaker 1: is can be a deciding factor. That being said, it's
• 20:56
  Speaker 1: very difficult to predict revolution. Um, we did a very
• 20:58
  Speaker 1: bad job of it in it with regard to Iran
• 21:01
  Speaker 1: in so I don't want to say that it's not possible.
• 21:06
  Speaker 1: Dr Ellen Wall, President Transversal Consulting, Thank you so much
• 21:10
  Speaker 1: for joining us. She is a nonresident fellow at the
• 21:13
  Speaker 1: Atlantic Council's Global Energy Center and a contributor to Bloombergh Opinion.
• 21:16
  Speaker 1: Thank you so much for joining us to discuss what
• 21:19
  Speaker 1: is going on in Venezuela, and uh, you know the
• 21:21
  Speaker 1: instability there on the political side, and what it means
• 21:23
  Speaker 1: for their vast energy reserves. Again, over three million barrels
• 21:27
  Speaker 1: in the ground in Venezuela, the largest reserve on the planet.
• 21:31
  Speaker 1: Clearly a significant driver of global oil prices from a
• 21:35
  Speaker 1: supplied demand perspective. How is this going to play out politically?
• 21:39
  Speaker 1: How is this going to play out? We will keep
• 21:41
  Speaker 1: our watch. The official manufacturing data that came out of
• 21:59
  Speaker 1: China overnight showed a bit of stabilization, but the numbers
• 22:03
  Speaker 1: that we're getting out of Chinese companies are pretty bleak.
• 22:06
  Speaker 1: Just to give you a picture of the more than
• 22:08
  Speaker 1: twenty four hundred mainland listed firms that have announced preliminary
• 22:11
  Speaker 1: figures for their earnings were issued guidance this season, uh
• 22:14
  Speaker 1: nearly four hundred of them said they'll post a loss.
• 22:18
  Speaker 1: There has been disappointment after disappointment. Joining us now to
• 22:21
  Speaker 1: talk about the Chinese economy and what we're learning about
• 22:23
  Speaker 1: it is Leland Miller, chief executive of China Beige Book International,
• 22:27
  Speaker 1: joining us here in our Blue brig Interactive Broker Studios. Leland,
• 22:30
  Speaker 1: I am so glad to have you here. What is
• 22:33
  Speaker 1: The big takeaway for you as you passed through some
• 22:36
  Speaker 1: of these numbers that we see from corporations, well, the
• 22:39
  Speaker 1: big takeaway is that the numbers that markets are looking
• 22:42
  Speaker 1: at buy and large for macro, the g d P numbers,
• 22:45
  Speaker 1: some of the manufacturing p m I numbers look weak,
• 22:48
  Speaker 1: but they don't look very weak and as a result,
• 22:50
  Speaker 1: they're not reflective of what's actually happening across the Chinese
• 22:53
  Speaker 1: economy right now. There is not mild weakness. There's not
• 22:55
  Speaker 1: the same weakness that you saw earlier in eighteen, which
• 22:58
  Speaker 1: I think was relative be mode weakness. You have much
• 23:01
  Speaker 1: more substantial weakness right now. And it's it's a problem
• 23:04
  Speaker 1: because it's not being uh, it's not being understood by investors.
• 23:07
  Speaker 1: They're just seeing the same trends continue. But but these
• 23:10
  Speaker 1: are not the same trends there So Leland, I think
• 23:13
  Speaker 1: the market feels. I think the market probably would say
• 23:16
  Speaker 1: it's probably discounting in certainly a slowing Chinese economy, and
• 23:20
  Speaker 1: if they were to put a number on it in
• 23:22
  Speaker 1: terms of GDP, it might be six or six and
• 23:24
  Speaker 1: a half percent. Yes, that's down from ten. We recognize
• 23:26
  Speaker 1: that we're trying to price that into our models. What
• 23:29
  Speaker 1: do you think the real underlying growth of the Chinese
• 23:31
  Speaker 1: economy is right now for the fourth quarter. I think
• 23:34
  Speaker 1: it's it's less than half that it's probably around two. Uh.
• 23:37
  Speaker 1: You know, we we try and annualized, so so we
• 23:40
  Speaker 1: so what we what we try to um. We try
• 23:44
  Speaker 1: not to harp too much on the GDP number because GDP,
• 23:46
  Speaker 1: of course doesn't tell most of the story. If you
• 23:49
  Speaker 1: build a bridge, we tell the story at the time.
• 23:51
  Speaker 1: If you build a bridge and then you tear it down,
• 23:53
  Speaker 1: and you build a bridge again, you tear it down,
• 23:54
  Speaker 1: you build a bridge tearer, you can get to whatever
• 23:56
  Speaker 1: GDP number you want. So it doesn't reflect restructuring and
• 23:59
  Speaker 1: reform and other important parts of what the Chinese are doing.
• 24:01
  Speaker 1: But the growth right now compared to what we saw
• 24:04
  Speaker 1: earlier in seventeen substantially weaker. Uh. And so it's it's
• 24:09
  Speaker 1: it's just it's the idea that it's just down a
• 24:11
  Speaker 1: tick from six seven and down to six four. It's
• 24:13
  Speaker 1: just it's it's it's a it's a lunacy. So is
• 24:15
  Speaker 1: this analogous you Well, we've been seeing a lot of parallels.
• 24:19
  Speaker 1: So one of the things that we alerted clients to
• 24:20
  Speaker 1: back in the fall was that the run up to
• 24:23
  Speaker 1: en was looking a lot like the run up to Steen.
• 24:26
  Speaker 1: We were seeing a lot of the same problems. Uh,
• 24:28
  Speaker 1: there was earlier in the year there was an official
• 24:31
  Speaker 1: data that suggested that maybe things were weaker and they weren't,
• 24:34
  Speaker 1: and people got a little bit more comfortable with the
• 24:36
  Speaker 1: fact that that, uh, you know, our data earlier in
• 24:38
  Speaker 1: ten actually showed that some of this official data which
• 24:41
  Speaker 1: had you know, twenty year lows in retail or twenty
• 24:44
  Speaker 1: year lows and investment whatever it was, Uh it was,
• 24:46
  Speaker 1: it was not as it's not as bad, and so
• 24:49
  Speaker 1: earlier in the year, you you had a slowdown, but
• 24:51
  Speaker 1: I'm not a substantial one, and I think it's been
• 24:53
  Speaker 1: building up to that and the problems we're seeing right now.
• 24:56
  Speaker 1: The last time we saw ch China Beige Book data
• 24:58
  Speaker 1: this week was first quarter, So I think there's there's
• 25:02
  Speaker 1: just a lot of parallels from from three years ago.
• 25:04
  Speaker 1: So leveland as you talk to your clients and you
• 25:06
  Speaker 1: you suggest that they don't focus too much on that
• 25:08
  Speaker 1: g d P number because it can in fact be
• 25:10
  Speaker 1: manipulated by the government to a certain extent. What data
• 25:13
  Speaker 1: is the best data to really look at to get
• 25:15
  Speaker 1: a sense of what's going on in China and what
• 25:18
  Speaker 1: influences your estimation of a two or two and a
• 25:21
  Speaker 1: half GDP growth. So what we're working looking at very
• 25:25
  Speaker 1: closely right now our credit data. Uh there's a belief
• 25:28
  Speaker 1: now and this is it's well founded because this is
• 25:30
  Speaker 1: the way China's works in the past, that they have downturns,
• 25:33
  Speaker 1: but then they stimulate the economy, things get better, you know,
• 25:36
  Speaker 1: rinse and repeat. Well, the problem right now is that
• 25:39
  Speaker 1: China has not been undergoing this credit starvation, this leveraging,
• 25:45
  Speaker 1: this intense to leveraging for for as long as as
• 25:48
  Speaker 1: people think. So what we've seen in the last three
• 25:50
  Speaker 1: quarters is actually very heavy levels of borrowing from corporates.
• 25:54
  Speaker 1: Now they have had a shut of finance crackdown, but
• 25:56
  Speaker 1: you have seen some heavy levels of borrowing and that's
• 25:58
  Speaker 1: not being understood. So you don't just have monetary stimulus
• 26:00
  Speaker 1: button you could turn on in early. They're already borrowing,
• 26:03
  Speaker 1: but it's not leading to more investment, it's not helping growth.
• 26:06
  Speaker 1: Given that, given the fact that we've seen this uh
• 26:10
  Speaker 1: substantial weakness, as you've been saying, amid an elevated level
• 26:15
  Speaker 1: of borrowing. How much more ammunition does China have to
• 26:20
  Speaker 1: juice growth, well beyond what you think is a two
• 26:23
  Speaker 1: percent annualized growth rate, well much less than I think
• 26:25
  Speaker 1: people think. And what we keep hearing over and over
• 26:27
  Speaker 1: is that will they have fiscal stimulus, and you know
• 26:29
  Speaker 1: they're about to do a tax cut that will make
• 26:31
  Speaker 1: Donald Trump blush. And the reality of fiscal stimulus is
• 26:35
  Speaker 1: that fiscal stimulus in China doesn't really mean fiscal stimuls.
• 26:38
  Speaker 1: They have never tried large scale fiscal stimulus. What happened
• 26:41
  Speaker 1: in two thousand TED was hybrid monetary policy because what
• 26:44
  Speaker 1: was happening was it was infrastructure bills and it was
• 26:47
  Speaker 1: other things lending that came out through the state banks.
• 26:51
  Speaker 1: It wasn't reflected in a higher budget deficit, was reflected
• 26:53
  Speaker 1: in a higher monetary base. So you always have a
• 26:56
  Speaker 1: monetary element to all everything they call fiscal. Now, corporations
• 27:01
  Speaker 1: don't pay most of their taxes. S s don't pay
• 27:03
  Speaker 1: hardly any of their taxes. So the idea they could
• 27:05
  Speaker 1: just cut taxes and have this massive stimulus. They can
• 27:07
  Speaker 1: get a little bump for a quarter or two, but
• 27:09
  Speaker 1: it's not the big it's not the big gun that
• 27:13
  Speaker 1: they claim they have in the background. So what fiscal
• 27:15
  Speaker 1: stimulus means, it's not really tax cuts, it means more
• 27:18
  Speaker 1: fiscal spending. And then you get back to the monetary problem.
• 27:20
  Speaker 1: So they're in a little bit of a difficult situation
• 27:23
  Speaker 1: right now. They don't want to increase the monetary base.
• 27:25
  Speaker 1: But that's how that's the only way they know how
• 27:28
  Speaker 1: is to is to is to expand credit and to
• 27:30
  Speaker 1: build up infrastructure. Uh, and they're they're not getting much
• 27:32
  Speaker 1: of return on it anymore. Okay, so this weaker than
• 27:35
  Speaker 1: even maybe the market's discounting economic picture in China. How
• 27:39
  Speaker 1: much is that influencing how you think China's approaching trade talks,
• 27:43
  Speaker 1: not just the two days we're seeing here in Washington,
• 27:45
  Speaker 1: but just in general. Do you really believe that's pushing
• 27:48
  Speaker 1: them and sending them to make a deal a real deal?
• 27:52
  Speaker 1: Oh yeah, massively. It's well not a real deal. They're
• 27:54
  Speaker 1: not gonna make a real deal because they're not being
• 27:56
  Speaker 1: asked to make a real deal. So what they will
• 27:58
  Speaker 1: They want to have a trade truth so they can
• 28:01
  Speaker 1: focus inward and fix some of the problems that are
• 28:04
  Speaker 1: happening in the economy. Now, what what would really set
• 28:08
  Speaker 1: things off is if these trade talks breakdown and you
• 28:11
  Speaker 1: don't have a deal and Trump walks away from the table,
• 28:13
  Speaker 1: and you have this layered on top of the current weakness,
• 28:16
  Speaker 1: you will absolutely see a crisis in China. So just
• 28:19
  Speaker 1: real quick, here a crisis in China. If that two
• 28:22
  Speaker 1: percent growth rate is sustained in China, what does that
• 28:25
  Speaker 1: mean for global markets? Not good things? I mean it's
• 28:30
  Speaker 1: all the obviously. So so basically, if you're looking at
• 28:33
  Speaker 1: at demand from China being much much less and you're
• 28:35
  Speaker 1: saying a trade war hit it overhead, um, you know
• 28:37
  Speaker 1: this is China has been able to counteract the tariffs
• 28:40
  Speaker 1: that have been put on it so far. You know,
• 28:42
  Speaker 1: they've they've depreciated the currency until very recently, they've done
• 28:45
  Speaker 1: subsidies to corporations that they're very good at this type
• 28:49
  Speaker 1: of work. They can't counteract another tronche of two or
• 28:52
  Speaker 1: sixty seven billion of tariffs. They can't counteract tariff rates
• 28:57
  Speaker 1: going up to on either this this has troncho the
• 29:00
  Speaker 1: next one. So they would be uh in very very
• 29:04
  Speaker 1: problematic situation if they were forced to try to deal
• 29:07
  Speaker 1: with that on top of the already very low level
• 29:10
  Speaker 1: of growth on top of the fact that the monetary
• 29:13
  Speaker 1: stimulus isn't being kept in reserve the way they say
• 29:15
  Speaker 1: it is. It's already being proven not very effective. Leland Miller,
• 29:19
  Speaker 1: wonderful having you here. Thank you so much for being
• 29:20
  Speaker 1: with us. Leland Miller is chief executive officer of China
• 29:24
  Speaker 1: Beige Book International, which does get an on the ground
• 29:28
  Speaker 1: read of the Chinese economy. Thanks for listening to the
• 29:31
  Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
• 29:34
  Speaker 1: to interviews at Apple Podcasts or whatever podcast platform you prefer.
• 29:38
  Speaker 1: Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa
• 29:41
  Speaker 1: abram Woy. It's I'm on Twitter at Lisa A. Bramwoit's
• 29:43
  Speaker 1: one before the podcast. You can always catch us worldwide
• 29:46
  Speaker 1: on Bloomberg Radio.