Latest / Bloomberg Intelligence / After Selling Patron, John Paul DeJoria Turns To Rok Mobile

Transcript

After Selling Patron, John Paul DeJoria Turns To Rok Mobile · 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
• 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. But Cardi,
• 0:33
  Speaker 1: they have acquired the shares of Patron Tequila that they
• 0:38
  Speaker 1: already didn't own. But this is a deal that values
• 0:40
  Speaker 1: Patron at about five billion dollars. It's expected to close
• 0:44
  Speaker 1: in the first half of the year. Joining us now
• 0:46
  Speaker 1: in a studio is a co founder and chairman of
• 0:49
  Speaker 1: the board of John Paul Mitchell Systems and co founder
• 0:52
  Speaker 1: of Patron Tequila. John Paul Or thanks very much for
• 0:56
  Speaker 1: being in the studio. Oh, my friend, always always a
• 0:59
  Speaker 1: joy interviewing with. All Right, let's just I want to
• 1:01
  Speaker 1: get to set this stage because let's go back to nine.
• 1:05
  Speaker 1: You are interested in having a friend of yours bring
• 1:08
  Speaker 1: back a bottle of tequila from Mexico and he brings
• 1:12
  Speaker 1: back a hand blown bottle and you and Martin Crowley, Yes,
• 1:18
  Speaker 1: that's correct. You guys decide, oh, we'll make twelve thousand
• 1:21
  Speaker 1: bottles and priced him at thirty seven bucks a bottle,
• 1:25
  Speaker 1: very very close. He came back with a couple of
• 1:27
  Speaker 1: bottles of what I said, Martin, when you go down there,
• 1:30
  Speaker 1: bring back whatever the aristocrats drink. So he found these bottles,
• 1:33
  Speaker 1: very slim, good bottles, and it was the smoothest I
• 1:36
  Speaker 1: ever drink. He said, But JP, I met this guy
• 1:38
  Speaker 1: named Francisco Alcarez and he could make it even smoother.
• 1:42
  Speaker 1: And then he had this bottle he showed me that
• 1:44
  Speaker 1: was out of blown glass he got in some uh
• 1:46
  Speaker 1: uh you know, gift shop. He says, we could do this,
• 1:49
  Speaker 1: and I said, can we do it out of recycled glass?
• 1:51
  Speaker 1: He goes yeah. I said, well what that, Let's make
• 1:53
  Speaker 1: twelve tho bottles and uh, you know it's gonna be
• 1:55
  Speaker 1: very expensive. Well, it was very expensive. We had to
• 1:58
  Speaker 1: sell it for thirty seven ninety five in nine when
• 2:02
  Speaker 1: the average tequila I think was four or five dollars
• 2:04
  Speaker 1: and the best one around was fourteen. So we actually
• 2:07
  Speaker 1: started in the United States altar premium tequila. But we thought,
• 2:10
  Speaker 1: you know what a great thing like tequila you could
• 2:12
  Speaker 1: sip and not have to put into Margarita of that quality,
• 2:15
  Speaker 1: you don't get that big hangover the next day. Not bad.
• 2:19
  Speaker 1: So we want to come out with quality. We be
• 2:21
  Speaker 1: in reorder business. It started out very slowly, by the way,
• 2:24
  Speaker 1: but then people realized, wow, I want to treat myself.
• 2:27
  Speaker 1: This is really good. And with a lot of friends
• 2:29
  Speaker 1: that kind of pitched in to lend a helping hand,
• 2:32
  Speaker 1: is started to take off and off and off, and
• 2:33
  Speaker 1: then zoom. And then unfortunately, uh oh beckon about two
• 2:37
  Speaker 1: thousand and three, my partner had a little bout at
• 2:40
  Speaker 1: heart attack. Uh and Ed Brown took over as our president.
• 2:43
  Speaker 1: He was in sales at the time. It should have
• 2:45
  Speaker 1: been the president. Great guy, and it went just straight
• 2:48
  Speaker 1: up in the air. It's really a phenomena. But it
• 2:50
  Speaker 1: shows you that America still works. And if you go
• 2:52
  Speaker 1: for a high quality in any product and you don't
• 2:55
  Speaker 1: lessen that quality and give people what they really would like,
• 2:59
  Speaker 1: you've got one of a chance of making it well
• 3:01
  Speaker 1: and you keep that quality going. And that's gonna happen,
• 3:03
  Speaker 1: by the way, even with the sale to Bacardi. Uh
• 3:06
  Speaker 1: that's it's gonna happen because they've agreed to keep everything
• 3:09
  Speaker 1: exactly the way it is keep our staff in place
• 3:11
  Speaker 1: and work with me on philanthropy and the good conditions
• 3:14
  Speaker 1: and the high quality that we have and not step
• 3:16
  Speaker 1: away from it. And you self funded, patron, Yeah, self
• 3:19
  Speaker 1: fund it, totally self funded. So why did you decide
• 3:24
  Speaker 1: to sell now? A couple of reasons. One, we've taken
• 3:28
  Speaker 1: it where no one's ever gone before with any tequila,
• 3:31
  Speaker 1: let alone Altar Premium tequila were there and it was
• 3:34
  Speaker 1: a lot of fun. Well, I'd like to take it
• 3:36
  Speaker 1: to the next stage right now. And someone like Baccardi
• 3:39
  Speaker 1: that has their own and they've been our distributed in
• 3:41
  Speaker 1: many parts of the world, but now that they have
• 3:43
  Speaker 1: a piece of it, they could double what we're doing
• 3:45
  Speaker 1: right now. And I know that because the product is
• 3:47
  Speaker 1: that good. So I'm excited to see this product that
• 3:50
  Speaker 1: I was the father of continue to grow and grow
• 3:53
  Speaker 1: and grow. Uh. And it's just the ideal time to
• 3:55
  Speaker 1: do it. I get more involved in my philanthropic work,
• 3:58
  Speaker 1: which I love. And I'm also working on another major,
• 4:01
  Speaker 1: major thing, which will announce with you guys another two
• 4:03
  Speaker 1: or three months through through rock r Okay Mobile that
• 4:06
  Speaker 1: is going to change the whole world for the better
• 4:08
  Speaker 1: for all people. So involvement. So I'm just wondering, do
• 4:12
  Speaker 1: you think that it would be harder for an entrepreneur
• 4:15
  Speaker 1: to start a business today than it was back in No,
• 4:20
  Speaker 1: not at all. I think it's so much easier today
• 4:22
  Speaker 1: because when I started Paul Mitchell in night seven, inflation
• 4:27
  Speaker 1: in the United States was twelve and a half percent,
• 4:29
  Speaker 1: unemployment ten and a half percent. If you could get alone,
• 4:32
  Speaker 1: if you could get a loan, prime rate in one
• 4:35
  Speaker 1: was seventeen percent. I mean, it was very difficult, and
• 4:38
  Speaker 1: we have computers. In those days, we were to set
• 4:40
  Speaker 1: time to make a business card. So today you can
• 4:43
  Speaker 1: make it, I believe a lot easier. But the two
• 4:45
  Speaker 1: things you've got to do if you start a business
• 4:47
  Speaker 1: is make sure that your product or your service is
• 4:51
  Speaker 1: so darn good. You're not in the selling business. During
• 4:54
  Speaker 1: the reorder business. When they get it, they would like
• 4:56
  Speaker 1: it so much they want to reorder it. Make sure
• 4:58
  Speaker 1: that quality is the and at the same time, be
• 5:01
  Speaker 1: sure that you could overcome rejection. You're gonna get a
• 5:03
  Speaker 1: lot of rejection, and if you know you're gonna get it,
• 5:06
  Speaker 1: it's not gonna hurt you so much. You're not gonna
• 5:08
  Speaker 1: give up after a hundred doors are slamming your face
• 5:10
  Speaker 1: like I did when I sold Encyclomphedias door to door.
• 5:13
  Speaker 1: You just keep on going to vet. You're gonna get it.
• 5:16
  Speaker 1: One of the things you do have, though, is competition.
• 5:18
  Speaker 1: I note that just acquired George Clooney's a high end
• 5:22
  Speaker 1: Casa Amigos tequila brand. I guess that deal was reported
• 5:26
  Speaker 1: to be worth about a billion dollars. Valuing Patron at
• 5:30
  Speaker 1: five point one billion, that's pretty high. Well, if you
• 5:33
  Speaker 1: valued Patron the same way, uh, the group with their
• 5:37
  Speaker 1: one of them, a couple of friends find that they
• 5:39
  Speaker 1: were part of the owners with them. If I did
• 5:41
  Speaker 1: it that way, Patron would be twenty four billion dollars
• 5:45
  Speaker 1: right now. So if you go on what you do
• 5:47
  Speaker 1: the abada and how many cases you sell. But that's
• 5:50
  Speaker 1: just crazy, you know. But because Clooney was involved, and
• 5:53
  Speaker 1: I'm sure they could use it for a lot of
• 5:54
  Speaker 1: publicity to them, it made sense. I would love to
• 5:57
  Speaker 1: get that, but you know, and but you know, no
• 6:00
  Speaker 1: one's gonna pay that kind of big money. However, I
• 6:02
  Speaker 1: think at five billion, one million, we did extremely well.
• 6:06
  Speaker 1: I'm very very happy and as you know and have
• 6:09
  Speaker 1: said many times, for seventy of a cumpany top that's
• 6:11
  Speaker 1: a home run. Congratulations. Think I could do a whole
• 6:14
  Speaker 1: lot more to help change your world with us. Thank
• 6:17
  Speaker 1: you so much for being with us. It really is fascinating,
• 6:19
  Speaker 1: and I want to care about selling Encyclopedia's door to
• 6:22
  Speaker 1: door and we'll start sometime because you're fascinating and maybe
• 6:27
  Speaker 1: perhaps can be an inspiration for my two little sons. First,
• 6:30
  Speaker 1: you have to first have to explain to them what
• 6:33
  Speaker 1: our encyclopedias, Yeah, they don't actually true. It is that
• 6:37
  Speaker 1: we are not around anymore. And tell them to watch
• 6:39
  Speaker 1: Good Fortune the movie. It was just reallyas you get
• 6:42
  Speaker 1: it on you know, Amazon iTunes. What a good Fortunately
• 6:44
  Speaker 1: the movie. Let your kids watch it shows you how
• 6:46
  Speaker 1: to go from homeless and no money, no influence, being
• 6:49
  Speaker 1: fired many times, and make it in America and you
• 6:51
  Speaker 1: can still do in other countries too. John Paul Gagoria,
• 6:54
  Speaker 1: thank you so much for being with us. John Paul
• 6:56
  Speaker 1: Gagoria as billionaire, co founder and chief executive officer Pau
• 7:00
  Speaker 1: Mitcher and the owner of Patron Spirits, which was just
• 7:03
  Speaker 1: sold to stocks. Gold and oil are up, bonds in
• 7:23
  Speaker 1: the US dollar are down. Jim Bianco is the president
• 7:26
  Speaker 1: and founder of Bianco Research. He joins us from Chicago. Jim,
• 7:30
  Speaker 1: always a pleasure. Do you think that the dollar weakness
• 7:33
  Speaker 1: will continue? I think over the very short term it
• 7:36
  Speaker 1: will continue because it's got momentum, it's got the Treasury Secretary,
• 7:41
  Speaker 1: it's got a lot of that going. But I do
• 7:44
  Speaker 1: think we're in the late stages of this move. The
• 7:46
  Speaker 1: dollars at uh significant highs. Speculation, you know, what we
• 7:51
  Speaker 1: call the crowded trade is getting pretty frothy right now.
• 7:55
  Speaker 1: Everybody's in this trade. There's not a lot of people
• 7:57
  Speaker 1: that are actually still long the dollar, and among the
• 8:00
  Speaker 1: speculative categories in words, they're they're long. There's a crowded
• 8:03
  Speaker 1: trade to short sell the dollar, correct, right the crowded
• 8:07
  Speaker 1: trade is there short to dollar or long currencies? Right now?
• 8:10
  Speaker 1: If you dial up your favorite billionaire at Davos or
• 8:14
  Speaker 1: your favorite hedge fund manager, they're all going to sound
• 8:16
  Speaker 1: the same when it comes to the dollar. It's just
• 8:18
  Speaker 1: gonna keep going down. That's why I think it's at
• 8:20
  Speaker 1: the late stages. Doesn't mean that today or tomorrow, this
• 8:23
  Speaker 1: week is the high, because it's got the momentum going,
• 8:26
  Speaker 1: but it is getting old. This rally speak currency rally
• 8:30
  Speaker 1: dollar weakness, what's gonna make it strengthen? What's the catalyst
• 8:34
  Speaker 1: and when strengthened against which currency? And which is an
• 8:36
  Speaker 1: important sort of cross to look at. Isn't the US
• 8:39
  Speaker 1: euro the dollar euro? Or is it dollar again? Dollar? Bitcoin? Yeah,
• 8:46
  Speaker 1: it's all our bitcoin, the key indicator that you watch
• 8:48
  Speaker 1: every morning. I watch it, but it's not yet to
• 8:51
  Speaker 1: a key indicator yet. Uh No. But I think one
• 8:55
  Speaker 1: of the things is to your question, you're right that
• 8:58
  Speaker 1: what what crush you'll be looking at right now? Because
• 9:02
  Speaker 1: the currency should have their own cycles. Some of them
• 9:05
  Speaker 1: should be going up against the dollars, some of them
• 9:07
  Speaker 1: should be sideways, some of them should be down. But
• 9:10
  Speaker 1: right now, as a sign of the speculative frost, the
• 9:12
  Speaker 1: dollar is going down against pretty much everything. Um for
• 9:16
  Speaker 1: now you can so I look at the d X, Y,
• 9:19
  Speaker 1: the the index or the euro understanding that this is
• 9:22
  Speaker 1: a dollar trade. What's gonna change it? I think when
• 9:25
  Speaker 1: we get off of focusing on the dollar, remember with
• 9:28
  Speaker 1: the currency, there's two sides of the trade. There's what
• 9:31
  Speaker 1: is U s policy? What are US rates? Oh? Yeah,
• 9:34
  Speaker 1: but then there's also what are European policies? What are
• 9:37
  Speaker 1: European rates, and that those are being largely ignored and
• 9:42
  Speaker 1: everything has been focused to US centric. When I think
• 9:45
  Speaker 1: we start focusing on what our Japanese policies and rates,
• 9:48
  Speaker 1: and what are European policies of rates, and what are
• 9:50
  Speaker 1: British policies and rates, I then think that this dollar
• 9:53
  Speaker 1: weakness will start to peter out. But we're not doing
• 9:55
  Speaker 1: that right now. Well, the rally in stocks peter out.
• 9:59
  Speaker 1: The only in stocks is a little different animal altogether. UM.
• 10:03
  Speaker 1: Following the tax hike or excuse me, following the tax cut,
• 10:08
  Speaker 1: analysts have aggressively hiked their earnings forecast. So for all
• 10:13
  Speaker 1: of seventeen, they're expecting about twelve to fourteen percent gained
• 10:17
  Speaker 1: year over year in earnings. For all of eighteen, they're
• 10:20
  Speaker 1: expecting another eighteen percent. If you had to two together,
• 10:23
  Speaker 1: that's thirty six percent between last year and this year,
• 10:27
  Speaker 1: justin earnings. The stock markets up twenty eight percent. Maybe
• 10:31
  Speaker 1: with today's rally, UM, it hasn't even caught up to earnings.
• 10:35
  Speaker 1: There has been no multiple expansion at this point. That
• 10:39
  Speaker 1: will come once we get beyond the thirty six percent
• 10:41
  Speaker 1: rally from the beginning of last year. We're up twenty
• 10:44
  Speaker 1: nine right now, if and this is a critical list,
• 10:47
  Speaker 1: the analysts expectations are right. But I think what's got
• 10:50
  Speaker 1: the market going right now is these aggressive um increases
• 10:54
  Speaker 1: in earnings estimates. All of the companies that have been
• 10:57
  Speaker 1: giving very positive guidance. Right now, you could actually make
• 11:01
  Speaker 1: the case that after rally that we've had, evaluations are
• 11:05
  Speaker 1: really not much different than they were eighteen months ago
• 11:09
  Speaker 1: because there's been such an aggressive uptick in earnings. It's
• 11:14
  Speaker 1: all about that right now. The earning story seems to
• 11:17
  Speaker 1: be working, So I think the stock market is going
• 11:19
  Speaker 1: to continue to work for a while. All right, So
• 11:21
  Speaker 1: let's turn to bonds. Uh. There is a lot of
• 11:25
  Speaker 1: talk that yields are heading higher, potentially much higher. And uh.
• 11:31
  Speaker 1: We saw Ray Dalio, the founder and the head of Bridgewater,
• 11:35
  Speaker 1: come out and say that if the tenure treasury yield
• 11:39
  Speaker 1: moves up by another hundred basis points, by another one
• 11:41
  Speaker 1: percentage point, Uh, this will be the biggest bond bear
• 11:45
  Speaker 1: market since the early eighties, and it will sort of
• 11:49
  Speaker 1: affect markets accordingly. What's your take on this? Um. What
• 11:54
  Speaker 1: he's explaining there is the simple math of the bond market,
• 11:57
  Speaker 1: a phrase that will make everybody fall asleep as positive
• 12:00
  Speaker 1: convexity that as yields get very very low, the sensitivity
• 12:04
  Speaker 1: that a bond has to interest rate movements sensitivey bond
• 12:07
  Speaker 1: price has to interestrate movements. Is that a record high.
• 12:10
  Speaker 1: So when you get a one percent move in bonds
• 12:13
  Speaker 1: right now, you get an enormous move in price. Different
• 12:17
  Speaker 1: than when you had a one percent move in interest
• 12:18
  Speaker 1: rates when we were at ten percent thirty years ago,
• 12:21
  Speaker 1: you got a very smaller price. Uh. He's mechanically correct
• 12:25
  Speaker 1: on that. But now that that said, there's only one
• 12:29
  Speaker 1: reason that we would have a hundred basis point rise
• 12:32
  Speaker 1: on the long end of the yield curve. And I
• 12:35
  Speaker 1: think that that's if we had solid evidence of inflation returning. Now.
• 12:39
  Speaker 1: The problem with that is everybody's got models and indicators
• 12:43
  Speaker 1: and they all say inflation is gonna return. They also
• 12:46
  Speaker 1: said that last year. They also said that three years ago,
• 12:48
  Speaker 1: they said that five years ago, and they said that
• 12:50
  Speaker 1: seven years ago. Uh. The models that inflation should have
• 12:54
  Speaker 1: returned five years ago, it has not. The Federal Reserve
• 12:58
  Speaker 1: Janet Yelling herself has even thrown her hands in the
• 13:01
  Speaker 1: air and said they're not sure why inflation has it returned,
• 13:04
  Speaker 1: and the data dependent FET is now using words like
• 13:07
  Speaker 1: guess when it comes to where inflation is going to
• 13:10
  Speaker 1: go next, because their models don't work anymore on this.
• 13:13
  Speaker 1: If we get inflation, then yes, we could see a
• 13:17
  Speaker 1: bond route. I'm fully in that camp. The problem is
• 13:21
  Speaker 1: the indicators that say that it will return are there,
• 13:24
  Speaker 1: but they've been there for five years and it's still
• 13:27
  Speaker 1: has it returned, So maybe this is the year it's right,
• 13:30
  Speaker 1: or maybe this isn't just yet another false start, So
• 13:33
  Speaker 1: we're all back to guessing on inflation, and I don't
• 13:36
  Speaker 1: like guessing. I'll stick. If I had to push your pull,
• 13:40
  Speaker 1: I think, yeah, you're gonna probably see yields creep up
• 13:42
  Speaker 1: a little bit more in the next month or two
• 13:45
  Speaker 1: on the fear of inflation. But I think by the
• 13:47
  Speaker 1: time you get into the later half of this will
• 13:51
  Speaker 1: probably be another false start. Maybe those inflation measures are
• 13:54
  Speaker 1: just playing wrong. Maybe they need a new inflation measure.
• 13:58
  Speaker 1: I think they need. I think they need a new understanding.
• 14:01
  Speaker 1: I think the effect of Amazon and the Internet on
• 14:04
  Speaker 1: inflation is profound. The problem is the FED wants to
• 14:07
  Speaker 1: know when it's going to go up forty basis points.
• 14:10
  Speaker 1: We know that that the internet in Amazon is holding
• 14:12
  Speaker 1: it down. We just don't know by how much and
• 14:15
  Speaker 1: how to model that yet. Maybe they need to include
• 14:17
  Speaker 1: food and energy in their inflation estimates. But let me
• 14:21
  Speaker 1: ask you about the tenure treasury right where at two
• 14:23
  Speaker 1: six how much uh further does the yield have to
• 14:27
  Speaker 1: move in order for Jim Bianco to say I'm done
• 14:30
  Speaker 1: with stocks. I'm buying ten years, Thank you very much.
• 14:33
  Speaker 1: I'll take my two point uh. I think that you know,
• 14:38
  Speaker 1: it actually doesn't one of two things. Either, it moves
• 14:42
  Speaker 1: to near three percent thirty the ten year. Excuse me.
• 14:46
  Speaker 1: If we get a three percent yield on that, I
• 14:49
  Speaker 1: think that that could be damaging for the stock market
• 14:52
  Speaker 1: in the economy if we were to get that. But
• 14:54
  Speaker 1: I think to get that we would need inflation. If
• 14:57
  Speaker 1: we don't get inflation, then I think what happens is
• 15:01
  Speaker 1: we're gonna be at Defet's going to raise rates. The
• 15:05
  Speaker 1: yield curve is going to flatten quite a bit. Uh.
• 15:09
  Speaker 1: The yield curve has forecasted correctly every recession since nineteen sixty.
• 15:15
  Speaker 1: We get that flatten yield curve, it's gonna freak everybody
• 15:18
  Speaker 1: out that a recession is coming. That could be damaging
• 15:21
  Speaker 1: for the market. To Jim Bianco, thank you so much
• 15:23
  Speaker 1: for joining us, President and founder of Bianco Research, also
• 15:26
  Speaker 1: a Bloomberg profit. The shares are General Electric are down
• 15:43
  Speaker 1: three tenths of a percent right now, and the company
• 15:46
  Speaker 1: has revealed that the Securities and Exchange Commission is looking
• 15:49
  Speaker 1: into the way that it has accounted for some of
• 15:51
  Speaker 1: its past insurance businesses as well as its revenue recognition program.
• 15:57
  Speaker 1: Here to tell us more, Brooks Sutherland our m and
• 15:59
  Speaker 1: a columnist and Bloomberg gad fly when it comes to
• 16:02
  Speaker 1: all things g E and Brooke can be followed on
• 16:05
  Speaker 1: Twitter at b L Seth s U t h Alright,
• 16:10
  Speaker 1: b L Suth, g E and the SEC. What does
• 16:15
  Speaker 1: the SEC want to know about? So they're reviewing two
• 16:19
  Speaker 1: things is what we learned today. So they're looking into
• 16:21
  Speaker 1: the process leading up to UM. You know gees announcement
• 16:26
  Speaker 1: last week that it's taking a six point two billion
• 16:28
  Speaker 1: after tax charger and its insurance business is paying fifteen
• 16:31
  Speaker 1: billion over seven years to shore up reserves there. Now,
• 16:34
  Speaker 1: that is a business that you know, g E largely
• 16:37
  Speaker 1: divested between two thousand and four and two thousand and six,
• 16:39
  Speaker 1: so it's been in runoff, they haven't been issuing new businesses,
• 16:42
  Speaker 1: and they've done this review annually ever since. So then
• 16:46
  Speaker 1: to all of a sudden see this need to you know,
• 16:48
  Speaker 1: put fifteen billion to shore up their reserves. I think
• 16:51
  Speaker 1: obviously raises a lot of questions. So to me, it
• 16:53
  Speaker 1: would be more surprising if the SEC wasn't looking into this.
• 16:56
  Speaker 1: But the interesting thing is the second part of this
• 16:58
  Speaker 1: that they're also looking at gees revenue recognition practice and
• 17:02
  Speaker 1: its controls around its long term service agreements. Now this
• 17:05
  Speaker 1: has been it's a little complicated, but it's been a
• 17:07
  Speaker 1: big sort of watch item for analysts because gees contract
• 17:11
  Speaker 1: assets have searched over the past couple of years. And
• 17:14
  Speaker 1: what those are are, you know, agreements that ge signs
• 17:17
  Speaker 1: with clients and it goes ahead and books the earnings
• 17:20
  Speaker 1: but not the cash, which then you know is delivered
• 17:22
  Speaker 1: when these service agreements are sort of completed. Now, the
• 17:25
  Speaker 1: concern is that when those agreements were signed, the underlying
• 17:30
  Speaker 1: sort of profitability assumptions may not have been conservative enough.
• 17:34
  Speaker 1: When you look specifically at the power market and how
• 17:37
  Speaker 1: significantly that's deteriorated. I think you have to wonder, you
• 17:40
  Speaker 1: know what we're sort of the baseline assumptions when those
• 17:44
  Speaker 1: agreements were made and those earnings were booked, and so
• 17:46
  Speaker 1: I think that was something analysts were very concerned about.
• 17:49
  Speaker 1: Now the SEC is looking into it again, not totally surprising,
• 17:53
  Speaker 1: but I think, you know, that's certainly going to be
• 17:55
  Speaker 1: important to watch. So frankly, it's sort of shocking that
• 17:59
  Speaker 1: the shares aren't own more because if you start talking
• 18:02
  Speaker 1: about potential accounting I don't want to say fraud, but
• 18:07
  Speaker 1: malfeasance over years or at least, you know, some kind
• 18:10
  Speaker 1: of fudging of the numbers over years and years that
• 18:13
  Speaker 1: calls into question a lot of things about this company. Sure,
• 18:17
  Speaker 1: and I want to be clear, I mean, I don't
• 18:18
  Speaker 1: think we're talking necessarily about fraud here, but if the
• 18:21
  Speaker 1: baseline assumptions were too optimistic, then they have to be rethought.
• 18:25
  Speaker 1: I mean it, we still have a lot to learn
• 18:26
  Speaker 1: about this, the SEC investigators in still very early days.
• 18:30
  Speaker 1: But yes, I mean it certainly does raise a lot
• 18:32
  Speaker 1: of questions. I think the reason why the stock is
• 18:34
  Speaker 1: not down more is that people have been worried about
• 18:37
  Speaker 1: this for a while, that this issue, you know, is
• 18:40
  Speaker 1: now sort of playing out because we have this sec headline,
• 18:42
  Speaker 1: but the contract bassets have been something that have been,
• 18:45
  Speaker 1: you know, sort of on analyst radar for a very
• 18:47
  Speaker 1: long time, and it's a big reason why g had
• 18:49
  Speaker 1: the cash shortfall that it did because again it's you know,
• 18:52
  Speaker 1: it's sort of booking these as earnings but not getting
• 18:55
  Speaker 1: the cash, and that's why you've seen the divergence and
• 18:57
  Speaker 1: its actual earnings and free cash flow. So one thing
• 19:00
  Speaker 1: I'm struggling with, so General Electric has a hundred and
• 19:02
  Speaker 1: twenty six billion dollars of debt outstanding. They're at investment
• 19:07
  Speaker 1: grade rated company in the A rating sphere. I'm trying
• 19:13
  Speaker 1: to understand at what point do they get downgraded and
• 19:15
  Speaker 1: all of a sudden, those borrowing costs just surge, piling
• 19:18
  Speaker 1: on yet another concern, another big worry for investors right now.
• 19:21
  Speaker 1: And the rating agencies came out and they did affirm
• 19:23
  Speaker 1: ges credit ratings after it took that charge and insurance. Now,
• 19:26
  Speaker 1: I don't know if they're going to be reevaluating that
• 19:28
  Speaker 1: as we get more information, but that is certainly something
• 19:31
  Speaker 1: that investors and analysts are worried about, and you know,
• 19:34
  Speaker 1: I think they're concerned because a lot of times when
• 19:37
  Speaker 1: you see companies take these charges to to shore a preserve.
• 19:40
  Speaker 1: Usually the first number is not the last number. And
• 19:43
  Speaker 1: if you start talking about maybe g E Capital needing
• 19:45
  Speaker 1: more reserves for the insurance business as well as other
• 19:49
  Speaker 1: liabilities that they have. They have this subprime mortgage business
• 19:52
  Speaker 1: that's still laying around and some other potential issues, then
• 19:55
  Speaker 1: you start to get into a question of cane Capital
• 19:57
  Speaker 1: pay all those bills on its own, does it start
• 20:00
  Speaker 1: eating money from the parent company, and then that becomes
• 20:02
  Speaker 1: a really serious concern for the credit rating. You also
• 20:05
  Speaker 1: have to worry about, you know, goodwill on the Alston
• 20:08
  Speaker 1: acquisition that they did in fifteen is very high. That
• 20:11
  Speaker 1: acquisition is obviously disappointed. Could there be a good will impairment,
• 20:15
  Speaker 1: which you know that's a non cash charge, but that
• 20:17
  Speaker 1: would play into credit rating concerns. Alright, Just to go
• 20:21
  Speaker 1: back for a second, because I want to understand this
• 20:23
  Speaker 1: in detail. G E Power signed a recently signed a
• 20:27
  Speaker 1: twenty five year, three and thirty million dollar maintenance service
• 20:31
  Speaker 1: contract with the owners of a new power plant in Mexico.
• 20:35
  Speaker 1: It's just south of El Paso at Cirez. How would
• 20:40
  Speaker 1: this contract relate to this investigation if indeed that was
• 20:46
  Speaker 1: part of it. What would be an example of how
• 20:48
  Speaker 1: that would work. Well, if it's a new contract, that's
• 20:50
  Speaker 1: probably less of a concern because the underlying assumptions for
• 20:54
  Speaker 1: that probably stuck a better relative to the current dynamics
• 20:57
  Speaker 1: in the market. I think the concern is some of
• 20:59
  Speaker 1: these contracts. But all right, so a legacy contracts. So
• 21:02
  Speaker 1: let's say you had a legacy contract and you're in
• 21:05
  Speaker 1: year ten of a twenty five year contract. You then
• 21:09
  Speaker 1: you made certain assumptions about how much that was worth,
• 21:12
  Speaker 1: and now it turns out that contract is not worth
• 21:14
  Speaker 1: that much because power markets have deteriorated. What is deteriorated,
• 21:19
  Speaker 1: so the demand for the products that GE produces has
• 21:24
  Speaker 1: significantly dropped off. And that's you know, been seeing not
• 21:27
  Speaker 1: just a GE but at Semens. But what we're also
• 21:29
  Speaker 1: seeing is very increased competition in the service markets. And
• 21:32
  Speaker 1: now that is a concern because service is where companies
• 21:35
  Speaker 1: like GE, Siemens, you know, really make all of their profits.
• 21:38
  Speaker 1: I mean, this is the lucrative revenue stream. It's more predictable.
• 21:42
  Speaker 1: But when you start having a lot of competition and
• 21:44
  Speaker 1: low demand, then you get into a question of what
• 21:47
  Speaker 1: prices can you really charge for those services and customers
• 21:51
  Speaker 1: are pushing back on price and ge. You know, having
• 21:54
  Speaker 1: the most market share has the most to lose and
• 21:56
  Speaker 1: that Brooke Sutherland, thank you so much. This is a
• 22:00
  Speaker 1: fascinating issue. Really laid it out tremendously well. Brooks Sutherland,
• 22:03
  Speaker 1: Bloomberg gad Fly columnist, UH covering the industrial space, UH,
• 22:08
  Speaker 1: talking about general electric and a lot of questions to
• 22:10
  Speaker 1: be answered. The SEC is looking for some answers as well.
• 22:29
  Speaker 1: There's growing interest and investing in cryptocurrencies as well as
• 22:33
  Speaker 1: the technology underpinning cryptocurrencies like bitcoin, and that is blockchain.
• 22:38
  Speaker 1: And here to talk to us about that is Dr
• 22:40
  Speaker 1: Steve Waterhouse, CEO and co founder of orchids Labs in
• 22:44
  Speaker 1: San Francisco. He comes to us from Davos, Switzerland. Uh. Steve,
• 22:50
  Speaker 1: thank you so much for being with us. First, I
• 22:53
  Speaker 1: just want you to tell us a little bit about
• 22:54
  Speaker 1: what orchid Labs is. Is a new blockchain based approach
• 23:02
  Speaker 1: to UM anti surveillance, anti censorship on the Internet UM.
• 23:07
  Speaker 1: It's an incentivized network where participants are paid to provide
• 23:10
  Speaker 1: bandwidth to other users UM and people pay a small
• 23:13
  Speaker 1: amount to access the Internet in the fashion. It's funded
• 23:18
  Speaker 1: by a number of the top French of Apple firms
• 23:20
  Speaker 1: in San Francisco and around the world. UM, and we
• 23:24
  Speaker 1: have a star team of open source experts from the
• 23:28
  Speaker 1: blockchain world and also other areas early units and SDA.
• 23:35
  Speaker 1: Which is the job. I can see iPhone, but can
• 23:38
  Speaker 1: you just tell us a little bit exactly what it
• 23:41
  Speaker 1: does it do? Is this just a conduit for investors
• 23:44
  Speaker 1: in these new technologies or is it itself participating UM? Well,
• 23:52
  Speaker 1: it's it's certainly a way to invest in the space.
• 23:56
  Speaker 1: But the purpose of the system is to sit above
• 24:01
  Speaker 1: the regular Internet and below applications such as WhatsApp and
• 24:06
  Speaker 1: provide a new UM mechanism to access the Internet in
• 24:12
  Speaker 1: which are not being tracked by your carrier or by
• 24:15
  Speaker 1: corporations or by the government. So the idea here is
• 24:18
  Speaker 1: basically that if somebody doesn't want to be tracked, they
• 24:23
  Speaker 1: could buy bandwidth from somebody else, use their bandwidth and
• 24:27
  Speaker 1: thus not be seen as themselves, but rather sort of
• 24:32
  Speaker 1: be viewed as the other person or the other bandwidth user. Correct, UM,
• 24:38
  Speaker 1: it's not so much for that purpose. Is actually more
• 24:41
  Speaker 1: an anonymization technology UM in the form of UM allowing
• 24:47
  Speaker 1: people to access this UH, not necessarily as someone else,
• 24:51
  Speaker 1: But in our system there's no real way of tracing
• 24:55
  Speaker 1: UM the information back to the originating requester UM by
• 25:00
  Speaker 1: the website or the other resource on the Internet which
• 25:03
  Speaker 1: they're accessing. Thus also go ahead. I was just gonna say,
• 25:07
  Speaker 1: who would be the main user of this, Well, I
• 25:11
  Speaker 1: think obviously there's countries like China which have very strong
• 25:16
  Speaker 1: markets for this, where there's heavy surveillance of the population. UM.
• 25:21
  Speaker 1: The Middle East, where we have you know, very significant
• 25:23
  Speaker 1: human rights issues now is also a very strong market
• 25:27
  Speaker 1: for this. But increasingly, with things like net New Charity
• 25:30
  Speaker 1: being over termed, the US is becoming a major opportunity
• 25:35
  Speaker 1: area too. And who would be the provider of the bandwidth? Well,
• 25:39
  Speaker 1: it could be you. Um, you could set up your
• 25:41
  Speaker 1: computer and run one of our clients and I provide
• 25:45
  Speaker 1: that you could potentially do it with your iPhone in
• 25:48
  Speaker 1: a smaller capacity, or people could use server farms to
• 25:52
  Speaker 1: provide this kind of capability and contry such as Cleanland,
• 25:55
  Speaker 1: which have incredibly strong data privacy laws. Our targets for
• 25:59
  Speaker 1: data centers like this, and we're in talks with a
• 26:01
  Speaker 1: number of people, including VPN providers, who want to partner
• 26:05
  Speaker 1: with us to provide this enhanced capability to their customers.
• 26:08
  Speaker 1: And how do you make money? So our systems actually
• 26:13
  Speaker 1: free UM from us. In other words, people pay other
• 26:17
  Speaker 1: people in the network to get that band red allocation.
• 26:21
  Speaker 1: Our approaches a little bit like the creators of bitcoin,
• 26:25
  Speaker 1: who we still don't know or ethereum in that we
• 26:28
  Speaker 1: create a new currency UM, which we believe, as the
• 26:33
  Speaker 1: network increases in usage, might drive in value. I can't
• 26:37
  Speaker 1: obviously provide investment advice here, but that is the belief
• 26:42
  Speaker 1: of our system. Just like currencies, when they increase in
• 26:44
  Speaker 1: the utility become valuable. What backs the currency We'll walk
• 26:52
  Speaker 1: back to the full faith and credit of the US
• 26:56
  Speaker 1: government and its ability to tax its citizens. Very good
• 27:01
  Speaker 1: UM economics mondel one, Right, UM. I mean we could
• 27:05
  Speaker 1: argue for a while about what does intrinsic value you mean?
• 27:07
  Speaker 1: And if anything really does UM? But you know, I
• 27:12
  Speaker 1: think since we moved back past the gold standard UM,
• 27:16
  Speaker 1: and I'm not an economist, I'm more of a computer scientist,
• 27:19
  Speaker 1: then gold, which really doesn't have that much intrinsic value either,
• 27:23
  Speaker 1: UM was the capability to back things. What backs our
• 27:28
  Speaker 1: network is utility, just like the backing of the cloin
• 27:31
  Speaker 1: or etherium. In using these new types of occurrencies, would
• 27:37
  Speaker 1: you have to register with a government if indeed a
• 27:40
  Speaker 1: transaction took place outside the jurisdiction of let's say Greenland. Um. No,
• 27:48
  Speaker 1: in our system, there's no way to trace who's using
• 27:51
  Speaker 1: the network at all. We don't keep records. We can't
• 27:55
  Speaker 1: be subpoena to release those records on like BP and
• 27:58
  Speaker 1: companies UM. And that's basically the whole idea of the
• 28:03
  Speaker 1: system is, maybe we should have a system in which,
• 28:06
  Speaker 1: in a world in which information is free to accessible
• 28:09
  Speaker 1: and in which it's not, there's no capability to track people.
• 28:13
  Speaker 1: Maybe that should read the default. All right, well, interesting stuff.
• 28:16
  Speaker 1: Thanks very much for joining us. Steve Waterhouse, co founder
• 28:19
  Speaker 1: of Orchid Labs, on the future perhaps of blockchain technology
• 28:23
  Speaker 1: and cryptocurrencies, joining us from Davos, Switzerland. Thanks for listening
• 28:31
  Speaker 1: to the Bloomberg P and L podcast. You can subscribe
• 28:34
  Speaker 1: and listen to interviews at Apple Podcasts, SoundCloud or whatever
• 28:38
  Speaker 1: podcast platform you prefer. I'm Pim Fox. I'm on Twitter
• 28:41
  Speaker 1: at pim Fox, I'm on Twitter at Lisa Abramo. It's
• 28:45
  Speaker 1: one before the podcast. You can always catch us worldwide
• 28:48
  Speaker 1: on Bloomberg Radio