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China Must Decide On Growth Or Deleveraging: Magnus · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg P and L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. The
• 0:31
  Speaker 1: topic is China and how to absorb what some describe
• 0:35
  Speaker 1: as industrial quantities of the most indigestible stuff had a
• 0:41
  Speaker 1: grapple with China's economy and its political system. Here to
• 0:46
  Speaker 1: tell us about it is none other than George Magnusi,
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  Speaker 1: an associate of the China Center at Oxford University, former
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  Speaker 1: chief economist for UBS, and the author of a new
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  Speaker 1: book entitled Red Flags Y G's China Is in Jeopardy.
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  Speaker 1: George magnus thank you very much for being with us.
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  Speaker 1: Tell us what you want people to take away from
• 1:07
  Speaker 1: your book. Well, I think the main thing is that
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  Speaker 1: China is facing a number of economic issues which are
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  Speaker 1: not necessarily unique to China. Um, they're very special in
• 1:22
  Speaker 1: the kind of China's case. But the main thing really
• 1:25
  Speaker 1: is that since Seijing pin came to power in two
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  Speaker 1: thousand and twelve. There's been a very substantial shift in
• 1:33
  Speaker 1: the way in which China is governed, in what we
• 1:36
  Speaker 1: might call its governance system. And this is not the
• 1:40
  Speaker 1: China that we thought we knew, that erupted onto the
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  Speaker 1: world scene, so to speak, during the last kind of
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  Speaker 1: twenty or thirty years. It's obviously still in certain years,
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  Speaker 1: are much more powerful China than it used to be,
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  Speaker 1: and it's a much richer China than it used to be.
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  Speaker 1: But the governance system has changed a dramatically. And what
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  Speaker 1: I've tried to do in the book is to set
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  Speaker 1: out what difference this makes to the chances of yet
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  Speaker 1: another transformation which China has to make if it wants
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  Speaker 1: to aspire to all the things that it says it
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  Speaker 1: wants to be. So, George, can you connect that sort
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  Speaker 1: of shifting governing structure in China to what we're hearing
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  Speaker 1: with respect of the tensions between the US and China?
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  Speaker 1: In other words, is the US misplacing some of its
• 2:26
  Speaker 1: concerns about the dominance of China, And is China going
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  Speaker 1: to become less of a threat than than China than
• 2:34
  Speaker 1: US officials seemed to think UM. Now I kind of
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  Speaker 1: picture the other way, to be honest. I mean, I
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  Speaker 1: think that, you know, one of the remarkable transformations that
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  Speaker 1: China has has done over the last thirty or forty
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  Speaker 1: years is, you know, once upon a time, it used
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  Speaker 1: to be a very um, you know, a magnetic customer
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  Speaker 1: for global companies and particularly for Western companies, and gradually
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  Speaker 1: it's sort of evolved into a very feisty competitor, not
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  Speaker 1: just in low value goods, but increasingly in in medium
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  Speaker 1: skill and medium technological level goods and serve one services,
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  Speaker 1: but certainly goods UM. And now it's become also, of course,
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  Speaker 1: a very feisty and very considerable competitor and and adversary
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  Speaker 1: to the United States and some degree to to the
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  Speaker 1: Western world as well. And I don't really see that
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  Speaker 1: this is going to change any time in the future.
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  Speaker 1: And if anything, I think that the trade war, which
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  Speaker 1: of course consumes us all and it's kind of almost
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  Speaker 1: front page news kind of every day, UM, is something
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  Speaker 1: that we should expect to continue and perhaps to become
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  Speaker 1: even starker and spill over to other areas in the future,
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  Speaker 1: because it does signify a kind of an adversarial relationship
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  Speaker 1: which at the moment, neither of the two presidents of
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  Speaker 1: the two countries, a President Trump and President sieging Ping,
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  Speaker 1: you know, seemed to be, you know, one of them
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  Speaker 1: is following an America first policy, the others following a
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  Speaker 1: chi in the first policy, and that sort of dialogue
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  Speaker 1: that America and China used to have has has clearly
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  Speaker 1: kind of broken down, at least for the time being.
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  Speaker 1: Can China pursue policies for speedy growth and simultaneously reduce
• 4:16
  Speaker 1: the risk of financial instability? M Now that is the
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  Speaker 1: sixty four trillion you are in question, um, And the
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  Speaker 1: answer that very simply is that I think is no. UM,
• 4:27
  Speaker 1: so as I think a lot of people who are
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  Speaker 1: watching China kind of realize and understand. Since the end
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  Speaker 1: of two thousand sixteen, China has embarked on a quite
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  Speaker 1: quite a seriously minded course of deleveraging the financial system
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  Speaker 1: to try to unhook the economy's dependency on debt and
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  Speaker 1: on credit creation, and to some degree they have been successful,
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  Speaker 1: but only to a limited degree. Now that the economy
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  Speaker 1: is also slowing down and falter a little bit in
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  Speaker 1: the wake of this de leveraging policy, but also supplemented
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  Speaker 1: increasingly by the consequences of the tariffs and the trade conflict. Um.
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  Speaker 1: We can see quite a number of bits of anecdotal
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  Speaker 1: evidence where the government and the People's Bank of China
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  Speaker 1: a kind of rowing back a little bit from the
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  Speaker 1: intensity of this kind of deleveraging squeeze. So I think
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  Speaker 1: there is an unresolved conflict in China between the almost
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  Speaker 1: the kind of the mantra that we have. You know,
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  Speaker 1: they have to have elevated or high rates of economic growth,
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  Speaker 1: and in the conviction that certainly many Chinese leaders have,
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  Speaker 1: which is that they need to reduce their dependency on debt.
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  Speaker 1: But I don't think they've resolved yet. You know how
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  Speaker 1: those two incompatible objectives actually can co exist Because they can't.
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  Speaker 1: You have to choose one or the other. Although Georgia,
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  Speaker 1: some people would say the fact that China is easing
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  Speaker 1: again actually prolongs this cycle and gives China more time
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  Speaker 1: to sort of right size itself and fix that some
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  Speaker 1: of the structural problems that it faces and avoids a
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  Speaker 1: hard landing. Do you agree with that? Um? Not not really.
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  Speaker 1: I mean I think that the there is an argument
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  Speaker 1: that you know, if you if the Chinese authorities can
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  Speaker 1: basically just hold the line on credit creation and deleveraging
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  Speaker 1: for long enough that you know that faster growth will resume.
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  Speaker 1: But I think that this conflates to kind of things
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  Speaker 1: which actually are entirely dependent on one another. The reason
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  Speaker 1: that China can have and has had during the last
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  Speaker 1: ten years relatively elevated rates of growth, maybe not quite
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  Speaker 1: as elevated as official numbers suggest, but certainly quite high
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  Speaker 1: rates of growth is because of the because of the
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  Speaker 1: credit creation that's underpending. It Once you take away that
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  Speaker 1: credit creation mechanists, and growth will almost certainly drop off
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  Speaker 1: quite significantly. So this is the this is the acid
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  Speaker 1: test of Chinese policy making and of seizing pings kind
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  Speaker 1: of governance, shall we say, in terms of macroeconomics over
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  Speaker 1: the next kind of two or three years, is will
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  Speaker 1: they be willing to kind of bite the bottom lips,
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  Speaker 1: so to speak, and allow the economy to slow down
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  Speaker 1: materially whilst this deleveraging takes place, or or will they
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  Speaker 1: kind of give up and and go for growth. They
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  Speaker 1: still have a system of setting annual growth targets, and
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  Speaker 1: if that were ever to be abandoned, which has been
• 7:40
  Speaker 1: mooted but it hasn't happened yet. If that were ever
• 7:43
  Speaker 1: to be abandoned, I think we would see certainly a
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  Speaker 1: big shift in the way in which, you know, policy
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  Speaker 1: was being conducted in China and the tolerance that would
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  Speaker 1: be implicit for weaker economic expansion. But so far that's
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  Speaker 1: not been the case. George Magnus, thank you so much
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  Speaker 1: for being with us. Wonderful to get your insights on
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  Speaker 1: this very important topic. China, of course front and center
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  Speaker 1: for the entire global economy, not only the US. We
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  Speaker 1: respect to the tensions. George Magnus economist and associate at
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  Speaker 1: the China Center at Oxford University, also a research associate
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  Speaker 1: at the School of Oriental and African Studies, and formerly
• 8:20
  Speaker 1: he was chief economist at u b S. Ongoing questions
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  Speaker 1: are continuing about China's hacking of hardware that is used
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  Speaker 1: by a lot of different US agencies, governmental companies, as
• 8:46
  Speaker 1: well as defense units. Matt Choti joins US now vice
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  Speaker 1: president chief information security Officer at Redlock from Philadelphia. Matt,
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  Speaker 1: thank you so much for for coming back with us.
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  Speaker 1: There was a story yesterday that our Bloomberg Business Week
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  Speaker 1: reporters broke talking about additional signs that China had implanted
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  Speaker 1: some sort of micro chip to be able to hack
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  Speaker 1: into computers for a major US to telecommunications company. And
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  Speaker 1: this was using information given by somebody who is using
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  Speaker 1: their name on the record. What did you make of this? So,
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  Speaker 1: you know, this is really really interesting for a couple
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  Speaker 1: of reasons, right, First is that this is the first
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  Speaker 1: time that we've got some indication possibly around which industry
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  Speaker 1: this is affecting. And the second thing, like you mentioned,
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  Speaker 1: now we have a known hardware security expert who seems
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  Speaker 1: to be backing up these claims really for the first time.
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  Speaker 1: And the thing that's different right this hack is different
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  Speaker 1: from what we heard about last week, and that this
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  Speaker 1: is not an embedded chip in the motherboard but rather
• 9:49
  Speaker 1: directly onto the servers network port. And I think the
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  Speaker 1: other thing that's important, and hold on one second before
• 9:54
  Speaker 1: you continue, what does that mean? What's the difference here?
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  Speaker 1: So the difference is that it's just from from a
• 10:00
  Speaker 1: skills perspective, it is it's much more difficult to do
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  Speaker 1: what we were talking about last week. We were talking
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  Speaker 1: about that really small embedded chip. In this case we're
• 10:09
  Speaker 1: talking about it has been reported that the server's actual port.
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  Speaker 1: So where it's called an Internet jack where you plug
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  Speaker 1: a computer into the network that the actual port was
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  Speaker 1: replaced with a device that now can do those remote communications.
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  Speaker 1: How would a company or an individual check to see
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  Speaker 1: whether they are affected? So you know, this is again
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  Speaker 1: we don't know the scope of this right now. That's
• 10:32
  Speaker 1: that's part of the challenge, right. So there is newer
• 10:35
  Speaker 1: technology that exists, surely not that a consumer would have, right,
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  Speaker 1: but there's technology that exists today that utilizes X rays
• 10:42
  Speaker 1: and machine learning to compare chip designs. Right, so you
• 10:45
  Speaker 1: show it this is what a good chip looks like,
• 10:47
  Speaker 1: and then it will compare it. And so this type
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  Speaker 1: of technology can help provide assurances, but today it's use
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  Speaker 1: is very limited. So Matt, I want to go back
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  Speaker 1: to this idea that you're talking about, where the prior
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  Speaker 1: story that we were talking at about how to deal
• 11:00
  Speaker 1: with them planting a chip on the motherboard. This is
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  Speaker 1: an easier way of accessing information going through the ethernet port.
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  Speaker 1: I'm sure I'm butchering this, but I'm just wondering from
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  Speaker 1: your perspective, is it also easier to detect from sort
• 11:13
  Speaker 1: of a security standpoint or does it just sort of
• 11:16
  Speaker 1: raise the fear that this type of hacking and in
• 11:20
  Speaker 1: these types of implants are all the more prevalent than
• 11:22
  Speaker 1: anyone could ever imagined. Surely, in this case, this is
• 11:26
  Speaker 1: something that was visibly different. I think I remember reading
• 11:28
  Speaker 1: that it was you know that one is normally plastics,
• 11:31
  Speaker 1: this sport, and this one was metallic. So surely this
• 11:34
  Speaker 1: would be easier to spot just visually. But I think,
• 11:37
  Speaker 1: you know, the thing that's really important remember is that
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  Speaker 1: this is not a super micro issue, right, this is
• 11:42
  Speaker 1: an industry wide concern that's actually gone back for a
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  Speaker 1: number of years. Um. I found a report from that
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  Speaker 1: the Department of Defense issued. It was called the Cyber
• 11:51
  Speaker 1: Supply Chain, and in there they identified concerns similar to
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  Speaker 1: what's been reported, and they actually made a couple of recommendations, right.
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  Speaker 1: The first was training, the SEC was developing new technical
• 12:01
  Speaker 1: methods to identify malicious hardware. And the last one was
• 12:05
  Speaker 1: new regulations that would require all defense suppliers to report
• 12:09
  Speaker 1: hardware issues. So this, again, this is not really new.
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  Speaker 1: It's just the first time that the general public has
• 12:14
  Speaker 1: been made aware of it. Matt, do you think that
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  Speaker 1: this will become a factor in the approval or disapproval process,
• 12:22
  Speaker 1: the review process for US companies combining with Chinese companies
• 12:27
  Speaker 1: or Chinese foreign investment in the United States. I think
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  Speaker 1: it's certainly going to add a whole new level of
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  Speaker 1: rigor in review. Right. So today companies they spend billions
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  Speaker 1: to secure software, but almost nothing for hardware. So definitely
• 12:43
  Speaker 1: it will definitely become a point of contention. But again,
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  Speaker 1: it's not just a super micro issue. This is an
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  Speaker 1: industry wide concern. All right, So Matt, let's let's say
• 12:53
  Speaker 1: that this is an industry wide concern and its evidence
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  Speaker 1: that China is trying to infiltrate big companies as well
• 13:00
  Speaker 1: as possibly governmental units. I'm just wondering from your perspective, Uh,
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  Speaker 1: how how how do you sort of counter it on
• 13:07
  Speaker 1: a broad level? And have you heard any I mean,
• 13:10
  Speaker 1: you talked about regulations, but have you heard any movement
• 13:13
  Speaker 1: in that direction. I have not personally seen that. I
• 13:17
  Speaker 1: haven't read anything about it. But I guarantee you this
• 13:19
  Speaker 1: is going to spurn it. That's why I think, you know,
• 13:21
  Speaker 1: regardless if what's being reported accurate, this news will have
• 13:26
  Speaker 1: a positive effect, and that it's going to spurn companies
• 13:29
  Speaker 1: and governments worldwide to begin investigating the security of their hardware.
• 13:33
  Speaker 1: All right, so let's let's actually go with that, because
• 13:36
  Speaker 1: a lot of people I tweeted out the story and
• 13:38
  Speaker 1: a lot of people were saying, hmmm, well, all of
• 13:40
  Speaker 1: the governmental agencies and all of the companies are denying
• 13:43
  Speaker 1: that this is the case, when at least the initial
• 13:46
  Speaker 1: story they're saying that there was no microchip that was
• 13:49
  Speaker 1: implanted in their hardware. Uh So, you know, with all
• 13:52
  Speaker 1: of those denials, could it be that somebody is trying
• 13:55
  Speaker 1: to get out this story or a lot of people
• 13:57
  Speaker 1: are in order to prompt change, but that perhaps aren't
• 14:00
  Speaker 1: getting the facts totally right. That's absolutely true. I mean,
• 14:03
  Speaker 1: that could absolutely be the case. The other thing to
• 14:06
  Speaker 1: keep in mind, right, if this really is a top
• 14:09
  Speaker 1: secret government investigation, no doubt, each one of these companies
• 14:12
  Speaker 1: would have received a national security letter, and if they
• 14:16
  Speaker 1: receive that national security letter, it may have very well
• 14:18
  Speaker 1: to have one that has a non disclosure provision, in
• 14:21
  Speaker 1: which case they are legally prevented from even talking about it,
• 14:26
  Speaker 1: and it would be in their best interest to stringently
• 14:28
  Speaker 1: deny it. We don't know if that is the case,
• 14:30
  Speaker 1: but it's certainly probable given the wide ranging nature of
• 14:34
  Speaker 1: this reported issue. If you're an individual that has responsibility
• 14:39
  Speaker 1: for the security of a network, or you had a
• 14:41
  Speaker 1: team that has such responsibility, what kind of money are
• 14:44
  Speaker 1: we talking about that's necessary in order to do the
• 14:47
  Speaker 1: right kind of review? You know, it's it's really going
• 14:51
  Speaker 1: to take in terms of investment. It's hard to say
• 14:53
  Speaker 1: what it would be for a specific company. Certainly would
• 14:56
  Speaker 1: depend upon, you know, just the scale at which that
• 14:59
  Speaker 1: company operating. You know, for example, my company, right we
• 15:02
  Speaker 1: operate all our compute capacity in for example, the Amazon
• 15:06
  Speaker 1: Web Services cloud. We've outsourced in a sense that hardware
• 15:10
  Speaker 1: security to Amazon and they do a phenomenal job at that.
• 15:14
  Speaker 1: But for companies that are still operating traditional data centers,
• 15:17
  Speaker 1: it could be a really large and very expensive effort.
• 15:20
  Speaker 1: As I mentioned, we know that companies are spending billions
• 15:23
  Speaker 1: of dollars on software security, but almost nothing for hardware.
• 15:27
  Speaker 1: That's going to need to change quickly. So, just in general,
• 15:31
  Speaker 1: from your perspective, how concerned should people be about this
• 15:33
  Speaker 1: in a broad level? I mean, I think that the
• 15:37
  Speaker 1: at the consumer level, I wouldn't be that concern right now,
• 15:41
  Speaker 1: simply because we really don't have specifics of around how
• 15:45
  Speaker 1: this may affect a consumer. Now, if I am a
• 15:48
  Speaker 1: business owner, if I am protecting very expensive, very sensitive
• 15:52
  Speaker 1: intellectual property, if I am a government right we're talking defense.
• 15:55
  Speaker 1: I'm very concerned over this, and this is something again
• 15:58
  Speaker 1: that's going to require a lot of investment. Again, I
• 16:01
  Speaker 1: mentioned that report. This is something that's been around for
• 16:03
  Speaker 1: a while. It's not new. It's just the first time
• 16:06
  Speaker 1: that this has been brought to such public attention, so
• 16:09
  Speaker 1: you know. And the only thing I've mentioned too is
• 16:11
  Speaker 1: there's been a lot of academic research on this just
• 16:13
  Speaker 1: in the last two years, so the information on how
• 16:16
  Speaker 1: to address this is out there. It just seems like
• 16:18
  Speaker 1: this may actually be the stimulus to finally get something done.
• 16:21
  Speaker 1: Matt ki Audi, thanks very much for being with US
• 16:24
  Speaker 1: Vice president chief Information Security officer for Redlock. Tesla has
• 16:39
  Speaker 1: been the focus for many who wished to short sell it,
• 16:42
  Speaker 1: basically betting on its demise or at least it's swoon,
• 16:45
  Speaker 1: and certainly it shares a fall in thirty four percent
• 16:48
  Speaker 1: since August seven, so it has been a pretty big swoon.
• 16:52
  Speaker 1: But is there more to come here? Molly Smith joining
• 16:54
  Speaker 1: US now corporate finance reporter for Bloomberg News Molly, you
• 16:57
  Speaker 1: wrote a story that I thought was really important because
• 17:00
  Speaker 1: people can talk about the short interest on Tesla, people
• 17:03
  Speaker 1: can talk about the business model of Tesla, but really
• 17:06
  Speaker 1: what you need to focus on is the debt. Please
• 17:08
  Speaker 1: explain why, right, I mean, the debt right now is
• 17:11
  Speaker 1: really Tesla's uh, it should be at least their first
• 17:14
  Speaker 1: and foremost priority. Right now, everyone's really been looking at
• 17:18
  Speaker 1: this million dollar maturity that's coming to in March on
• 17:22
  Speaker 1: a convertible bond, and Tesla Elon Musk in particular, has
• 17:27
  Speaker 1: said that he plans to repay, not refinance this bond,
• 17:30
  Speaker 1: which is pretty strong language, especially given that the company
• 17:33
  Speaker 1: had two point two billion dollars of cash as of June,
• 17:37
  Speaker 1: so it would, in most analysts and investors opinion, be
• 17:41
  Speaker 1: very prudent to do another capital raise or try to
• 17:44
  Speaker 1: refinances bond instead of pay it outright. How much debt
• 17:49
  Speaker 1: does Tesla have right now at eleven and a half
• 17:52
  Speaker 1: billion dollars worth and the likelihood that they would be
• 17:57
  Speaker 1: able to raise capital any s demn No, I don't
• 18:01
  Speaker 1: think there's any indication right now the capital markets are
• 18:04
  Speaker 1: closed to Tesla. The equity valuation is still incredibly strong.
• 18:08
  Speaker 1: I mean, thet bllion dollars is still an incredible sum
• 18:13
  Speaker 1: regardless of what the debt is trading at. But even
• 18:16
  Speaker 1: if you do look at the bonds right now, they're
• 18:18
  Speaker 1: trading in line with other triple C rated peers, which
• 18:21
  Speaker 1: is what these bonds are rated. They're not showing any
• 18:24
  Speaker 1: imminent panic or distress levels. So yes, it would be
• 18:28
  Speaker 1: expensive to go that root of an unsecured bond, but
• 18:31
  Speaker 1: doing another convertible bond or equity or possibly secured debt,
• 18:35
  Speaker 1: those are definitely options that have been raised. So has
• 18:38
  Speaker 1: anyone looked at just how much interest they can take on,
• 18:42
  Speaker 1: how much how much they can actually afford to pay
• 18:45
  Speaker 1: out in interest payments to lure in new investors, given
• 18:49
  Speaker 1: the fact that they're burning through cash and they need
• 18:52
  Speaker 1: to increase their profitability, their productivity. I mean, they've got
• 18:56
  Speaker 1: a lot of needs and wants here and kind of
• 18:58
  Speaker 1: does the math work. I haven't seen any numbers that
• 19:01
  Speaker 1: actually put out Tesla's interest payment capacity, but that would
• 19:05
  Speaker 1: be a really interesting stat to nail down. But that's
• 19:07
  Speaker 1: exactly right that there is. There are just so many
• 19:10
  Speaker 1: needs that the company has right now, between servicing the debt,
• 19:13
  Speaker 1: between funding the operations and are we going to finally
• 19:17
  Speaker 1: see positive free cash flow and a profit for the
• 19:19
  Speaker 1: first time in this company's fifteen year history. Well, and
• 19:22
  Speaker 1: just to put into perspective what we have seen in
• 19:24
  Speaker 1: terms of price action on the Tesla bonds maturing in
• 19:28
  Speaker 1: they're currently trading at less than eighty four cents in
• 19:31
  Speaker 1: the dollar. August of last year, they were trading at
• 19:33
  Speaker 1: more than a hundred cents in the dollars. So this
• 19:35
  Speaker 1: has been a huge swoon. People are pricing in a
• 19:37
  Speaker 1: much bigger risk today, uh than they were a little
• 19:40
  Speaker 1: bit more than a year ago, even though in general
• 19:43
  Speaker 1: triple c's have actually rallied right right, and at Tesla
• 19:46
  Speaker 1: bonds right they were issued at part. They have never
• 19:49
  Speaker 1: traded at parts since they were issued. These were fell
• 19:52
  Speaker 1: right out of the gates and have been you know,
• 19:55
  Speaker 1: I guess, uh whenever there's you know, some kind of
• 19:58
  Speaker 1: event that drives the bonds down on maybe a Musk
• 20:01
  Speaker 1: tweet or an SEC lawsuit for example, that you've seen
• 20:05
  Speaker 1: them go down as low as I think somewhere in
• 20:07
  Speaker 1: the two eight three range maybe, but they tend to
• 20:09
  Speaker 1: come back into this eight seven level, and that seems
• 20:13
  Speaker 1: to be the sweet spot right now, but exactly in
• 20:16
  Speaker 1: line with the triple ceas, which, like you said, yeah,
• 20:19
  Speaker 1: are the best performing part of the high yield market
• 20:21
  Speaker 1: right now. Who owns most of the debt it's not
• 20:25
  Speaker 1: institutional hands. I can tell you that every traditional asset
• 20:28
  Speaker 1: manager who I've talked to has said they will not
• 20:30
  Speaker 1: look at these. They want companies with proven free cash
• 20:34
  Speaker 1: flow that they can show ability to service their debt.
• 20:37
  Speaker 1: It's mostly short money that's in it. Uh make an
• 20:40
  Speaker 1: individual money managers like about Post Group, White Box Advisor
• 20:46
  Speaker 1: without naming names. Yeah, alright, so just looking forward, let's
• 20:50
  Speaker 1: talk about just how much do they have coming do?
• 20:53
  Speaker 1: And you know, has Testla started to have conversations with
• 20:57
  Speaker 1: investors about what their potential, uh post abilities are for
• 21:00
  Speaker 1: raising additional cash From those that I have talked to,
• 21:03
  Speaker 1: it doesn't sound that way, but the company is still
• 21:06
  Speaker 1: really maintaining this stance that they're going to be able
• 21:09
  Speaker 1: to pay out this bond in March, and there's also
• 21:12
  Speaker 1: a maturity do in November on convertible bonds issued by
• 21:17
  Speaker 1: Solar City, which these bonds are what we would call
• 21:20
  Speaker 1: out of the money, Like there's uh the conversion price
• 21:23
  Speaker 1: would be so high for Tesla to be able to
• 21:26
  Speaker 1: convert the bonds into stock, that it looks like they
• 21:29
  Speaker 1: will have to pay the two million dollars of principle
• 21:31
  Speaker 1: outright to holders, just as a quick reality check. Does
• 21:35
  Speaker 1: anyone who you speak to believe that Tesla really doesn't
• 21:39
  Speaker 1: need to raise additional cash? No? Alright, I mean, but
• 21:46
  Speaker 1: then that's telling. I mean basically that that Elon Musk
• 21:48
  Speaker 1: is saying we don't need to do it, and not
• 21:51
  Speaker 1: one person who has been studying corporate finance for their
• 21:53
  Speaker 1: lifetimes believes that that's the case. They will all tell
• 21:57
  Speaker 1: Some will tell you definitely. I've definitely heard people say, yes,
• 22:01
  Speaker 1: they have the money to pay the maturities to do
• 22:04
  Speaker 1: what they say they can do. Is that a wise move?
• 22:08
  Speaker 1: Is that what they should be doing? No, everyone will
• 22:11
  Speaker 1: tell you no. Well done. Thanks very much for being here.
• 22:16
  Speaker 1: Molly Smith our expert for all things related to the
• 22:19
  Speaker 1: debt markets and of course talking about Tesla and it's debt,
• 22:23
  Speaker 1: and you can follow Molly Smith on Twitter at Molly
• 22:27
  Speaker 1: Smith News. Our next guest is Jim Paulson. He is
• 22:41
  Speaker 1: the chief investment strategist for the Luthhole Group, helping to
• 22:44
  Speaker 1: manage nearly one and a half billion dollars based in Minneapolis. Jim,
• 22:49
  Speaker 1: I want you to define a couple of terms for us.
• 22:52
  Speaker 1: Let's begin with toggle switch. What's a toggle switch? When
• 22:56
  Speaker 1: it comes to Wall Street? Well, damn us to do?
• 23:00
  Speaker 1: Um UM. I think people are looking. You know, the
• 23:03
  Speaker 1: question everywhere today is what yield level bites stocks? And UM.
• 23:09
  Speaker 1: I think people when they look back historically, they go, well,
• 23:12
  Speaker 1: let's look back historically. You know, yields had to get
• 23:14
  Speaker 1: the five per cent or whatever on the tenure before
• 23:17
  Speaker 1: that happens. And I think it's not about a yield level.
• 23:21
  Speaker 1: It's about an attitude that develops. And that attitude I
• 23:25
  Speaker 1: think is captured by the correlation between stocks and bonds.
• 23:31
  Speaker 1: And when the correlation UH is positive between the stock
• 23:35
  Speaker 1: market and yields, which it has been most of the
• 23:37
  Speaker 1: time in the last twenty years, what that says is
• 23:40
  Speaker 1: that good good news comes out and it pushes yields up.
• 23:44
  Speaker 1: But because the attitude on Wall Street is mostly concerned
• 23:47
  Speaker 1: about weak growth, that's good news for stocks as well.
• 23:51
  Speaker 1: It just means we're farther away from recession or depression. Um.
• 23:55
  Speaker 1: But occasionally this this correlation is turned negative, that is
• 23:59
  Speaker 1: to say that higher yields caused stock market to fall.
• 24:03
  Speaker 1: And I think that's because good news becomes bad news
• 24:07
  Speaker 1: for stocks. And and it's a shift in the Wall
• 24:10
  Speaker 1: Street attitude from worried about we growth to worried about
• 24:14
  Speaker 1: overheat uh and inflation conditions. And we just actually, if
• 24:20
  Speaker 1: you update this correlation, the fifty two week trailing correlation
• 24:23
  Speaker 1: between stock movements and yield movements, that just went negative
• 24:28
  Speaker 1: or the toggle switch just went off as it's toggled
• 24:33
  Speaker 1: from positive to negative correlation. And in the past when
• 24:38
  Speaker 1: this has gone negative, it has not been a good
• 24:40
  Speaker 1: sign for the stock market. Alright, So basically taking taking
• 24:44
  Speaker 1: a big step back to try to get this sort
• 24:46
  Speaker 1: of ten thousand foot picture here. Uh. The Fed another
• 24:49
  Speaker 1: central banks suppressed rates across the board, brought down overnight rates,
• 24:54
  Speaker 1: purchased bonds to lower longer term rates. They're stepping away
• 24:58
  Speaker 1: from that rates rising. We don't have to reach for
• 25:00
  Speaker 1: yield anymore, so people are not needing to go into equities. UH.
• 25:05
  Speaker 1: And and to risk your corporate that we're seeing some
• 25:07
  Speaker 1: pretty big outflows overnight, actually some of the biggest I've
• 25:10
  Speaker 1: ever seen. And I'm just trying to understand from from
• 25:12
  Speaker 1: your perspective, how bad could this get right and what
• 25:16
  Speaker 1: sort of the threshold of yields at which things really
• 25:20
  Speaker 1: start to heat up in terms of losses for stocks. Well,
• 25:23
  Speaker 1: you know, it's I think it's been building for a
• 25:25
  Speaker 1: while UM already, Lisa, in the sense that yields that
• 25:29
  Speaker 1: came up earlier this year at the yield rise pause
• 25:33
  Speaker 1: for a while, but eventually you kind of saw defensive stocks.
• 25:37
  Speaker 1: A lot of those stocks. Utility stocks have been have
• 25:40
  Speaker 1: been matching the market, for example since January of this year,
• 25:45
  Speaker 1: and uh staple stocks have been matching since April. You know,
• 25:49
  Speaker 1: you're seeing a similar type of matching with the SMP
• 25:53
  Speaker 1: dividend aristocrats and with low valve the SMP Lovaland my
• 25:57
  Speaker 1: point is is that even the stopped going up for
• 26:01
  Speaker 1: a while, defensive stocks started to help perform the leadership
• 26:04
  Speaker 1: of the market for the last few years, technology started
• 26:07
  Speaker 1: to underperform, and so a lot of this has already
• 26:11
  Speaker 1: been building. You look at the narrowing of the market,
• 26:15
  Speaker 1: the equally weighted SMP has been falling relative to the
• 26:18
  Speaker 1: market cap. For example, small cap stocks have started to
• 26:22
  Speaker 1: underperform UM. So I I think it wouldn't take a
• 26:27
  Speaker 1: lot more for this too turn into more of not
• 26:30
  Speaker 1: just to sell off, but a panic to some degree.
• 26:34
  Speaker 1: I don't really see the conditions for a recession or
• 26:37
  Speaker 1: bear market, but I certainly do see rising conditions for
• 26:42
  Speaker 1: a really healthy correction that scares a lot of players.
• 26:47
  Speaker 1: Jim Paulson, Just to your point about the utilities, the
• 26:50
  Speaker 1: Dow Utility Index has gained thirteen and a half percent
• 26:55
  Speaker 1: since mid June. Is this because investor sentiment has changed
• 27:01
  Speaker 1: or is there something underlying the actual corporate fundamentals that
• 27:07
  Speaker 1: has changed well? Or might be both? Yeah, it might be.
• 27:11
  Speaker 1: I think it is maybe a little both, but I
• 27:14
  Speaker 1: do think it. Uh, It's very interesting that in the
• 27:17
  Speaker 1: year where the economy by all accounts has been better
• 27:20
  Speaker 1: than it's ever been in this recovery, and that people
• 27:22
  Speaker 1: feel very excited about conditions on main Street and super
• 27:26
  Speaker 1: excited about profits, that in the last you know, six
• 27:30
  Speaker 1: months or more, and and particularly this last move to
• 27:33
  Speaker 1: a new high we just did in the last couple
• 27:35
  Speaker 1: of months was led by defensive stocks. Now what is
• 27:39
  Speaker 1: that saying? What when defensive stocks start to outperform in
• 27:43
  Speaker 1: a good economy, when financial is no longer outperformed? Uh,
• 27:48
  Speaker 1: in a in a good economy. When raw industrial commodity
• 27:52
  Speaker 1: prices have a ten fall since June, what's the message
• 27:56
  Speaker 1: of that. I think it's a message that weaker growth
• 27:59
  Speaker 1: is coming on mas read in the stock markets already
• 28:01
  Speaker 1: starting to pick it up. Jim Paulson, thank you so
• 28:04
  Speaker 1: much for being with us. Jim Paulson, Chief Investment Strategies
• 28:06
  Speaker 1: at the Luthhold Group. Thanks for listening to the Bloomberg
• 28:12
  Speaker 1: P and L podcast. You can subscribe and listen to
• 28:15
  Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 28:20
  Speaker 1: I'm Pim Fox. I'm on Twitter at Pim Fox. I'm
• 28:23
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 28:26
  Speaker 1: You can always catch us worldwide on Bloomberg Radio.