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As Economy Underwhelms, Favor Treasuries Over Stocks: Sri-Kumar · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg pim 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. Following
• 0:33
  Speaker 1: the conclusion of the Federal Reserve Open Market Committee meeting today,
• 0:38
  Speaker 1: the Central Bank will issue a rate Decision of policy
• 0:41
  Speaker 1: statement and updated forecasts on the economy and the path
• 0:45
  Speaker 1: of interest rates that'll take place at two pm Wall
• 0:48
  Speaker 1: Street time that will be covered live right here on Bloomberg.
• 0:51
  Speaker 1: And Jerome Powell, the Chairman of the Federal Reserve, will
• 0:55
  Speaker 1: have his first press conference that begins at the half
• 0:58
  Speaker 1: past two, also here live on Bloomberg. And surely one
• 1:03
  Speaker 1: gentleman who will be listening and watching all of this
• 1:05
  Speaker 1: is Kamal Shri Kamara. He is the president and the
• 1:08
  Speaker 1: founder of Shri Kamar Global Strategies and he joins us now. Shri,
• 1:14
  Speaker 1: thank you very much for being with us. And also
• 1:16
  Speaker 1: I should mention that you are a global Bloomberg profit
• 1:19
  Speaker 1: and you can be followed on Twitter at shri k Global. Um,
• 1:26
  Speaker 1: can you tell us what is going to be the
• 1:28
  Speaker 1: most important thing for you as regards today's events and
• 1:32
  Speaker 1: the Federal Reserve? Tim Those are great and timely questions.
• 1:36
  Speaker 1: First of all, I don't think there is any surprise
• 1:38
  Speaker 1: in terms of a quarter point hike. UM. If he
• 1:42
  Speaker 1: really wanted to shock the market, Chairman Powell can do
• 1:46
  Speaker 1: one of two things, maybe both things. First, if you
• 1:50
  Speaker 1: if you haven't a totally unexpected fifty point basis point
• 1:54
  Speaker 1: hike that would shock the market, both the bond market
• 1:58
  Speaker 1: and the equity market immediately. The second way to do
• 2:02
  Speaker 1: it is to give an extremely optimistic view of economic
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  Speaker 1: growth ahead. His expectations that inflation is likely to quickly
• 2:10
  Speaker 1: go to the two percent FED target and go beyond,
• 2:14
  Speaker 1: and so that in turn would suggest four or even
• 2:17
  Speaker 1: higher a number of rate hikes during the year. My
• 2:21
  Speaker 1: expectation is we are going to stay pretty pedestrian in
• 2:25
  Speaker 1: terms of what the Chairman would say a twenty five
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  Speaker 1: basis point hike, and not too optimistic in terms of
• 2:33
  Speaker 1: a view because he cannot afford to shock the equity
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  Speaker 1: market into a big swoon soon after his speech. Yeah,
• 2:40
  Speaker 1: you know, it's interesting because the FED has had a
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  Speaker 1: party line of not wanting to disrupt markets pretty steadily
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  Speaker 1: for the past number of years. But Stale, I'm wondering
• 2:49
  Speaker 1: how much politics is starting to weigh on FED decisions.
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  Speaker 1: We have a an administration that is cutting taxes, which
• 2:58
  Speaker 1: should give a boost to the U. S economy. The
• 3:00
  Speaker 1: j Powell could halt if he raises rates too quickly.
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  Speaker 1: How much is this going to weigh on the decision? Lisa,
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  Speaker 1: There are two ways in which the politics centers here.
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  Speaker 1: First of all, as you said, the if do we
• 3:12
  Speaker 1: have a big stimulus as a result of the tax package,
• 3:15
  Speaker 1: and if you'll recall what happened after the quantitative easing
• 3:19
  Speaker 1: program of then FED Chairman Bernanky at the end of
• 3:22
  Speaker 1: two thousand eight. It was expected to boost prices substantially,
• 3:26
  Speaker 1: interest rates were going to rise, neither of which happened.
• 3:30
  Speaker 1: And I've been saying consistently that monetary growth does not
• 3:34
  Speaker 1: mean that inflation immediately picks up and that rates would
• 3:37
  Speaker 1: go up. I think you're going to have a similar
• 3:40
  Speaker 1: reaction now to the fiscal stimulus. Although the stimulus has
• 3:44
  Speaker 1: helped the equity markets just as quantitative easing did, I
• 3:48
  Speaker 1: don't think it is putting money into the hands of
• 3:51
  Speaker 1: people who would actually spend it. It is going more
• 3:54
  Speaker 1: into the hands of equity investors who are higher income groups,
• 3:58
  Speaker 1: and they typically tend to be more of savers and
• 4:01
  Speaker 1: investors rather than spenders. Wages have not increased significantly. We
• 4:06
  Speaker 1: saw that also in the most recent wage news. Retail
• 4:10
  Speaker 1: sales have fallen recently. This was again contrary to expectations.
• 4:16
  Speaker 1: I don't see where all the growth optimism is coming from. Sree.
• 4:20
  Speaker 1: What would you like to ask Jerome Powell if you
• 4:23
  Speaker 1: were in the room during the press conference, I would
• 4:26
  Speaker 1: ask him the second question PIM that comes forth as
• 4:30
  Speaker 1: a result of Lisa's point, which is, um, are you
• 4:33
  Speaker 1: going to be influenced by President Trump and Secretary minute
• 4:37
  Speaker 1: In in terms of future rate hikes? Clearly, the President
• 4:41
  Speaker 1: has said several times that he would prefer a week dollar.
• 4:45
  Speaker 1: He has also indicated that given his business background, he
• 4:50
  Speaker 1: prefers low interest rates. And we have a history in
• 4:55
  Speaker 1: the U s. Monetary policy PIM where presidents time and
• 4:58
  Speaker 1: time again have interfered with the FED policy. The FED
• 5:02
  Speaker 1: has hardly been independent. The question is is power going
• 5:06
  Speaker 1: to be different? Is he going to stand up to
• 5:09
  Speaker 1: all the job owning that's almost certain to take place
• 5:12
  Speaker 1: a tree I was. I thought I was compelling what
• 5:14
  Speaker 1: you said, that the optimism about the U. S economy
• 5:18
  Speaker 1: was overdone in your in your view, I want to
• 5:22
  Speaker 1: talk a little bit about that and another perspective of yours,
• 5:24
  Speaker 1: which is that treasuries hold value right now, perhaps even
• 5:28
  Speaker 1: more so than equities. Can you explain the reason for
• 5:33
  Speaker 1: treasuries coming out to be more attractive, Lisa, is because
• 5:36
  Speaker 1: treasury yields are basically dependent on two factors, inflationary expectations
• 5:43
  Speaker 1: and economic growth expectations. If you have a continuation of
• 5:48
  Speaker 1: the first quarter poor growth, that we're going to have
• 5:51
  Speaker 1: about one point eight percent according to the Atlanta Fed.
• 5:54
  Speaker 1: Even if it goes up to two to two and
• 5:56
  Speaker 1: a half percent in subsequent quarters, you're going to fall
• 6:00
  Speaker 1: way shot of three percent. And as I said, I
• 6:03
  Speaker 1: don't expect the fiscal stimulus to be helpful for the economy.
• 6:06
  Speaker 1: As to the financial market, the second part of it
• 6:10
  Speaker 1: is the expectation on inflation. We have not seen that
• 6:13
  Speaker 1: go up. And I thought the bound market panic in
• 6:17
  Speaker 1: early February was a false alarm, and it was quickly
• 6:20
  Speaker 1: reversed and we saw the bond yields come down from
• 6:23
  Speaker 1: the highs we reached earlier in the year. Were you
• 6:26
  Speaker 1: buying Are you buying? I would be buying. Yes. Did
• 6:29
  Speaker 1: you buy back in February? Uh? In terms of again,
• 6:32
  Speaker 1: I'm not specifically an investor in terms of the moves
• 6:36
  Speaker 1: that I make every time, Lisa, because I'm not a
• 6:39
  Speaker 1: short term trader, but I think clearly in terms of
• 6:42
  Speaker 1: long term expectations, my investments are built that way. Should
• 6:47
  Speaker 1: do you believe that we have entered an era of
• 6:49
  Speaker 1: trade wars and tariffs? I think we have. I think
• 6:52
  Speaker 1: it's already started, PIM. If you look at what happened
• 6:56
  Speaker 1: so far on the exports of soy beans, which by
• 6:59
  Speaker 1: the way, is as important and export as aircraft for
• 7:04
  Speaker 1: US exports to China, China has increased the restrictions on
• 7:08
  Speaker 1: the quality that will be accepted in terms of US
• 7:11
  Speaker 1: o beans going to China, and that essentially is a
• 7:15
  Speaker 1: form of a tariff. It's a form of trade restriction.
• 7:19
  Speaker 1: And if in fact the President imposes a tariff of
• 7:23
  Speaker 1: sixty billion dollars as much as this as early as
• 7:26
  Speaker 1: this Friday, as has been rumored, you can expect a
• 7:29
  Speaker 1: retaliation even by Saturday Sunday in terms of what the
• 7:33
  Speaker 1: Chinese would do. And I think you're going to that
• 7:36
  Speaker 1: is where I think the big risk to economic growth lies.
• 7:39
  Speaker 1: And if that happens. Going back to Lisa's question, the
• 7:43
  Speaker 1: fixed income or high the yield and treasuries as where
• 7:47
  Speaker 1: you want to hide And just a real quick I'm
• 7:49
  Speaker 1: looking at a thirty year yield right now three point
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  Speaker 1: one two six. Where do you see it going by
• 7:54
  Speaker 1: the end of this year three point one to six
• 7:57
  Speaker 1: I would see again going down by anywhere from thirty
• 8:01
  Speaker 1: to fifty basis points. And if at the same time
• 8:04
  Speaker 1: you have a connection in equities, it makes it thirty
• 8:08
  Speaker 1: even more attractive. That's a really interesting call. Thank you
• 8:12
  Speaker 1: so much for being with us. We always enjoy a
• 8:14
  Speaker 1: Camal Street Kumar, President and founder of shriek Kumar Global Strategies,
• 8:18
  Speaker 1: also a Bloomberg profit. Perhaps he is recommending people hide
• 8:22
  Speaker 1: out in treasuries while growth expectations start to decline, but
• 8:27
  Speaker 1: he is hiding out Santa Monica, California, away from the
• 8:29
  Speaker 1: snowstorm here in New York City. Twitter and Facebook, as
• 8:48
  Speaker 1: well as other social media platforms, have been hit by
• 8:53
  Speaker 1: a variety of investigations, and this has to do, of
• 8:56
  Speaker 1: course with the information that people are volunteer the offering
• 9:00
  Speaker 1: to these organizations. Here to help us understand all this
• 9:03
  Speaker 1: is Jim Anderson. He is the chief executive of a
• 9:06
  Speaker 1: social Flow and in full disclosure, social Flow is a
• 9:10
  Speaker 1: platform that is used by Bloomberg for social media purposes.
• 9:15
  Speaker 1: Jim Anderson, thank you very much for being here in
• 9:17
  Speaker 1: our eleven three oh studios. How does this kind of
• 9:21
  Speaker 1: data mining work, or maybe it's better to say, how
• 9:24
  Speaker 1: does it differ from data mining that we hear about
• 9:29
  Speaker 1: when it comes to things like the preference that you
• 9:32
  Speaker 1: might have for the kind of detergent that your family uses,
• 9:36
  Speaker 1: or the kinds of news that you're interested in reading about. Yeah, Pam,
• 9:40
  Speaker 1: thanks for having me. There's a lot to unpack here.
• 9:42
  Speaker 1: So let's let's first start with the fact that Facebook
• 9:45
  Speaker 1: is a social network, right. I mean, we we get
• 9:47
  Speaker 1: onto Facebook to share and connect with our friends, and
• 9:51
  Speaker 1: so you know, in many ways, privacy and sharing are
• 9:54
  Speaker 1: diametrically opposed to each other, and so we do share
• 9:58
  Speaker 1: a lot of information with Facebook with our friends. On Facebook,
• 10:01
  Speaker 1: Facebook learns a lot about us and exactly what you
• 10:03
  Speaker 1: just said. The commercialization of that is really what's at
• 10:06
  Speaker 1: heart here. I mean that that information is quite valuable
• 10:09
  Speaker 1: to advertisers who want to sell us shaving cream and
• 10:11
  Speaker 1: laundry detergent and all the kinds of things that we buy.
• 10:13
  Speaker 1: And so that's really the crux of the issue. You
• 10:15
  Speaker 1: take that and you put it at the intersection of
• 10:18
  Speaker 1: some of the most heated political issues of our days,
• 10:20
  Speaker 1: the presidential election, uh, potential Russian interference, and you get
• 10:24
  Speaker 1: I think the mails from that we've got right now. Well,
• 10:26
  Speaker 1: but Jim, is there a difference between the data that
• 10:29
  Speaker 1: you willingly share with your friends, whether it's pictures of
• 10:31
  Speaker 1: your kids or what party you've gone to, and uh,
• 10:35
  Speaker 1: having data scraped from your emails from other systems that
• 10:40
  Speaker 1: you've been using that are not social media, that are
• 10:42
  Speaker 1: not public platforms, and using that for say, political advertisements. Yes, there,
• 10:49
  Speaker 1: I think there is a difference. Although to be clear,
• 10:51
  Speaker 1: and we're all speculating here about what may or may
• 10:53
  Speaker 1: not have happened, and I wasn't there, so I don't
• 10:56
  Speaker 1: know what Cambridge Analytica did, but what has been reported
• 10:59
  Speaker 1: is that they uh sort of unauthorized it took information
• 11:03
  Speaker 1: about people's friends. So it wasn't so much that they
• 11:05
  Speaker 1: scraped it from their email, It's that they did something
• 11:08
  Speaker 1: they weren't supposed to according to Facebook's policies. And then
• 11:12
  Speaker 1: the logical question that everybody's asking is, well, Facebook, you
• 11:14
  Speaker 1: had those policies, and you knew that some people might
• 11:17
  Speaker 1: not comply with them. What was your obligation to make
• 11:19
  Speaker 1: sure that Cambridge Analytical or anybody else complied with what
• 11:23
  Speaker 1: they were supposed to do? And so that's what I
• 11:24
  Speaker 1: think we're really talking about, is your your not only
• 11:27
  Speaker 1: your information, but your friends information, and your friends never
• 11:30
  Speaker 1: consented to have them do that. So let's say it's
• 11:33
  Speaker 1: not scraping. It's not a matter of scraping data from
• 11:37
  Speaker 1: other sites. Let's say it's just the information that people
• 11:40
  Speaker 1: put out there about themselves on Facebook. Do you know
• 11:42
  Speaker 1: anybody who's been upset by disclosure of information that they
• 11:46
  Speaker 1: have put out there publicly? Uh, certainly we all know
• 11:49
  Speaker 1: people who have been upset. I mean this is a
• 11:51
  Speaker 1: very emotional issue for a lot of people. Privacy. Uh,
• 11:56
  Speaker 1: you start talking about people's families and their kids. You know,
• 11:58
  Speaker 1: my kids information is on face this book and and
• 12:00
  Speaker 1: all of us. I think I'm a parent. All of
• 12:02
  Speaker 1: us who have kids wrestle with that kind of question
• 12:04
  Speaker 1: just by default. How much information do you put about
• 12:06
  Speaker 1: your children out? I mean, it's it's one thing for
• 12:08
  Speaker 1: your friends and family, uh to know about your children.
• 12:11
  Speaker 1: It's quite another for some anonymous third party to have
• 12:14
  Speaker 1: taken that information through no action of my own, but
• 12:17
  Speaker 1: maybe one of my friends downloaded one of their apps
• 12:19
  Speaker 1: and suddenly now they know things about me, my family,
• 12:22
  Speaker 1: and my kids. I think that's why you see such
• 12:24
  Speaker 1: an emotion here. Is is that information that you put
• 12:27
  Speaker 1: out there wasn't being done with the expectation that it
• 12:29
  Speaker 1: would be used for marketing or even political purposes. Now
• 12:33
  Speaker 1: this is not the first time, though, that Facebook has
• 12:36
  Speaker 1: had to deal with issues related to what many describe
• 12:40
  Speaker 1: as being genuine news or information that is available via
• 12:45
  Speaker 1: their website. They've had a program I believe that really
• 12:49
  Speaker 1: affected a lot of what it's called independent journalism in
• 12:52
  Speaker 1: many smaller countries such as Guatemala and Sri Lanka. You're
• 12:55
  Speaker 1: familiar with this, maybe just enlightened people a little bit
• 12:58
  Speaker 1: so that they understand that this is not a brand
• 13:00
  Speaker 1: new topic when it comes to Facebook and the information
• 13:04
  Speaker 1: that's shared on their network. Yeah, well, again, there's there's
• 13:07
  Speaker 1: multiple stories and news threads intersecting here, and so we
• 13:10
  Speaker 1: have we really have to untangle it. I think what
• 13:11
  Speaker 1: you're referring to is they ran tests in the news
• 13:14
  Speaker 1: feed in these some of these smaller countries, which by
• 13:17
  Speaker 1: the way, added up to almost exactly one point zero
• 13:20
  Speaker 1: percent of the world's population, So you could understand from
• 13:22
  Speaker 1: a testing standpoint, they wanted to experiment with the news
• 13:26
  Speaker 1: feeds of of people in you know, one point zero
• 13:29
  Speaker 1: percent of the world's population, which probably correlates to one
• 13:32
  Speaker 1: point zero percent of Facebook users around the world, and
• 13:34
  Speaker 1: they're trying to understand how people interact with content and
• 13:37
  Speaker 1: their news feed. And so the implication of that in
• 13:40
  Speaker 1: the an outcry was, wow, you have severely disadvantaged the
• 13:44
  Speaker 1: legitimate news media in those countries by doing your experiment.
• 13:48
  Speaker 1: You know, never mind what you think you might have
• 13:50
  Speaker 1: been able to accomplish or learn the experiment, did you
• 13:52
  Speaker 1: really think through the implications of of what that was
• 13:54
  Speaker 1: going to do to journalism and to news outlets in
• 13:56
  Speaker 1: those countries. And I think the answer that Facebook uhs
• 13:59
  Speaker 1: said itself is well, no, we didn't really think through that,
• 14:02
  Speaker 1: and we didn't intend to do that, and so we'll
• 14:04
  Speaker 1: we'll stop doing that and our experiment is done. I
• 14:07
  Speaker 1: just wanted to bring to the news that Mark Zuckerberg,
• 14:10
  Speaker 1: the head of Facebook, will address the public in the
• 14:14
  Speaker 1: next twenty four hours aimed at regaining trust. This, according
• 14:19
  Speaker 1: to Bloomberg News is Sarah Fryer just confirmed this. What
• 14:22
  Speaker 1: do you hope to hear from Mark Zuckerberg? Well, I
• 14:25
  Speaker 1: think me and everybody hopes to hear a clear explanation
• 14:30
  Speaker 1: of Facebook's position on this, and and and in all
• 14:32
  Speaker 1: fairness is an objective you know, observer trying to be
• 14:35
  Speaker 1: as objective as I can. It is a very complicated issue.
• 14:39
  Speaker 1: Right again, I said right at the at the top
• 14:41
  Speaker 1: of this, Uh, you know, Facebook is a social network,
• 14:43
  Speaker 1: right wet We put information out there. Every single Facebook
• 14:46
  Speaker 1: post has a share button on it even today, and
• 14:48
  Speaker 1: so sharing is built into the core of the platform.
• 14:52
  Speaker 1: So how does he and how does Facebook more broadly
• 14:55
  Speaker 1: view sharing versus privacy and how do they plan to
• 14:59
  Speaker 1: reconci aile those really quite contradictory perspectives, and I think
• 15:03
  Speaker 1: that's what everybody wants to hear. Jim Anderson, thank you
• 15:05
  Speaker 1: so much for being with us. Thank you Jim Anderson,
• 15:08
  Speaker 1: chief executive officer of Social Flow in New York, to
• 15:12
  Speaker 1: be fully disclosed here. Social Flow as a platform used
• 15:15
  Speaker 1: by Bloomberg for social media purposes, and it is confirmed
• 15:19
  Speaker 1: that we will be hearing from the previously absent er
• 15:22
  Speaker 1: up till now absent, Mark Zuckerberg about Facebook's response to
• 15:27
  Speaker 1: this data breach and their path forward. Tesla maybe the
• 15:46
  Speaker 1: poster child for this era, a company that burns through cash.
• 15:51
  Speaker 1: It has promise of technological prowess that has excited the
• 15:55
  Speaker 1: imaginations of many out there. The true story of this company, however,
• 15:59
  Speaker 1: may lie with its credit, And here to join us
• 16:01
  Speaker 1: is Joel Lovington, Senior credit analyst for Bloomberg Intelligence. You've
• 16:06
  Speaker 1: been digging into Tesla's credit. An interesting concept, this company
• 16:11
  Speaker 1: borrowing to burn cash. Um, This perhaps is the true
• 16:15
  Speaker 1: story and what is it telling us? Well, I think
• 16:19
  Speaker 1: what it's telling us is that the company will continue
• 16:22
  Speaker 1: to invest much like an Amazon did in trying to
• 16:25
  Speaker 1: build out its optionality. And as it does that, it
• 16:28
  Speaker 1: needs both costs financing and that's becoming more and more challenging,
• 16:31
  Speaker 1: which will make their drivers difficult and will also make
• 16:35
  Speaker 1: the ability to for that for their bonds to perform. Well,
• 16:40
  Speaker 1: so what kind of collateral would be valuable to an
• 16:44
  Speaker 1: investor here? Well, everybody loves receivables and uh, and it
• 16:50
  Speaker 1: has a tremendous brand name, and so I think that's
• 16:52
  Speaker 1: the concern is that, Uh, this past summer they issued
• 16:57
  Speaker 1: a billion aid of debt which is unsecure, and as
• 17:01
  Speaker 1: that bond has lagged, it makes it harder to finance.
• 17:04
  Speaker 1: So a cheaper way of doing it would be secured debt,
• 17:07
  Speaker 1: which would prime the current debt. In other words, it
• 17:10
  Speaker 1: would push it down on the capital structure UH and
• 17:12
  Speaker 1: make it worth make it less valuable. Well, if it
• 17:16
  Speaker 1: makes it less valuable, then what's the likelihood that, unless
• 17:20
  Speaker 1: they get these issues resolved, that they can continue to
• 17:24
  Speaker 1: go back to the market to borrow more money. Well,
• 17:27
  Speaker 1: that's that's the chicken and the egg game. Obviously, they
• 17:30
  Speaker 1: could go out and issue equity, it's an as if
• 17:33
  Speaker 1: their equity has a low valuation on it, or they
• 17:36
  Speaker 1: can use convertibles. I think what's interesting is that what
• 17:39
  Speaker 1: they said on their last call is that you know
• 17:42
  Speaker 1: that they can they could see cash flow becoming much
• 17:44
  Speaker 1: stronger over the next couple of years. And if they
• 17:47
  Speaker 1: really believe that using something like bank debt makes a
• 17:50
  Speaker 1: lot more sense than going out and issuing more unsecured
• 17:53
  Speaker 1: debt or giving away your or giving away your equity.
• 17:58
  Speaker 1: So Tesla is about eight and a half billion dollars
• 18:01
  Speaker 1: of debt currently. They've burned through more than a billion
• 18:05
  Speaker 1: dollars per quarter to sustain itself. They've clearly had a
• 18:09
  Speaker 1: lot of issues with respect to production snaff foods, UH.
• 18:13
  Speaker 1: They are currently contemplating our shareholders are anyway awarding Elon
• 18:17
  Speaker 1: Musk a two point six billion dollar compensation package. Just
• 18:22
  Speaker 1: how much more do they have to borrow? And what
• 18:26
  Speaker 1: happens if they can't? I mean, is that basically game over? Well,
• 18:31
  Speaker 1: I don't think it will be a question of if
• 18:34
  Speaker 1: they can or they can't. I think they will be
• 18:35
  Speaker 1: able to borrow. H they are fifty four billion dollar
• 18:39
  Speaker 1: cap company. It becomes how will they finance and how
• 18:43
  Speaker 1: much they'll need to finance? Lisa and I think at
• 18:46
  Speaker 1: least our model that we have on the terminal shows
• 18:50
  Speaker 1: that it should be about two and a half billion
• 18:53
  Speaker 1: dollars that they would that they'll be cash negative this year.
• 18:56
  Speaker 1: So if they want to keep their liquidity consistent, they
• 18:59
  Speaker 1: would need to you know, issue about two and a
• 19:01
  Speaker 1: half billion dollars worth of new debt. You know, it
• 19:05
  Speaker 1: doesn't bang. The question though, that if you are going
• 19:07
  Speaker 1: to be asked to do a leverage buyout with a
• 19:10
  Speaker 1: company like this or take it private, could you do
• 19:12
  Speaker 1: it based on the financials as they currently exist. That's
• 19:16
  Speaker 1: a great question him and I think the short answer
• 19:18
  Speaker 1: is no. The company at least again, like if the
• 19:22
  Speaker 1: way that we look at it, if they financed that
• 19:25
  Speaker 1: two and a half billion dollars shortfall this year with debt,
• 19:28
  Speaker 1: they'll be levered at eleven times, so they already look
• 19:30
  Speaker 1: like an extremely levered l b O. Bryan they going private,
• 19:35
  Speaker 1: So I don't really think that would be a mechanism, Uh,
• 19:38
  Speaker 1: that would be doable in any way. So you talked
• 19:41
  Speaker 1: about how it would be more attractive for them to
• 19:44
  Speaker 1: issue in the bank debt spaces is the leveraged loan market,
• 19:47
  Speaker 1: and I'm wondering, perhaps from Tesla's point of view, it's
• 19:50
  Speaker 1: more attractive. What about from an investor's standpoint, would you recommend?
• 19:55
  Speaker 1: And I know you can't recommend, so you're going to
• 19:56
  Speaker 1: totally punt on this, but uh, you know, our invest
• 20:00
  Speaker 1: is adequately compensated. At what point are they adequately compensated
• 20:03
  Speaker 1: with yield for buying something like that to finance this
• 20:07
  Speaker 1: cash burning car company. Sure? Well, what I would say
• 20:11
  Speaker 1: is that if you look at the triple c um
• 20:15
  Speaker 1: leverage loan market, UH, if you and you look at
• 20:18
  Speaker 1: similar dates to what they have in terms of their
• 20:21
  Speaker 1: five mon issue UH, those UH secured bank debt financings
• 20:26
  Speaker 1: tend to run between a hundred and a hundred twenty
• 20:28
  Speaker 1: five THESS points cheaper or tighter than what you would
• 20:32
  Speaker 1: get in the unsecured market, and so that would be
• 20:35
  Speaker 1: the cost savings to the company. I think the other
• 20:38
  Speaker 1: component of it it becomes that with bank debt you
• 20:41
  Speaker 1: can repay it quickly. So if they do believe that
• 20:44
  Speaker 1: they're going to be cashlow positive towards twenty nineteen, that
• 20:48
  Speaker 1: would give them the optionality of paying down that debt
• 20:51
  Speaker 1: without having any sort of call provision or feature in it,
• 20:54
  Speaker 1: which is different than a bond, which again would if
• 20:58
  Speaker 1: I was sending in the treasure re seat over at Tesla.
• 21:00
  Speaker 1: Those are the kinds of things that I would be
• 21:02
  Speaker 1: thinking about in how to reduce the cost UH in
• 21:05
  Speaker 1: terms of financing. That's gonna say would you would you
• 21:08
  Speaker 1: be interested in reducing the cost of the two point
• 21:10
  Speaker 1: six billion dollar compensation package that they're going to be
• 21:13
  Speaker 1: voting on. Yeah, well, you know, I'm a credit guy.
• 21:16
  Speaker 1: I have not. The credit guy says, no way, do
• 21:20
  Speaker 1: you expect them to get downgraded because I think that
• 21:23
  Speaker 1: they're rated in the single B area at this point. Yeah.
• 21:25
  Speaker 1: Let me just add on him that I hope that you, Lisa,
• 21:28
  Speaker 1: and I can all get a compensation package similar to that.
• 21:32
  Speaker 1: Thank you. But in terms of the ratings, I do
• 21:36
  Speaker 1: think that there is a big risk that they get
• 21:39
  Speaker 1: downgraded this year. They will not meet rader expectations. And
• 21:43
  Speaker 1: the reason that that is important is because as a
• 21:46
  Speaker 1: triple C bond, which is where the issue would go,
• 21:51
  Speaker 1: those bonds at similar maturities trade about seventy basis points tight,
• 21:56
  Speaker 1: seventy basis points wider than where the Tesla bond is.
• 21:59
  Speaker 1: That's worth about three points on a ninety two and
• 22:02
  Speaker 1: a half dollar bond. Just try to frame what that
• 22:05
  Speaker 1: risk might look like. Well done, Thanks very much for
• 22:08
  Speaker 1: enlightening us. Joel Levington is our senior credit analyst for
• 22:11
  Speaker 1: Bloomberg Intelligence, discussing the I don't know it's a debt picture,
• 22:18
  Speaker 1: it seems it's another word at TESLA. New rules from
• 22:37
  Speaker 1: the Department of a Labor having to do with tip
• 22:40
  Speaker 1: sharing and this of course affecting the restaurant industry. Let's
• 22:44
  Speaker 1: bring in Ben Penn. He's a labor reporter for Bloomberg
• 22:47
  Speaker 1: Law joining us from Arlington, Virginia. Ben just layout for
• 22:51
  Speaker 1: people that are not familiar with, what is the current
• 22:54
  Speaker 1: regulatory environment when it comes to tips and what does
• 22:58
  Speaker 1: the Labor Department have to say about this? Sure So,
• 23:01
  Speaker 1: in two thousand and eleven, the Obama Department of Labor
• 23:04
  Speaker 1: issued a regulation that stated what was what the department
• 23:08
  Speaker 1: intended to be clarifying it's long standing policy that employees
• 23:13
  Speaker 1: own the tips that they receive and that managers can't
• 23:16
  Speaker 1: skim those tips. Now, what happened last December is the
• 23:20
  Speaker 1: department issued a new rule proposal to reverse that two
• 23:24
  Speaker 1: thousand eleven rule. And that proposal, the intention behind it
• 23:28
  Speaker 1: is to allow restaurants to uh impose tip sharing arrangements
• 23:33
  Speaker 1: in which the front of house workers like servers and bartenders,
• 23:36
  Speaker 1: who directly earned tips can share those tips with the
• 23:40
  Speaker 1: backup house kitchen workers. UM. However, the issue that's really
• 23:44
  Speaker 1: caused quite a bit of contention, is that the rule
• 23:47
  Speaker 1: does not expressly forbid managers from taking apart in the
• 23:51
  Speaker 1: tip pull themselves. And uh, that's uh, that's what's happening.
• 23:55
  Speaker 1: And uh, the of course this only the controversy only escalated.
• 24:00
  Speaker 1: I reported less months that the Department had conducted an
• 24:03
  Speaker 1: internal analysis showing that six D forty million dollars per
• 24:09
  Speaker 1: year in tips could be transferred to businesses as a
• 24:12
  Speaker 1: result of the rule, and that they deleted that that
• 24:16
  Speaker 1: analysis from the proposal. And uh, now the next the
• 24:20
  Speaker 1: next word is that I reported today is how they
• 24:23
  Speaker 1: went about getting approval to do that. And basically what
• 24:27
  Speaker 1: you're reporting is that they didn't disclose certain data. Correct. Correct?
• 24:32
  Speaker 1: They stated instead under the regulatory impact Analysis section of
• 24:36
  Speaker 1: the rule that at this point the Department is unable
• 24:39
  Speaker 1: to quantify the transfer costs to businesses and uh, the
• 24:44
  Speaker 1: transfer costs from workers to businesses. And they asked the
• 24:47
  Speaker 1: public input to inform the analysis that would be included
• 24:51
  Speaker 1: in the final stage of the rule. And why do
• 24:54
  Speaker 1: you believe or what have you learned about the background
• 24:58
  Speaker 1: as to why the Department of Labor would do this? Well,
• 25:02
  Speaker 1: there are certainly a number of interesting theories. I think
• 25:05
  Speaker 1: what we do know for sure is what the Secretary
• 25:08
  Speaker 1: of Labor, alex A. Costa, said less earlier this month
• 25:11
  Speaker 1: when he was testifying on Capitol Hill, that he believes
• 25:15
  Speaker 1: that the Department, even though it made an attempt to
• 25:17
  Speaker 1: quantify the data at the proposed rule stage, that there
• 25:20
  Speaker 1: were assumptions in that proposal that he disagreed with that
• 25:24
  Speaker 1: he thought would be misleading to release to the public.
• 25:27
  Speaker 1: And uh, and that's why they felt instead it would
• 25:30
  Speaker 1: be best to solicit public input that would then inform
• 25:35
  Speaker 1: a more reliable estimate in the final rule. Of course, Um,
• 25:39
  Speaker 1: there are plenty of pushback there saying that they saw
• 25:43
  Speaker 1: a number. In fact, I had reported that the original
• 25:45
  Speaker 1: estimates compiled internally projected it would be in the billions,
• 25:50
  Speaker 1: before political leadership kept asking for new methodologies that gradually
• 25:54
  Speaker 1: lessened the anticipated impact, and now as a report today,
• 25:58
  Speaker 1: down to six forty million. So, UM, they're getting accused
• 26:03
  Speaker 1: now of you know, seeing the numbers that they don't like,
• 26:06
  Speaker 1: wanting to hide that from the public. Um. And uh,
• 26:11
  Speaker 1: so that you know, you take your pick of which
• 26:13
  Speaker 1: is the more plausible theory. But I want to I
• 26:16
  Speaker 1: want to just get your perspective on what the economic
• 26:19
  Speaker 1: reason would be behind forcing employees in the service industry
• 26:23
  Speaker 1: to share their tips and sort of why the Department
• 26:27
  Speaker 1: of Labor would want this. Sure, the Department of Labor
• 26:32
  Speaker 1: and the Restaurant Association, which is a big supporter of
• 26:35
  Speaker 1: this rule has uh they've both stated that what this
• 26:38
  Speaker 1: would accomplish is it would improve the the workplace camaraderie
• 26:43
  Speaker 1: because you have employees in the front of house and
• 26:46
  Speaker 1: workers in the back of house who are all working, uh,
• 26:50
  Speaker 1: you know, in a community to improve the customer experience,
• 26:52
  Speaker 1: and why not allow everyone who plays a role in
• 26:56
  Speaker 1: that process to benefit from it? And uh, so that
• 27:00
  Speaker 1: you know, that's the stated um benefit of the rule.
• 27:03
  Speaker 1: Now where it gets interesting is that front of house
• 27:06
  Speaker 1: workers do not make the full minimum wage. Typically they
• 27:10
  Speaker 1: earn as low as two thirteen per hour provided that
• 27:14
  Speaker 1: their tips combined with their hourly wage equal the full
• 27:18
  Speaker 1: minimum wage of at least whereas workers in the back
• 27:22
  Speaker 1: of house typically don't earn as much and uh they
• 27:26
  Speaker 1: get pay the full minimum wage, but frequently not that
• 27:30
  Speaker 1: much more than it. So you know, this is another
• 27:33
  Speaker 1: stated uh benefit of the rules, that this would allow
• 27:36
  Speaker 1: cooks and dishwashers to make more money. And of course
• 27:40
  Speaker 1: then the criticism is that why aren't the businesses themselves
• 27:43
  Speaker 1: uh giving those workers a race so real quick. The opponents,
• 27:47
  Speaker 1: I assume are the front office or the front of
• 27:50
  Speaker 1: house service workers. Now, yeah, well, I think it really
• 27:55
  Speaker 1: depends on the on the business. I've heard that there
• 27:58
  Speaker 1: there are some restaurant where workers would be happy to
• 28:02
  Speaker 1: uh to take partner tipple at the back of house,
• 28:05
  Speaker 1: of course, provided that they are paid a full minimum wage.
• 28:08
  Speaker 1: And you know, in some states now that full minimum
• 28:10
  Speaker 1: wage can be as high as getting close to fifteen
• 28:13
  Speaker 1: dollars per hours, so they would still be able to
• 28:16
  Speaker 1: earn uh, you know, a decent take home pay. But
• 28:20
  Speaker 1: you know, there are other places where they would feel that,
• 28:22
  Speaker 1: especially if they felt that their managers were allowed to
• 28:27
  Speaker 1: skim a portion of those tips, that this would you know,
• 28:31
  Speaker 1: this would just force them to move on to a
• 28:33
  Speaker 1: different restaurant. Ben Penn, thank you so much for being
• 28:35
  Speaker 1: with us. Really fascinating great scoops. Ben Pen, labor reporter
• 28:39
  Speaker 1: for Bloomberg Law, coming to us from Arlington, Virginia. Very controversial.
• 28:44
  Speaker 1: The idea of employees, usually in the service industry, having
• 28:48
  Speaker 1: to share their tips with everybody. Sort of raises a
• 28:51
  Speaker 1: question of what is the point of tips which were
• 28:54
  Speaker 1: meant sensibly to compensate for the quality of that service.
• 29:02
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 29:05
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 29:09
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 29:12
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 29:17
  Speaker 1: It's one before the podcast. You can always catch us
• 29:19
  Speaker 1: worldwide on Bloomberg Radio.