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

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Following the conclusion of the Federal Reserve Open Market Committee meeting today, the Central Bank will issue a rate Decision of policy statement and updated forecasts on the economy and the path of interest rates that'll take place at two pm Wall Street time that will be covered live right here on Bloomberg. And Jerome Powell, the Chairman of the Federal Reserve, will have his first press conference that begins at the half

past two, also here live on Bloomberg. And surely one gentleman who will be listening and watching all of this is Kamal Shri Kamara. He is the president and the founder of Shri Kamar Global Strategies and he joins us now. Shri, thank you very much for being with us. And also I should mention that you are a global Bloomberg profit and you can be followed on Twitter at shri k Global. Um, can you tell us what is going to be the most important thing for you as regards today's events and

the Federal Reserve? Tim Those are great and timely questions. First of all, I don't think there is any surprise in terms of a quarter point hike. UM. If he really wanted to shock the market, Chairman Powell can do one of two things, maybe both things. First, if you if you haven't a totally unexpected fifty point basis point hike that would shock the market, both the bond market and the equity market immediately. The second way to do it is to give an extremely optimistic view of economic

growth ahead. His expectations that inflation is likely to quickly go to the two percent FED target and go beyond, and so that in turn would suggest four or even higher a number of rate hikes during the year. My expectation is we are going to stay pretty pedestrian in terms of what the Chairman would say a twenty five basis point hike, and not too optimistic in terms of a view because he cannot afford to shock the equity

market into a big swoon soon after his speech. Yeah, you know, it's interesting because the FED has had a party line of not wanting to disrupt markets pretty steadily for the past number of years. But Stale, I'm wondering how much politics is starting to weigh on FED decisions. We have a an administration that is cutting taxes, which should give a boost to the U. S economy. The j Powell could halt if he raises rates too quickly.

How much is this going to weigh on the decision? Lisa, There are two ways in which the politics centers here. First of all, as you said, the if do we have a big stimulus as a result of the tax package, and if you'll recall what happened after the quantitative easing program of then FED Chairman Bernanky at the end of two thousand eight. It was expected to boost prices substantially, interest rates were going to rise, neither of which happened.

And I've been saying consistently that monetary growth does not mean that inflation immediately picks up and that rates would go up. I think you're going to have a similar reaction now to the fiscal stimulus. Although the stimulus has helped the equity markets just as quantitative easing did, I don't think it is putting money into the hands of

people who would actually spend it. It is going more into the hands of equity investors who are higher income groups, and they typically tend to be more of savers and investors rather than spenders. Wages have not increased significantly. We saw that also in the most recent wage news. Retail sales have fallen recently. This was again contrary to expectations. I don't see where all the growth optimism is coming from. Sree.

What would you like to ask Jerome Powell if you were in the room during the press conference, I would ask him the second question PIM that comes forth as a result of Lisa's point, which is, um, are you going to be influenced by President Trump and Secretary minute In in terms of future rate hikes? Clearly, the President has said several times that he would prefer a week dollar. He has also indicated that given his business background, he

prefers low interest rates. And we have a history in the U s. Monetary policy PIM where presidents time and time again have interfered with the FED policy. The FED has hardly been independent. The question is is power going to be different? Is he going to stand up to all the job owning that's almost certain to take place

a tree I was. I thought I was compelling what you said, that the optimism about the U. S economy was overdone in your in your view, I want to talk a little bit about that and another perspective of yours, which is that treasuries hold value right now, perhaps even more so than equities. Can you explain the reason for treasuries coming out to be more attractive, Lisa, is because treasury yields are basically dependent on two factors, inflationary expectations

and economic growth expectations. If you have a continuation of the first quarter poor growth, that we're going to have about one point eight percent according to the Atlanta Fed. Even if it goes up to two to two and a half percent in subsequent quarters, you're going to fall way shot of three percent. And as I said, I don't expect the fiscal stimulus to be helpful for the economy. As to the financial market, the second part of it is the expectation on inflation. We have not seen that

go up. And I thought the bound market panic in early February was a false alarm, and it was quickly reversed and we saw the bond yields come down from the highs we reached earlier in the year. Were you buying Are you buying? I would be buying. Yes. Did you buy back in February? Uh? In terms of again, I'm not specifically an investor in terms of the moves that I make every time, Lisa, because I'm not a short term trader, but I think clearly in terms of

long term expectations, my investments are built that way. Should do you believe that we have entered an era of trade wars and tariffs? I think we have. I think it's already started, PIM. If you look at what happened so far on the exports of soy beans, which by the way, is as important and export as aircraft for US exports to China, China has increased the restrictions on the quality that will be accepted in terms of US o beans going to China, and that essentially is a

form of a tariff. It's a form of trade restriction. And if in fact the President imposes a tariff of sixty billion dollars as much as this as early as this Friday, as has been rumored, you can expect a retaliation even by Saturday Sunday in terms of what the Chinese would do. And I think you're going to that is where I think the big risk to economic growth lies.

And if that happens. Going back to Lisa's question, the fixed income or high the yield and treasuries as where you want to hide And just a real quick I'm looking at a thirty year yield right now three point one two six. Where do you see it going by the end of this year three point one to six I would see again going down by anywhere from thirty to fifty basis points. And if at the same time you have a connection in equities, it makes it thirty

even more attractive. That's a really interesting call. Thank you so much for being with us. We always enjoy a Camal Street Kumar, President and founder of shriek Kumar Global Strategies, also a Bloomberg profit. Perhaps he is recommending people hide out in treasuries while growth expectations start to decline, but he is hiding out Santa Monica, California, away from the

snowstorm here in New York City. Twitter and Facebook, as well as other social media platforms, have been hit by a variety of investigations, and this has to do, of course with the information that people are volunteer the offering to these organizations. Here to help us understand all this is Jim Anderson. He is the chief executive of a social Flow and in full disclosure, social Flow is a platform that is used by Bloomberg for social media purposes.

Jim Anderson, thank you very much for being here in our eleven three oh studios. How does this kind of data mining work, or maybe it's better to say, how does it differ from data mining that we hear about when it comes to things like the preference that you might have for the kind of detergent that your family uses, or the kinds of news that you're interested in reading about. Yeah, Pam, thanks for having me. There's a lot to unpack here. So let's let's first start with the fact that Facebook

is a social network, right. I mean, we we get onto Facebook to share and connect with our friends, and so you know, in many ways, privacy and sharing are diametrically opposed to each other, and so we do share a lot of information with Facebook with our friends. On Facebook, Facebook learns a lot about us and exactly what you just said. The commercialization of that is really what's at

heart here. I mean that that information is quite valuable to advertisers who want to sell us shaving cream and laundry detergent and all the kinds of things that we buy. And so that's really the crux of the issue. You take that and you put it at the intersection of some of the most heated political issues of our days, the presidential election, uh, potential Russian interference, and you get

I think the mails from that we've got right now. Well, but Jim, is there a difference between the data that you willingly share with your friends, whether it's pictures of your kids or what party you've gone to, and uh, having data scraped from your emails from other systems that you've been using that are not social media, that are not public platforms, and using that for say, political advertisements. Yes, there,

I think there is a difference. Although to be clear, and we're all speculating here about what may or may not have happened, and I wasn't there, so I don't know what Cambridge Analytica did, but what has been reported is that they uh sort of unauthorized it took information about people's friends. So it wasn't so much that they scraped it from their email, It's that they did something

they weren't supposed to according to Facebook's policies. And then the logical question that everybody's asking is, well, Facebook, you had those policies, and you knew that some people might not comply with them. What was your obligation to make sure that Cambridge Analytical or anybody else complied with what they were supposed to do? And so that's what I think we're really talking about, is your your not only your information, but your friends information, and your friends never

consented to have them do that. So let's say it's not scraping. It's not a matter of scraping data from other sites. Let's say it's just the information that people put out there about themselves on Facebook. Do you know anybody who's been upset by disclosure of information that they have put out there publicly? Uh, certainly we all know people who have been upset. I mean this is a very emotional issue for a lot of people. Privacy. Uh,

you start talking about people's families and their kids. You know, my kids information is on face this book and and all of us. I think I'm a parent. All of us who have kids wrestle with that kind of question just by default. How much information do you put about your children out? I mean, it's it's one thing for your friends and family, uh to know about your children.

It's quite another for some anonymous third party to have taken that information through no action of my own, but maybe one of my friends downloaded one of their apps and suddenly now they know things about me, my family, and my kids. I think that's why you see such an emotion here. Is is that information that you put out there wasn't being done with the expectation that it

would be used for marketing or even political purposes. Now this is not the first time, though, that Facebook has had to deal with issues related to what many describe as being genuine news or information that is available via their website. They've had a program I believe that really affected a lot of what it's called independent journalism in

many smaller countries such as Guatemala and Sri Lanka. You're familiar with this, maybe just enlightened people a little bit so that they understand that this is not a brand new topic when it comes to Facebook and the information that's shared on their network. Yeah, well, again, there's there's multiple stories and news threads intersecting here, and so we

have we really have to untangle it. I think what you're referring to is they ran tests in the news feed in these some of these smaller countries, which by the way, added up to almost exactly one point zero percent of the world's population, So you could understand from a testing standpoint, they wanted to experiment with the news feeds of of people in you know, one point zero percent of the world's population, which probably correlates to one

point zero percent of Facebook users around the world, and they're trying to understand how people interact with content and their news feed. And so the implication of that in the an outcry was, wow, you have severely disadvantaged the legitimate news media in those countries by doing your experiment.

You know, never mind what you think you might have been able to accomplish or learn the experiment, did you really think through the implications of of what that was going to do to journalism and to news outlets in those countries. And I think the answer that Facebook uhs said itself is well, no, we didn't really think through that, and we didn't intend to do that, and so we'll

we'll stop doing that and our experiment is done. I just wanted to bring to the news that Mark Zuckerberg, the head of Facebook, will address the public in the next twenty four hours aimed at regaining trust. This, according to Bloomberg News is Sarah Fryer just confirmed this. What do you hope to hear from Mark Zuckerberg? Well, I think me and everybody hopes to hear a clear explanation of Facebook's position on this, and and and in all fairness is an objective you know, observer trying to be

as objective as I can. It is a very complicated issue. Right again, I said right at the at the top of this, Uh, you know, Facebook is a social network, right wet We put information out there. Every single Facebook post has a share button on it even today, and so sharing is built into the core of the platform. So how does he and how does Facebook more broadly view sharing versus privacy and how do they plan to reconci aile those really quite contradictory perspectives, and I think

that's what everybody wants to hear. Jim Anderson, thank you so much for being with us. Thank you Jim Anderson, chief executive officer of Social Flow in New York, to be fully disclosed here. Social Flow as a platform used by Bloomberg for social media purposes, and it is confirmed that we will be hearing from the previously absent er up till now absent, Mark Zuckerberg about Facebook's response to

this data breach and their path forward. Tesla maybe the poster child for this era, a company that burns through cash. It has promise of technological prowess that has excited the imaginations of many out there. The true story of this company, however, may lie with its credit, And here to join us is Joel Lovington, Senior credit analyst for Bloomberg Intelligence. You've been digging into Tesla's credit. An interesting concept, this company borrowing to burn cash. Um, This perhaps is the true

story and what is it telling us? Well, I think what it's telling us is that the company will continue to invest much like an Amazon did in trying to build out its optionality. And as it does that, it needs both costs financing and that's becoming more and more challenging, which will make their drivers difficult and will also make the ability to for that for their bonds to perform. Well, so what kind of collateral would be valuable to an

investor here? Well, everybody loves receivables and uh, and it has a tremendous brand name, and so I think that's the concern is that, Uh, this past summer they issued a billion aid of debt which is unsecure, and as that bond has lagged, it makes it harder to finance. So a cheaper way of doing it would be secured debt, which would prime the current debt. In other words, it would push it down on the capital structure UH and

make it worth make it less valuable. Well, if it makes it less valuable, then what's the likelihood that, unless they get these issues resolved, that they can continue to go back to the market to borrow more money. Well, that's that's the chicken and the egg game. Obviously, they could go out and issue equity, it's an as if their equity has a low valuation on it, or they

can use convertibles. I think what's interesting is that what they said on their last call is that you know that they can they could see cash flow becoming much stronger over the next couple of years. And if they really believe that using something like bank debt makes a lot more sense than going out and issuing more unsecured debt or giving away your or giving away your equity. So Tesla is about eight and a half billion dollars of debt currently. They've burned through more than a billion

dollars per quarter to sustain itself. They've clearly had a lot of issues with respect to production snaff foods, UH. They are currently contemplating our shareholders are anyway awarding Elon Musk a two point six billion dollar compensation package. Just how much more do they have to borrow? And what happens if they can't? I mean, is that basically game over? Well, I don't think it will be a question of if they can or they can't. I think they will be

able to borrow. H they are fifty four billion dollar cap company. It becomes how will they finance and how much they'll need to finance? Lisa and I think at least our model that we have on the terminal shows that it should be about two and a half billion dollars that they would that they'll be cash negative this year. So if they want to keep their liquidity consistent, they would need to you know, issue about two and a half billion dollars worth of new debt. You know, it

doesn't bang. The question though, that if you are going to be asked to do a leverage buyout with a company like this or take it private, could you do

it based on the financials as they currently exist. That's a great question him and I think the short answer is no. The company at least again, like if the way that we look at it, if they financed that two and a half billion dollars shortfall this year with debt, they'll be levered at eleven times, so they already look like an extremely levered l b O. Bryan they going private, So I don't really think that would be a mechanism, Uh,

that would be doable in any way. So you talked about how it would be more attractive for them to issue in the bank debt spaces is the leveraged loan market, and I'm wondering, perhaps from Tesla's point of view, it's more attractive. What about from an investor's standpoint, would you recommend? And I know you can't recommend, so you're going to totally punt on this, but uh, you know, our invest

is adequately compensated. At what point are they adequately compensated with yield for buying something like that to finance this

cash burning car company. Sure? Well, what I would say is that if you look at the triple c um leverage loan market, UH, if you and you look at similar dates to what they have in terms of their five mon issue UH, those UH secured bank debt financings tend to run between a hundred and a hundred twenty five THESS points cheaper or tighter than what you would get in the unsecured market, and so that would be

the cost savings to the company. I think the other component of it it becomes that with bank debt you can repay it quickly. So if they do believe that they're going to be cashlow positive towards twenty nineteen, that would give them the optionality of paying down that debt without having any sort of call provision or feature in it, which is different than a bond, which again would if I was sending in the treasure re seat over at Tesla.

Those are the kinds of things that I would be thinking about in how to reduce the cost UH in terms of financing. That's gonna say would you would you be interested in reducing the cost of the two point six billion dollar compensation package that they're going to be voting on. Yeah, well, you know, I'm a credit guy. I have not. The credit guy says, no way, do you expect them to get downgraded because I think that they're rated in the single B area at this point. Yeah.

Let me just add on him that I hope that you, Lisa, and I can all get a compensation package similar to that. Thank you. But in terms of the ratings, I do think that there is a big risk that they get downgraded this year. They will not meet rader expectations. And the reason that that is important is because as a triple C bond, which is where the issue would go, those bonds at similar maturities trade about seventy basis points tight, seventy basis points wider than where the Tesla bond is.

That's worth about three points on a ninety two and a half dollar bond. Just try to frame what that risk might look like. Well done, Thanks very much for enlightening us. Joel Levington is our senior credit analyst for Bloomberg Intelligence, discussing the I don't know it's a debt picture, it seems it's another word at TESLA. New rules from the Department of a Labor having to do with tip sharing and this of course affecting the restaurant industry. Let's

bring in Ben Penn. He's a labor reporter for Bloomberg Law joining us from Arlington, Virginia. Ben just layout for people that are not familiar with, what is the current regulatory environment when it comes to tips and what does

the Labor Department have to say about this? Sure So, in two thousand and eleven, the Obama Department of Labor issued a regulation that stated what was what the department intended to be clarifying it's long standing policy that employees own the tips that they receive and that managers can't skim those tips. Now, what happened last December is the department issued a new rule proposal to reverse that two

thousand eleven rule. And that proposal, the intention behind it is to allow restaurants to uh impose tip sharing arrangements in which the front of house workers like servers and bartenders, who directly earned tips can share those tips with the backup house kitchen workers. UM. However, the issue that's really caused quite a bit of contention, is that the rule does not expressly forbid managers from taking apart in the tip pull themselves. And uh, that's uh, that's what's happening.

And uh, the of course this only the controversy only escalated. I reported less months that the Department had conducted an internal analysis showing that six D forty million dollars per year in tips could be transferred to businesses as a result of the rule, and that they deleted that that analysis from the proposal. And uh, now the next the next word is that I reported today is how they went about getting approval to do that. And basically what

you're reporting is that they didn't disclose certain data. Correct. Correct? They stated instead under the regulatory impact Analysis section of the rule that at this point the Department is unable to quantify the transfer costs to businesses and uh, the transfer costs from workers to businesses. And they asked the public input to inform the analysis that would be included in the final stage of the rule. And why do you believe or what have you learned about the background

as to why the Department of Labor would do this? Well,

there are certainly a number of interesting theories. I think what we do know for sure is what the Secretary of Labor, alex A. Costa, said less earlier this month when he was testifying on Capitol Hill, that he believes that the Department, even though it made an attempt to quantify the data at the proposed rule stage, that there were assumptions in that proposal that he disagreed with that he thought would be misleading to release to the public.

And uh, and that's why they felt instead it would be best to solicit public input that would then inform a more reliable estimate in the final rule. Of course, Um, there are plenty of pushback there saying that they saw a number. In fact, I had reported that the original estimates compiled internally projected it would be in the billions, before political leadership kept asking for new methodologies that gradually lessened the anticipated impact, and now as a report today,

down to six forty million. So, UM, they're getting accused now of you know, seeing the numbers that they don't like, wanting to hide that from the public. Um. And uh, so that you know, you take your pick of which is the more plausible theory. But I want to I want to just get your perspective on what the economic reason would be behind forcing employees in the service industry to share their tips and sort of why the Department

of Labor would want this. Sure, the Department of Labor and the Restaurant Association, which is a big supporter of this rule has uh they've both stated that what this would accomplish is it would improve the the workplace camaraderie because you have employees in the front of house and workers in the back of house who are all working, uh, you know, in a community to improve the customer experience, and why not allow everyone who plays a role in

that process to benefit from it? And uh, so that you know, that's the stated um benefit of the rule. Now where it gets interesting is that front of house workers do not make the full minimum wage. Typically they earn as low as two thirteen per hour provided that their tips combined with their hourly wage equal the full minimum wage of at least whereas workers in the back of house typically don't earn as much and uh they get pay the full minimum wage, but frequently not that

much more than it. So you know, this is another stated uh benefit of the rules, that this would allow cooks and dishwashers to make more money. And of course then the criticism is that why aren't the businesses themselves uh giving those workers a race so real quick. The opponents, I assume are the front office or the front of house service workers. Now, yeah, well, I think it really

depends on the on the business. I've heard that there there are some restaurant where workers would be happy to uh to take partner tipple at the back of house, of course, provided that they are paid a full minimum wage. And you know, in some states now that full minimum wage can be as high as getting close to fifteen dollars per hours, so they would still be able to

earn uh, you know, a decent take home pay. But you know, there are other places where they would feel that, especially if they felt that their managers were allowed to skim a portion of those tips, that this would you know, this would just force them to move on to a different restaurant. Ben Penn, thank you so much for being with us. Really fascinating great scoops. Ben Pen, labor reporter for Bloomberg Law, coming to us from Arlington, Virginia. Very controversial.

The idea of employees, usually in the service industry, having to share their tips with everybody. Sort of raises a question of what is the point of tips which were meant sensibly to compensate for the quality of that service. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.

It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.