Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
Every business day, we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moven news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. All right, I'm reading speaking of Bloomberg Intelligence, I'm reading some research here. It says most commodities are melting except for gold. What stops it? Let's go right to the person who wrote this stuff. Mike mcclooney covers all the
commodity stuff. He's a senior macro strategist for Bloomberg Intelligence. Mike, what are you thinking about these days in terms of the commodity space? What are you telling your clients? What are the conversations you're having with your clients about commodities?
Well, hello, Paul, I appreciate you reading that headline because it's something I like to re iterate periodically, particularly when it's relevant. Is typically historically over time, gold is the best performing commodity now, basically because it's not really a commodity. It's it's a store of value. It's a metal. I mean, you can store it on your body in terms of jewelry. But certainly lately it's been the key case. It's the
best performing command this year. It's up ten percent, and the average, the Bloomberg Commodi Index this year is down sixteen percent. And the key thing I like to ask myself is those are bodies in motion. And as a strategist, I say, okay, is it going to stay the same reverse or accelerate. I think it's more likely accelerate, particularly at some point if we get to a point where the FED pivots, it's going to happen. But that's the bottom line is we had this massive pump and commandis
last year and they're proving what they always do. Elastic supply demand makes commandies their worst enemy. It's the higher priced cure. As a farmers say, well, that's.
Interesting, though, I feel like we're a far bit away at least if you listen to J Powell on Friday from when we see the FED reverse course, I mean, talk me through the timeline there. When would you expect goal to start showing some outporfore? I mean, I guess it is showing out performance.
Right, that's the point. Goal's looking ahead, and that's a key point. They will probably not be cutting rates anytime soon, particularly in my view, until the stock market tells them to. And that's part of the lose lose for risk ads. There's then a high high connection and correlation between stock market bouncing this year, all this massive fiscal stimus and the FED hiking another one hundred basis points. They are
still on that hiking trajectory. Despite then you look over a commodities, what's the number one source of demand historically at least the last twenty years or so, is China demand estimate revisions heading lower in China are just getting started, so their key customers, their key export customers Europe, US and Europe are in these early days of just getting showing signs of what you expect from high interest rates jumping.
And then of course the leader of China, President z cozing up with Putin right before the war, so we see that tilt just get us out, and so that to me is this is early days. So I look at this is what's normally is potentially a very bear scenario for commodities, and you look at yourself so what's going to change is typically also you need a week dollar, and for the dollar to get week, we have a
major issue there. It's the hardest, you know, most expensive to short commodity currency in the planet, particularly if you look very compared versus the top top top commodities and I'm sorry economies in the planet China, Japan, and Germany, US is just a much higher rate. So that to me is basically a train wreck heading for commodities and for deflation.
So, Mike, I know you come from the land of the great American farmer. I wonder how the American farmers doing here. I'm looking at corn down thirty percent year to date, soybeans down eight percent year to date, wheat down twenty six percent year to date. How is the farmer doing these days?
They are crushing it, so it will price us down so much, oh well down from where they were. So corn right now the number one, as I'm going back next to next week and lesson I learned going and raised and having owned the farm in the corn belt, we plant soybe so we can plant corn. We plant corn because that's what we do and that's where we make our Money's world's most significant commoditybeans the plant corn that fit. It's a rotation because soybeans add nitrogen and
fertilizer to the soil and they're a legome. Corn takes it away. It's very nitro and expensive. It's a grass. It's just that rotation that the corn belt has crushed. But the bottom line is, partly because of this war in Europe, you've had prices well above their cost of productions and the cost of costs of production. For instance, anhydrous ammonia is collapsing, and so we're making a lot of money. It's just called profits. What a profits mean
for farmers production. So this year is probably gonna be close to the biggest production year ever for corn, just in the weather is not so great. And also what did they do with corn and soybeans in Argentina and I'm sorry in South America, but most noted in Brazil record production I mean off the charts. So this is just a normal lasticity of supplying demand in the area
of the commodites. We can bring on that supplying one year and the bottom line is are making a lot of money, and that means more supply, more production, and it means typically lower prices. But I'll just end with this. September is the worst monthly year for grains, typically buys a harvest, and that's how futures came about because it needed to start hedging, most knownly when they all try to sell at the same time.
And I've been looking at it. I've been I've been pulling out, pulling back a little bit our our commodity price for corn, and we're levels where we were in late twenty twenty, but those are substantially higher than where we were in previous to that. Talk me through, Mike's what's happening in wheat, because you know we have all this stuff with a grain deal in Turkey. Very interesting to see where you think this is going.
Also, so the significance of wheat is that was at the epicenter of what happened with Russia's I'm sorry, President Putin's invasion of Ukraine. But it's been in a straight downward trajectory since reaching that high last year, right around thirteen dollars a bushel. But typically what we does now it's back to a level that was kind of en during before. Because what happens is you can bring on rate supply rapidly, and it's the most widely grown agricultural
crop on almost every country will can grow wheat. Now, Ukraine was a big exporter US we explored over fifty five percent of our week. We grow less of it every day because it's so much easier to produce. It's basically considered a weed, and it's one commodity you never want to be long after it goes up. It's just the way it works because you're bringing on so we
it's been a good indicator. Right now it's around six dollars a bushel, and I view it's all going to continue to trend lower unless we get some kind of surprise out of that war, which means hopefully not but
something nuclear could do. But there's this is a situation similar to World War two for the grain, for the grain belt, corn belt which where I'm from, and that is prices and the war in Europe kept prices rather high, which meant US did very well, created more and more production and profited, and then it all collapsed when the war ended and we had way too much supply. That is the risk, and that's markets are looking ahead to.
That so real quick.
WTI crude oil going to switch gears here eighty dollars or barrel seems to found a little bit of a home here for a while.
Yes, it's happy, it's consolidating. Well, it's the same prices. I'll put this back into history. This price here was first traded in two thousand and seven. Imagine we said that about the stock market. Yet over that time period the PPIs of fifty percent. In terms of gold, here's one for you. It takes point zero four to two ounces of gold to buy one barrel of cruel. That's
the same price as nineteen thirty one. Cruel is the world's most auto correlated acid and has a lot of reason to continue trade lower after that big pump last year. Fifteen percent of all sales of evs and the world our automobiles are evs. And then course that supply out of the US. The biggest thing that's pressured crude all the last at least almost fifteen years is the US. We just create much more than we need, and with Canada are surplus every day. It's about four million barrels
a day of lick with fuels. So we can spell up the spr that's cheating Pasolium reserve in just a few months.
Interesting, all right, Mike always learned something with you. You put in soybeans the ducorn I learned that at That's new Mike mcglohone's senior macro strategist and Bloomberg's resident a farmer for Bloomberg Intelligence.
You're listening to the team Ken's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
The I field market looks like it might be heating up a little bit. Had a couple of filings late last week arm Holdings, the chip maker, and then the grocery delivery company Instacart.
So we want to talk about that deal.
Brian Lynch joints as she's head of market insight at Equity Zen. She joins us here, so brand talked to us about Instacart here. What do we learn from their IPO filing last week?
Yeah, thanks for having me. I think Instacart really painted a picture in that file of what companies are going to need to show if they want to have potentially a successful IPO. So this is a company that is growing. They grew transaction revenue thirty nine percent year over year. They're profitable with fifteen percent operating margins, which a lot of other players in the gig economy space that are public, like uber lyft Dash, you know, they all are not
presenting profitability yet. And this is both a brand that people recognize and a business model that people know, so definitely a strong one that could potentially open up the IPO market for others.
Well.
The interesting bit as well to me, and we were talking with this about this with our equity reporter Bailey Lipshits earlier, is that this company had been valued much much higher as of twenty twenty one, I believe thirty nine billion dollars according to pitchbook, And now you know the valuation here is going to be maybe seventy percent less. Talk to me about how investors can I get comfortable allowing this company or going along with the company's plans
to ibo here. How does this change the dialogue between the company and its existing investors.
Sure so, Instacart has already been priming its investors about this. So while they did raise that thirty nine billion dollar round in twenty twenty one, their internal valuations have gone as low as ten billion dollars now closer to thirteen billion. So this is for the equity that they're issuing to new employees or you know, new stock grants. That's the
valuation that they've given themselves. So internally at least they've accepted that haircut, and I think that's ultimately the tough pill that a lot of these venture backed companies are going to have to swallow. As we raised money at a crazy valuation in twenty twenty one, it's not where the market is anymore. And if we're going to raise capital and either the private or public markets, it's most
likely going to be at a discount. And I think investors understand that as well, just given where multiples are. With a case of instacart, you have Dash as a public market competitor. That's a pretty good comp that helps from a valuation perspective.
So speaking of DoorDash brand, I mean this has become a crowded space really since the pandemic, as this market's really developed and evolved. Where does instacart kind of position itself in terms of its competition, whether it is DoorDash or Uber Eats or Amazon and all the type of thing.
Yeah, so they're by far the market leader. Both uber and DoorDash have less than one percent of the grocery market, and it's a market that they're aggressively pursuing, but they still are not big players in it. When you look at all of the grocery players, instackcart has partnerships with over eighty five percent of them, and this is a one point one trillion dollar market. Largest retail market is grocery, so it's a huge market where they are already the leaders.
So there is a lot of competition, but they are one foot ahead. But to your point, it's not just these other kind of gig economy players they're up against. They're up against Amazon Fresh, They're up against Walmart, Grocery and other players that you have a lot more resources just from being bigger companies. So there is a lot of competition.
Yeah, does that competition scare would be investors in this space at all? Because you know, you think of Amazon coming into any space and it's just sort of you know, that has the potential to be transformative, even if they've struggled a little bit with their with expanding their grocery footprint.
Yeah, so they got a strong vote of confidence by Pepsi, who's investing one hundred and seventy five million in this IPO and a lot of the thesis or you know, the bulk that they see is around the advertising piece of instacarts business. So about thirty percent of their revenue comes from advertising. So when they highlight different products you know, on their marketplace to users, and this actually helps diversify their revenue stream in ways that you know, some of
these other players haven't done yet. And it's also the piece of their business that is driving their profitability. So that's kind of a unique or you know, a strong point that they have now that investors have found compelling.
Growth has slowed a little bit for this company. Is that just a post pandemic kind of evening out of this marketplace in terms of number of subscribers in terms of that metric.
Yeah, in terms of I would say they haven't saturated the market fully, but you know, they did see such growth during the pandemic that it's probably more about activation. So of these customers you have who have used instacart, how do you get people, you know, more captive on the platform. They haven't admitted and understand that it's not going to be onlinely for every customer. People will still be going to stores. So it's more about you know,
activating those customers and then just improving their margins. You know, amongst those who are transacting, so they have grown revenue, They've grown grown average cart size over the same period, So even if their customer base isn't growing, you know, their revenue is growing.
We saw as well, filing by ARM for its megalistic I believe it was a filing, but we uh, what threads are there here for you that you're starting to see evolve in the the IPO space, because I think there was a bit, a fair bit of hesitancy for a while, just given what had happened to IPOs in twenty twenty one, and now maybe we were turning around.
It looks like we're starting to turn around. This year has been the worst year for IPOs since two thousand and nine. We really haven't seen that many blockbuster names hit the market, and Instacart and ARM those will be the largest IPOs in the US since Rivian in twenty twenty one, So definitely starting to signify this turning tide, and ultimately you have over fourteen hundred unicorn tech companies sitting in the private markets, many of who have been
waiting for the right opportunity to have an exit. Their investors are ready for an exit. Their employees who maybe have got in some liquidity but are looking for you know, broader liquidity, are looking for an exit. And I think the fact that you know, while there's been some recent market volatility, you have the nastac up thirty percent, You've seen a few successful IPOs though not tech ipo is
like Kava oddity and can you hit the market. People are feeling a little bit more comfortable, like this may be the time if they're looking to exit this year.
I think for a lot of investers, I think for me, the thing that jumped out of me is, as Simone was mentioning earlier, the dramatic reduction in valuation. I think that's kind of been kind of a gating issue for a lot of these companies not tapping the public markets because they didn't want to take that big write down on valuation. Is the expectation that maybe Instacartal maybe opened the way for more companies to kind of bite the bullet if you will.
Absolutely, I think Instacart doing this and kind of taking it on the chin is going to open the door for others who realize it will become less taboo. Essentially, as more companies accept these valuation right downs, it becomes less of you know, a negative and just more reflection of how multiples have cracked. So I do think that they will make it easier for other companies doing this as well. You know, Klavio is another company, a marketing automation platform
that also filed their S one on Friday. Got a little lost in the Instacart news, but this is a company that raised at a nine and a half billion dollar valuation twenty twenty one, so they are likely to be one that is you know, trading down from those levels as well. So it's just kind of a reality for where we are in the market.
All right, Brian, thanks so much for joining us. I really appreciate getting your thoughts there. We're getting some IPO filing starting to hit the tape. Maybe get a little bit of a action in the fall here with the IPO market Brand Lynch, head of market insight at Equity Zen and again, you like to think maybe we're going get a little bit of deal activity once everybody comes back from the summer.
Yeah, i mean busy Friday, even though even though Klavio is not quite as large a company and likely will not be quite as large a company when Instacart.
Yeah, Instacart, you know, it's going to be a pretty big transaction. We're going to have all the big investment banks. So this deal is being led by Goldman Sachs, so it'll be certainly a deal that people will pay attention to. And there are some comps out there, as brand was mentioning, so see how that plays out.
You're listening to the tape cans are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and.
The Bloomberg Business App.
You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
I'm looking.
I mean, we're talking about Vinfest. You know what a crazy name that is. Story that is the exact opposite, might be Minnesota mining and manufacturing three m. You're talking industrial heartland, been around forever. I'm looking at this stock over the last five years, it's down ten percent on a compounded annual basis, where the S and P's up a little more than ten percent, so really underperformed the market.
But they're in the news today and we want to talk about three M. We want to talk about industrial America. What's happening out there? Brooks Southerland. She covers all that so well for us. She's a columns covering.
Industrials and deals for Bloomberg Opinion.
She joins us live here in our Bloomberg Interactive Brooker Studio. So three M, I guess the story today Brooke agrees to pay more than five point five billion dollars over combat earplugs.
Can you give us the background of this story? Sure?
So threems sold. They were dual ended earplugs to the US military through its Arrow Technology subsidiary which it acquired, and the idea was that on one side it was sort of block out everything, and the other would block out sort of immediate near term gunfire sounds that you could still hear the person sitting next to you, which obviously has a lot of appeal for the US military.
But the veterans have claimed that these airplugs did not in fact work and left them instead with hearing loss and tonightis and so this has been sort of a mushrooming legal challenge for three M. Veterans were increasingly winning bell weather trials at THREEM then made the move last summer to put the aerotechnology sublicidiary into bankruptcy as a means of sort of speeding up the resolution of those claims. Now, a judge earlier in June said you can't do that.
This is not a valid reorganization purpose, and you know, the company was appealing that, but it looked like a rocky road. We've seen J and J run into legal challenges with a similar ploy involving some of those talk claims for that company, and so it looks like the company three M is instead moving toward a settlement, which makes sense. I mean, this was really the only way that this probably was going to end for the company.
Now I understand that there are more issues the three AM space, But first, is this it for this specific issue? Is this likely to kind of settle all the claims around the ear plug issue?
So we don't know a lot of the details, and so Bloomberg News has reported on this Sunday that this was in the works. It's a tentative deal at this point. I think it'll be interesting to see what the actual details look like once we get the final paperwork. One of the things that's been reported is that this settlement would be paid out over five years, which is not what Wall Street was expecting. If you think about the
type of hearing loss we're talking talking about. If you, you know, lost your hearing because you were exposed to very loud gunfire, this is not something that plays out over time that we were sort of waiting to see happen, like you would with cancer coins. Okay, so I think analysts had been bracing for more sort of an upfront payment, So it wo'd be interesting to see what that actually
looks like. But you know, theoretically, I don't think they would be moving forward with something like this unless they thought it was really going to put this issue behind them. Now there will be sort of ramification down the road. I do think you have to worry about a dividend cut at three M just given the fact that they've also separately agreed to a twelve point five up to twelve point five billion dollar settlement. Regarding p Fast and drinking water, but that is not the end of their
p Fast liabilities by any stretch. And I think that dividend is just going to be under pressure.
He Yeah, the dividend you'll looking just about five point eight percent, So that might be that's some risk there.
For three M.
I mean, was this hearing were these hearing aid issues just from the left since f Afghanistan in Iraq from that time period or is it even before that.
I'm not sure exactly on the dates of the claims, but like I said, this has been sort of a mushrooming issue that has you.
Know, certain of stocks stocks up about three or four percent, So I guess the Marco's thinking maybe it would have been a bigger number.
Maybe sure, And so you know a lot of analysts have been bracing for something in the ten billion dollar range, and you know, I think the stock is up because quite frankly, any progress is good progress for three M on its legal issues. You know, the stock has lost more than fifty billion dollars in market values since CEO
mic Roman took over in twenty eighteen. Like you said, it's been a serious underperformer, and some of that has to do with execution issues, operational hiccups within the company, tougher industrial markets, but a lot of it has to do with these legal liabilities that have just been hanging over the company's head. And they're very open ended and nobody could really put a number on it. So the fact that we now have a number that we're talking about, I think is a relief to shareholders.
Yeah, can you talk to us a little bit about these PFEST obligations. There's one twelve plus billion dollars, but there may be more than that.
Sure, So the settlement that they've agreed to covers claims that Pfast polluted drinking water supplies, and that's with US public water systems.
But these are forever chemicals. They exist forever. You ingest them somehow and then they're bad.
So three M manufactured them for a range of products for years. They stopped making some of the most problematic compounds several decades ago, and then more recently have come out and said we're getting out of past altogether. But so we're talking about legacy manufacturing from years and years back. So the settlement involves drinking water claims, but then there are also potentially liabilities involving state attorney generals, potentially the EPA,
the military. Then there are also foreign governments to consider because three M has factories all over the world. So Barclay's analyst, Julian Mitchell has put some of these outstanding liabilities at about sixteen billion addition to the twelve point five billion that we've been talking about, and that does not include any sort of deals with the foreign government.
That's just us.
One of the biggest budgets is personal injury claims, property damage claims. They just brought in a very big lawyer or trying to bring in a big lawyer to help with some of those claims. He was the one who got the big tobacco settlement, and so I think we could still see some big, multi billion dollar settlements.
Brooke, you cover a lot of the big industrial companies. A lot of those companies are conglomerates and conglomerates. It seems like in time and time are in favor, some of the times are out of favor. I've pitched it both ways. As a banker, you know which way the winds are blowing. You have a fascinating column out on that. Where are we now with just conglomerates to investors like them, did they not like them? What's going on?
So it's interesting because we went through a moment during the pandemic where all of a sudden, diversity was an asset again because it was very helpful to not just be an aerospace company, for example, but even beyond that, you sort of had different markets were covering at different rates as we came out of the pandemic, and you actually heard a lot more companies talking about diversity as an asset, and that message is not resonating in the same way now that we're sort of on the other
side of that initial robust COVID comeback, and we're sort of seeing some market slow down, other markets being more robust, and diversity is becoming a liability again. Now there's not that many big diversified industrial conglomerates left just because so many have done breakups, spinoffs, what have you. Even three MS you know is planning to spin off its healthcare unit at the end of this year. But there are a couple and I think, you know, we may see them under more scrutiny.
Is this a cyclical sort of thing, because are there various times, you know, over when you look over periods of decades where it helps to be diversified because it helps insulate you from some risk, and then all of a sudden, you know, the market recovers and activists say get rid of your XYZ division.
It definitely is cyclical, and to your point, you know, it's one thing to argue that diversity is a liability, and then when times get tough and you're just an aerospace company, then the numbers don't look so great. But you know, I do think it goes in waves. And one of the comments that the industrials always make is if you look outside of manufacturing, look at finance, for example, some of the big banks are in a wide variety
of businesses. Look at the tech companies. Amazon will deliver goods to your front door, but then they also sell cloud computing services, and they own whole foods, and so there is you know a number of examples of conglomerate out there in the markets. And I think one of the ironic things is for all the times that this business structure has been pronounced dead, it actually has quite a lot of staying power and just reincarnates itself into sort of different visions.
What are you working on these days. What's the next cool thing coming out of your Bloomberg terminal?
Oh, well, I mean all kinds of things. But certainly, watching this diversity issue and how it plays out, I think will be really interesting. And we haven't really seen a lot of activists investors in the industrial sector for a while. The last big time I can remember somebody pushing for changes at an industrial conglomerate was in twenty nineteen with D. E. Shaw and Emerson Electrics, So it's really.
While and Emerson did do something.
They did break up, although that was not so much I don't know how much that was connected to the activist. They got a new CEO who had a lot of energy and a lot of vision for what he wanted this company to look like, and I think that was
sort of more the driving force in that case. But we really haven't seen that many activists in industrials, which is fascinating, And so I wonder if you know now that sort of the pendulum is swinging the other way on diversity, if we might diversity of businesses, if we might see, you know, some activists come out of the
woodwork and take a look at these companies. Honeywell, stock in particular has been under pressure since they announced a CEO change, and I think investors are just sort of waiting and watching to see what that new CEO of vim Wi Kapor might do with that mix of businesses. They're sort of the last remaining really big industrial conglomerate
that has not done a massive spin off. They spent off two smaller businesses in twenty eighteen, but we haven't seen the kind of full scale breakup we've seen elsewhere.
All Right, brook thanks so much for joining us. As always, Brooks Subland and Calumnists. She covers industrials and deals for Bloomberg Opinion. Joining us here on all things industrial, including Minnesota mining and manufacturing.
You're listening to the Team Cancer Live program, Bloomberg Markets weekdays at ten am Easter and on Bloomberg, the iHeartRadio app and the Bloomberg Business App, or listen on demand wherever you get your podcast.
Our next guest, I would say it just feels like consistently bullish on the state of California. Several weeks ago, we discussed San Francisco, and the numbers bear out a bullish outlook there. Today it's the city of Angels, Los Angeles. Matt Winker joins us. He is the founder of Bloomberg News. He is the editor emeritus right now of Bloomberg News,
joining us via zoom Matt. When I think LA, I think Hollywood, because I'm a former media analyst, and Hollywood's kind of on its backside these days with the actors on strike, the writers on strike. Tell us about what the numbers show you about the health of the LA economy.
Always great to be with you, and truth be told, it's not just Hollywood actors and screenwriters. At some point this year, you've had airports, shuttle drivers, boat captains, crane operators, sanitation workers, duty mechanics, custodians, longshoremen which handled, by the way, forty percent of US imports from Asia, and nurses and
school teachers all on strike. However, that pervasive perception of paralysis, if you like, is really belied by the reality that not only does Los Angeles still work, its ten largest publicly traded companies are number one in sales and employee growth among the same group of firms based in each of the ten most populated US cities now and for the foreseeable future. And what are we talking about The ten run the gamut from banks, financial services, insurance to
consumer discretionary staples and industrials healthcare. They're doing better as a group than any top ten companies in any of the top ten US cities.
Now, does this analysis that you've done here apply to having more people work from these firms in LA itself or is it just simply that these firms are based in LA they're successful. I guess I'm trying to connect to the home base of these companies and actually bringing benefits back for the city itself.
Okay, so that's a great question, And of course, none of this would be meaningful unless, as you query, all the people we're talking about are in LA proper and we are talking about employee growth within Los Angeles, not outside Los Angeles, inside Los Angeles. And there really is no city that comes close to this double digit sales
gain from its top ten firms. San Jose, by the way, is the closest firm at ten percent, and LA is way above that, and way above Chicago, Phoenix, Philadelphia, and Diego. They're all distant. Also, rans San Antonio and Dallas are going to have average revenue decline. So LA really is out front here and employee growth. It's the same story
all over again. So and you can see that, by the way, on the Bloomberg terminal, if you were to graph Los Angeles, for example, against the Russell three thousand, which is big and small companies alike publicly traded, the gap between the two has widened, maybe close to a record actually.
Right now, Hey, Matt, if I were to listen to the leaders of states like Florida and Texas, I would get a different narrative. It seems like that, Oh, everybody's leaving California the high taxes. That's not pro business. They're coming down here to lower no tax states. What's what is the data show you?
You could fit Florida, maybe a couple of them inside California.
Yep, without missing a being exactly you could fit you.
Could probably all of corporate Florida, all of corporate Florida inside of LA and not miss abeat. The point is that California is huge, all right, Let's be clear about this. So there's been a according to the Census, you know, three percent decline in population since twenty twenty in Los Angeles. Having said that California is thirty nine million people, Okay, that's at least ten million more than any other state. Texas is number two, and then corporate California dwarfs corporate anywhere,
Corporate Texas, Corporate New York, corporate Florida. You could fit any of those economies comfortably into California without so much as a bulge. That's the reality. And you know, look, George Orwell said this best. He said, you know, to see what is in front of one's nose needs a constant struggle. And that's really the reality for California, particularly
Los Angele is that it's a very diverse city. By the way, it's still got the largest manufacturing base that's five hundred thousand plus people of any city in the United States. So it's not only you know, a place where you have if you like Hollywood screenwriters, but you also have aerospace going back decades, and that's just a bigger footprint than anywhere else.
You know.
Interestingly, Los Angeles is one of those places that's struggling with these these empty office or not empty, but much more much high office buildings with very high vacancy rates, to the point that their owners are sometimes giving the keys back to the banks. Do you get any sense of how Los Angeles is going to tackle that problem. Is it any different than somewhere like San Francisco might be trying to tackle that problem.
Well, look, it's early days. We're talking about a peer really since the pandemic, which was unprecedented in our lifetime, So who's to say, you know, what kind of calamity this really is. Certainly in the short term it seems so. But look, one of the people that we have followed closely is a thirty three year old co founder and chief executive officer of a company called Relativity Space. It's an eight year old startup. Made the first three D
printed rocket to enter space. That's the one hundred and ten foot Tehran. One is the largest metal object three D printed. Okay, it's right in the backyard of Los Angeles. It's actually in Long Beach, but it's close enough, and their offices are in Los Angeles. And he'll tell you, speaking about downtown and everything else, that most of his friends are engineered, but he's friends with artists, people in fashion,
people in other industries. And that's the kind of innovation and mentality says that with take to do something as crazy as put a million people on Mars and I forgot to mention he's from Plano, Texas, right, Okay, he loves California. So be careful. You know what the prevailing narrative is, because this being Bloomberg, you look at the data, and, as our owner likes to say, you know, in God we trust, but everybody else bring data.
Hey, Matt, thanks so much for joining us.
Matt Winkler, he is the founder of Bloomberg News fascinating column on the great city of Los Angeles and how well it is doing economically.
At this point, you're listening to the tape.
Can's our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and.
The Bloomberg Business App.
You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Goldman is offloading a wealth unit to two hundred and forty billion dollar money manager. Shrinana Rojen reported that story. He joins us here in our Bloomberg Interactive Broker studio, shre what is Goldman doing here?
I thought they liked the wealth management business.
Well, they still like the wealth management business. But what they're doing here is another strategic flip flop, and we've seen a little bit of that over the course of the last twelve months. This is an ria investment advisory business that purchased in twenty nineteen for seven hundred and fifty million dollars. Goldman has a dominant presence when catering to the ultra rich, the ultra high net worth individuals.
No one does it better than Goldman. You know, people who have twenty five thirty fifty million dollars per account. The most affluent market is one where people could have a million dollar account on average. One point to one point three million dollar account is what they got when they purchased United Capital with about twenty two thousand clients. Four years in, they've realized that really is not where
they want to be. It has been a little bit of a drag on their profit pre tax margins as well, so they've decided to shed that. They're selling it to this two hundred and forty billion dollar wealth manager called Creative Planning, which is run by a very interesting gentleman by the name of Peter Muluk. But for Goldman What that means is you refocus your attention on the part of the business that you're really good at, which is
serving the ultra rich. It mirrors some of their stumbles with consumer banking, which is something we've spoken about a lot over the course of the last year. Again another way to expand beyond their core roots and go into
the retail banking markets. And in many ways, I think it's fair to call it an attempt that flopped, and they're getting out of much of that through trying to sell off its credit cards businesses, trying to sell off the installment lender, shutting off its lending platform for consumers.
All that they've left is that Marcus Savings business, which by the way, is very successful, is a big benefit to Goldman because it doesn't mind accumulating deposits that way because what it has to pay out on that is less than what it has to pay out when it has to raise my from the market, so that they will stick with. But pretty much every other vestige of their consumer banking for a is either being you know, chucked overboard or in the process of being chucked overboard.
Well, yeah, so this was purchased United Capital. This RII was purchased for seven hundred and fifty million dollars back in twenty nineteen. Is that where does that seven hundred fifty million dollars go.
That's a good question because when Goldman announced the deal, which came a little bit after our story a few minutes back, they did confirm the sale of this business, they didn't give us a price, so we don't know what price this platform fetched. But they do have an important line in their press release that says when this deal closes, which they expect by the end of the fourth quarter, there will be a gain. There will be
an accounting gain. That doesn't necessarily mean that the buyer is paying more than seven hundred and fifty million dollars, But the way with most of these transactions is you buy something, you have some goodwill. That goodwill gets amortized, appreciates over the years. Relative to that, I think you will see an accounting gain. And I think that's what they're signating at rather than necessarily telling us that this is something where they will get in excess of seven to fifty million.
Sure, the beginning of this discussion, you characterize this deals perhaps a flip flop. Investors don't like flip flops. What's going on at the senior ranks of Goldman sacks here a lot of flip flopping in terms of what they own, what they don't own, strategies.
Two ways to look at it. Right, When David Solomon took over in October twenty eighteen, there were two key pillars, which is, expand the businesses you're really good at, grow earnings. There they benefited hugely benefited from that boom in trading and deal making set off by the pandemic and every
other dynamic that continued after that. But the other important pillar for David Solomon and his management team was to try and improve the stock multiple, try and convince investors the stock is worth a lot more that their price to book creature, price earnings, whatever fancy technical metric you want to throw out there, deserves more. They haven't really succeeded in doing that. A lot of book value growth because of earning's growth, but not any success in convincing
investors that you can do the multiple growth. Maybe now that they've done a strategy pivot or have done the slip flop, there perhaps in the place where they want to be, and maybe investors come on board.
All right, Sre, thanks so much for joining us. Glad you could join us here in studio. Shri Nana Rogen from Bloomberg News. He covers Goldman Sacks. He covers a big investment banks. He is all over Goldman Sachson, including some of the recent changes in strategy.
You're listening to the tape cats are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com.
And the Bloomberg Business App.
You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Whyant Electric Industries? It stocks up forty three percent? Looks like the company saying, hey, wait a minute, maybe we're not so much to blame. Maybe the there's a they're putting out a statement on. Maybe there's some other causes as and.
As Billy talking about it still down sixty seven percent this year.
Yep.
So it's interesting. So I have to get the latest here. But let's do that with an analyst who covers the bonds. Here covers the credit side of the utilities. Jamon Patel. He's a senior Fixed and Come strategist for Bloomberg Intelligence, joining us via zoom. Jamie, what do you know about what's happening here with Hawaiian Electric? Quite the turnaround here.
Well, you know.
What, we're we're really very much in the early days here, right, So you're gonna you've had allegations being filed, you've had some responses, you've had some findings. But over the next you know, weeks, months, as as a pg and Ek showed us, this sort of thing can take a really long time. There'll be more findings, there'll be more allegations and so on. But this latest one seeds to be
very interesting. Up until we you know this, this particular statement that came out from the company, Hawaiian Electric had really not mentioned anything about de energizing its lines. In fact, it said that it didn't de energize its lines simply because they were concerned about emergency usage hospitals, et cetera that would you know, be damaged obviously if if the
if the powers turned off. But today they came out with a statement saying that the first fire, the one that occurred in the morning, had been contained and then according to the Maui Department of Fire, it had been extinguished. Then the second fire, which was the one that I believe created most of the damage, didn't really start to about six hours later, and they apparently, or a little bit more than six hours they had de energized their lines,
presumably because of the first fire. So at the end of the day, it really depends upon the findings that come out of the next few weeks and months, what the courts decide, uh, and then how that liability is is apportioned.
All right, So just the Bloomberg reporting here, Hawaii utility source, after pointing blame for the fire at the county Hawaiian Electric says power lines de energized before the fire.
Yeah, And I guess the the interesting bit is there there is that they're sort of drawing this line this was not a continuation of the first fire, but rather a second fire.
And of course, yeah, exactly exactly.
I think I think what they you know, what, what the litigants, maybe not the county so much, but certainly the litigants will will try to claim and try.
To prove is that the first the first fire.
Had not been extinguished and and had eventually led to the second fire. If that's the case, then the question becomes, well, is is Maui County, through the Department of Fire liable at the end of the day, I you know, and and in addition to all this, I think you sort of have to kind of take a step back, you so you know, what's going to affect the bonds uh, and and the equity, which is you know, where where
we'd started this. The whole question depends upon how much the liability is, how much h E is is determined to be responsible for, how much of it will they share?
Uh?
And then once that's determined, will that be tax deductible for the company, because that obviously reduces the overall.
Liability, And then where.
The the regulators will allow them to recover that liability as well as the obviously the restoration costs that they have to go through through rates. If they don't, that's you know, obviously not good for the bonds and and certainly not good for the equity.
So, Jamie, what has the company done to date to maybe from a balance sheet perspective, to prepare for, you know, maybe some some downside scenarios.
Well, so far they've they've you know, there's not much they can do on the balance sheet side, but they.
Have tried to shore up their liquidity.
They drew down the two revolvers that they have, one for one hundred and seventy million up at the parent and then two hundred million down at the intermediate parent Hawaiian Electric Company. So that plus any dividends that may come up from American Savings Bank and any cash that they have on hand, will hopefully take them through the restoration period through to the end of the year so that they can they can get their power up and running to all the all the customers that don't have it.
At this point, I'm looking at bonds of Hawaiian Electric Do in December twenty twenty eight. It looks like they're training around eighty six cents on the dollar. How should we interpret that, jaymen? How dire are things for the company with respect to its credit worthiness?
So you have to sort of differentiate between the bonds up at the parent level and then the intermediate holding company and down at the utilities the parent level bonds have, you know, and this is sort of what differentiates Hawaiian Electric from PG and E pgn E had just the electric utility as its only subsidiary. Hawaiian Electric has American Savings Bank as a separate subsidiary through which they can upstream dividends in the normal course of business to continue
to service their debt. Down at the utility level, you don't have that. Everything is purely dependent upon the earnings at the utility in terms of the ability to service debt. But I think you know, we haven't seen the bonds move as much today as certainly not as much as the share prices. I think you know two reasons for that. One is the liquidity most of these bonds are privately placed,
don't trade as much as you would expect. But two also the junk ratings on the bonds, right, and the bonds are going to trade in line with their ratings until there is a change those ratings.
So Jim.
And for these utilities, whether it's you know, you know the at in California that we saw several years ago or here in Hawaii, there's just a ton of risk that these utilities have in a world of climate change and more and more fires, some of which are caused by utility lines. Is there any way for them to ensure against that? Or if you're a creditor or you're a shareholder. You just have to assume this growing risk going forward.
Yeah.
So, I you know, most of the transmission assets that are owned by utilities, and those are the ones that are you know, generally the most susceptible, whether it's to hurricanes or to wildfires, are generally not in short, and the understanding there is that if they are damaged, regulators will allow the utility to recover through increased rates, recovery of those assets, and to rebuild those assets. Certainly, that's what we saw with Entergen New Orleans when when Katrina hit.
That's what we saw with CNP and and FP and L when when both those were hit by hurricanes. You know, it remains to be seen what's gonna happen over here.
At PG and E there wasn't the full recovery.
Because PGNU was found to be liable to to the significant extent. So I think I think utilities are not those boring UH investments that that they have traditionally been, you know, sort of buying and and put away. I think you've got more risk perhaps at at at individual utilities then at the holding company to the extent that the holding company owns more than one utility. Diversification is
probably the way to go. You have a utility that's operating in one jurisdiction, uh and in in different geographic localities as opposed to another. So when you've got multiple utilities, you've got a little bit of diversification that helps to prevent a hit up at the parent level and for the equity.
Yeah, that's interesting. And is PG and E is that the sort of situation that we really should see as indicative of how this might play out? Or do you think we could see some sort of answer as to who's liable, et cetera more quickly. And I'm sorry we have only about twenty seconds here.
So in terms of your question, is are we wondering how this is going to play out in relative to PG and E. So PG and E's you know, obviously you had a much bigger utility. The advantage that PG and E had as it came out of bankruptcy was it shared California primarily with two other solid utilities, investment
grade utilities. So California was able to set up this wildfire farm twenty billion dollars plus, which all of the utilities have had to contribute into, and will continue to contribute into, and will be at least partially be able to recover through rates. That's sort of I don't want to use the word subsidizes, but maybe that is the one that comes first to mind, subsidized PG and e's liabilities with the other two.
But of course it works all ways.
Right yep, all right, Jamie, thanks so much for joining us.
We really appreciate you getting some of your analysis here today, big news for Hawaiian Electric jam and Pateel, senior fixed income strategists for Bloomberg Intelligence, joining us from Bloomberg Princeton Campus.
Thanks for listening to the Bloomberg Markets podcasts. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio