Facebook’s Business Model Relies On Polarizing Fears: McNamee

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Roger McNamee, co founder Elevation Partners, also one of the leaders of the band Moon Alice, and he joins us here in our eleven three oh studios based in Menlo Park, California. Roger Pleasure, thanks for being here him. It is always fun to be on Bloomberg Radio. All right, are you addicted to the Internet. Well, I'm definitely addicted to social

media and my smartphone. In fact, the realization of that fact was one of those incredibly disapp pointing things where I went, oh, my gosh, you know, I think of myself as self disciplined. I think of myself this being fitness oriented and ah. The realization that that this thing was controlling my life was not my finest heart. When when was this? Uh? And I should also note that you're you know, you've got an iPad it in your

hands right now. I do, and in fact so I. I have spent thirty five years as an investor in the technology industry, and I've always been an early adopter, and I've always felt that technology was a thing, that it was a tool, but it was a tool that could make my life better in a lot of ways. And that has been consistently true. I mean, notwithstanding all of the aggravation. If you think thirty five years, you've

gone back, that's the very beginning of personal computers. And God knows a lot of the products along the way have delivered less than than their initial promise. The challenge that we have with internet platforms on smart phones is that, for the first time, we have a device in a smartphone that can really deliver any kind of content more or less anywhere, Lucien, every moment that you're awake, and you know, like everyone else, I did not anticipate how

that was going to change my life. I mean, the good parts were obvious immediately. The dark side became clear, only, shall we say, with a lag, and sadly that leg was well passed the point at which I was largely unable to modify my behavior. So, Roger, you are an early investor with both Google and Facebook, and you've been writing columns basically bashing them for the past years, so basically saying that Facebook and Google threatened public health and democracy.

I invested early in Google and Facebook. Now they terrify me. Have you heard any response from me there of the company?

I have not. And so the important thing to understand is that before I went public on this, I spent four months appealing to Facebook directly, starting with Mark Zuckerberg and Cheryl Sandberg and then working with other executives that they had delegated to deal with this, beginning in October before the election UH, and accelerating dramatically on November nine, where I tried for four months as a friend of the firm to persuade them that I thought that the

things that we were seeing with respect to Brexit, with respect to the U S election, with respect to UM firm, financial firms using Facebook tools to discriminate in housing, UH, some of the things related to Black Lives Matter, some of things that were going on overseas, that I thought all of those things had a common route, which was to say that the business model of Facebook, the advertising business model and the way the algorithms were set up

created um incentives for bad actors to use the platform, and that really terrified me. You know, I just have to say we did get Jana Partners and cal Stars, the second biggest public pension in the US coming out putting a letter out appealing as investors in Apple, appealing that they study the effect of iPhones on children. Apple responds, We're fine, We're good. We have the protections that we

need and we're looking at it. I mean, since this behavior has gotten so rooted, is there any financial reason for Facebook, Google, or Apple to modify anything about their businesses? So that is a, I think a great question. Now I want to come a little bit to Apple's defense. Apple, as the the maker of the iPhone, has an unusual market power here, and to their credit, they've exercised that very constructively over the last year without any external stimuli.

The most important thing they did was they've upgraded the operating systems over the last few months and they eliminated auto play in Internet applications. This is really important for video on the Internet, and they essentially made it impossible for Facebook and Netflix to have AutoPlay b the default thing, and that was a very consumer friendly thing. They've also been very good at enabling things like ad blockers and

tracking blockers to protect your privacy. There's a lot more Apple can do, and I welcome shareholders taking a role here. I do think shareholder activism is going to matter a lot because I'm very concerned that there is no appetite for regulation of this in the United States. And realistically, we're so early in the process of educating consumers about what's going on that it's going to take years. And you know, we have an election coming up in November.

There will for sure be massive attempts to manipulate, just as there were in probably coming from people both inside the US and outside, left right center, all over the place. I mean, essentially, the Russians showed you that you can use those tools to produce the outcome of your dreams. And we're going to see a lot of people try. Many of them will fail, but we're going to see

a lot of people try. Because it is inherent in the design of Facebook that the way they talk about bringing people together, but in fact what the product does is it it polarizes. It basically tries to um in order to service its business models. Business models based on advertising. Advertising is based on engagement. Engagement is based on emotion. The emotions that cause the highest engagement are the ones we call the lizard brain emotions, things like fear and anger.

And the problem with fear and anger, obviously, is that they're asymmetric, and people who want to do harm can use fear and anger a lot more effectively than people want to do good. And I first observed that during Brexit, So when the UK was voting whether to leave the European Union, there was the campaign to leave was based

on two kind of outrageous emotional appeals. One they were going to take all the savings and bail out the National Health Service, and the one they really focused on was terrifying people about the role that immigrants were playing in the economy and in the culture. And the leave or Sorry the Remain campaign the other side, had a very sedate kind of, you know, stay the course, unemotional appeal.

They were doomed. And we don't know exactly, but we suspect that the economic advantage to the leave campaign of using products like Facebook was roughly twenty to one. That is, if you had a negative you know, tear it down kind of thing. I think that appealed to anger and fear. You get roughly twenty times the reach for every dollar you invest, and that is a prohibitive advantage. And it's

a symmetric. There is nothing that the people with the positive campaign can do because Facebook isn't structured to emphasize the positive, is structured to emphasize the negative. That's a choice. Real quick twenty seconds. Do you still own any steak in Google and Facebook? I do own a steak in Facebook because I'm trying to help them get this right. I want to work with them. But would you sell it if they didn't do it right eventually? Yes, of course, but I hold hope. I mean, I think these are

smart people. I think they're good people. I don't think they intended to do this. Roger mcnameee, thank you so much for joining us. Always always a pleasure speaking with you. Roger McNamee is co founder of Elevation Partners in Menlo Park, California. He's also in a band, Muna Alice. He's got the callouses on his fingers to show it. We were going to ask him to freestyle and he was prepared, So maybe the rest of the show will be just that, thank you so much for joining us. Tesla the company

that continues to defy calls for its demise. Tesla is burning through about a billion dollars of cash each quarter, and now it's having trouble meeting its goals with respect to production meeting it's probably going to have to raise more money. Here with us to talk about its debt profile and how it might meet its financing needs is Joel Levington, senior credit analyst for Bloomberg Intelligence who joins us at our eleven three oh studios. Joel, Tesla has

already issued debt. It has fallen in price with yields rising since issue ends. What are its options at this point for raising money in the debt market? Sure, well, I think they have a few options. They've issued both senior unsecured notes. They can always go back to that market. UH. To me, I think they would be smarter to use a convertible instrument. They have several UH convertible bonds that

are outstanding. Mainly because at this point in time, when cash flow is weak, to put on a fixed layer of interest EXPANSE on top of that UH really puts extra pressure on the on the P and L, and also on the balance sheet. So does this also include the depth that was incurred by the purchase of Solar City. That's exactly right. And one of the interesting things about how the rating agencies look at Tesla is that none of that Solar City debt is guaranteed, so essentially Tesla

could walk away from it if they chose to. But the rating agencies included in all their calculations as if they would never walk away from it. Uh. I find that to be interesting simply because the Solar City bonds, like you get a twenty nineteen Solar City bond at about five and a half percent, not all that different than the seven year bond UH the Tesla bond that is in the index, So clearly there's some liquidity there, but you're also cutting down your term risk by about

seven years. So I'm looking right now at Tesla bonds, the ones that are due in August, currently yielding about six percent, priced under don any six cents on the dollar on the dollar, and I have to wonder, um, this is well below other companies in the high yeal bond market as far as the price goes higher yield UM our bon us is going to buy this. I mean, honestly, Tesla has not proven that they can be profitable or come through on its promises. Right, Well, investors will buy

it because they did buy it. They did buy it, and they they punished for it, and they haven't punished for it. I think the thing is is that you know that the company is very polarizing. People either feel very strongly that it's gonna change the world and you know, like that would be great if it doesn't. Other people feel like it's miserable and will never achieve its goals, and a senior unsecured piece of paper doesn't really work

for either of those cases. If you are feeling strong about the company, that's a place where you're saying, I should be bullish and that like look to clip a five point three percent coupon. I should be in the equity. If you feel very against the company, then there then you wouldn't be in the bonds or the or the equity. Right.

So basically you're getting none of the upside with the bond and all of the downside risk with the senior unsecured bond, whereas convertible you kind of are mixing the two, you're giving them financing. You're not diluding shareholders, but you're also getting some steak in the potential upside um. So you're saying that it's likely or it would be appropriate

for Tesla to look at convertible bonds for financing. Does this mean that the unsecured bond market is I don't want to say close to them, but only available to them if they're willing to pay up a lot more than they did last time around. Right, well, as you as you can see now that their bonds are you know, somewhere about five and three quarters to six percent, so they could issue new bonds. I don't think that would be a problem issuing more unsecured bonds if they wanted to.

I just think strategically it doesn't make a lot of sense to go that route, especially when you're equity price is so high. Now is the time to you know, like worry about getting your business operations together as opposed to layer layering in additional financial risk through an unsecured issue. I understand that they've got what about four hundred and eighteen million that in bond principle that is due this year.

That's right, and at least based on my math, it looks like they'll be free cash flow negative by about a billion eight. So, you know, like if they went back to the market for somewhere between two and two and a half billion dollars this year, I wouldn't be unsurprised. Wait, just back up. So in other words, they're going to be negative. They're going to earn negative one point eight

billion dollars this year. In other words, their their capital expenditure should be somewhere in the three three three point two billion dollars, or their cash flow should be you know, about a billion four. So that would give you about negative a billion eight, which is not that surprising for

a company that's in a rapid growth mode. But companies in rapid growth modes really shouldn't be playing with unsecured debt or or you know, and in either case, whether you go to a senior secured piece of paper that will prime your bond that's outstanding that's in the Bloomberg Barkley's index, or alternatively, if you're doing more converts, uh, you know, like that would be a kind of along

the lines where you're getting a lower coupon issue. If TESLA lower to issue a two point two billion dollar convertible bond offering. That would be a massive, massive convertible issuance. Do you anticipate that they could do the whole thing

in the convertible bond? They might, And you know, I would say that's something that's interesting if you look back at the past issue once as the stock has actually gone up when they've issued convertible debt, the stock has actually gone up because there's the liquidity fear that's in there. That's that's bakeing into Tesla. Right, it's a it's a

very hit or hit or miss. You're either going to have a moon shot and it's going to be unbelievably awesome, or you have a heavy financial risk so that the stock market is actually approved of them issuing converts. Well, I mean liquidity risk saying basically, they're burning through cash. They're not gonna be able to keep in business if they can't raise money. So if they and raise money without diluting shareholders and without incurring huge interest payments, that's

a good thing. That's true. Well, there you go. I don't know where to go with this except that they're going to have to raise some money pretty quickly, I would think. So, you know, if what's the clock on this four and eighteen million repayment, Well, the four eighteen million dollars shouldn't be that troubling to them. They do. They did have three and a half billion dollars of

cash on the on the balance sheet September. It's really more of you know, like, if I'm thinking more strategically out for a couple of years, how do I need to finance this company until it moves going from a cash user, a high growth company, cash burner, into more of a cash cow. They kind of get that model three out there in the public. Thanks very much for joining us. Joel Levington is our senior credit analyst for

Bloomberg Intelligence telling us all about Tesla. We consult Ira Jersey are interest rate strategist for Bloomberg Intelligence for details about the economy and interest rates. Ira. I want you to begin, if you can, all the way at the back end of your latest report, because I found it very interesting about household growth in the United States and if you could enlighten us a little bit about what

has happened to household growth and who's actually living at home. Yeah, so household growth has been very slow since the sense of global financial crisis a couple of almost a decade ago now and um and one of the big reasons for that. So so we always focus on retirees, and we know that there's an aging population in general, but that's not necessarily what's holding household growth back. What's holding

household growth back is young workers. That these are people to thirty four who are living at home in the greatest numbers ever. And also as a percentage of that age group, Uh, it's now six of that age group living at home, when it used to be and historically

between eight and eleven percent. So you're talking about more young workers living at home and that has major impacts on the economy because these folks aren't buying houses, they're not renting apartments, they're not buying refrigerators, they're not getting household services. They're basically using the household services um for for their parents at their parents house. So so that is a constraint on growth right now. And you know that's kind of this fiscal situation. That's the kind of

thing monetary policy can't fix. So ira, can you bring that sort of reality into into the market right now and what we're seeing with ten uere yields trying to break out of this two point six threshold that a lot of people say is sort of the tipping point. How does this relate, Well, it's not necessarily relating to you know, the mood that we're seeing today, or some of the um UH or or some of the kind

of day to day moves. But I think it shows that one of the reasons why inflation has been and continues to be a bit lower than um people would like it to be. It's just that there's a various socio economic and demographic factors that are driving inflation to be somewhat lower. Now that being said, when you look at things like what's going on with oil prices recently UM and how high they're going, that's increased helping increase inflation expectations at least at the headline level, even even

if core inflation isn't necessarily going up. So you look at what's happened, UM just in the last couple of months, the last couple of weeks, I should say, and you've seen a good you know, ten basis point move in things like five year inflation break even so so the Marcus expectation of what inflation is going to average over the next five years, and that's coincided quite closely with the uptick and oil prices. So I think that's a that's one of the several drivers of yields in the

near term. So the idea that there are all of these younger people living at home, is there any evidence out there that anything would push them out of their parents basements and into their own homes or is it just going to be a new a new reality. Yeah, that's a good question. UM. I think for that for the time being, it has to be. It's probably a new reality. I think part of it ends up being what happens when, um, you do get more retirees actually

retiring and creating new new jobs. I think wage pressures and wage growth has to pick up. I think once you see a significant amount of wage growth, UM, you can wind up seeing, um, some of these people move out of their their parents homes. I think a big part of it is is that that age group now as a as a share of income compared to people twenty years older than them, their wages are lower than

they have been UM historically speaking. So I think that has to catch up, So it's kind of this distribution of of of wages, if you will, that winds up mattering somewhat, I think for the market today, though, you know, we're looking at things like monetary policy overseas, so things like the Bank of Japan hinting that might scale back

their purchases. UH. The e c B we know is Star is already starting to um to buy less bonds out there, and that's a non trivial reason why we we're seeing some of today's market action with you know, thirty year yields back up six basis points, which is a relatively substantial moves these days. So if if a client were to call and say, why is there this big sell off at the long end, why are we

down one and eight thirty seconds? What's up at that two point eight seven yield on the thirty year, what's your answer? Yeah, that's all about the the Bank of Japan action firstly, and then secondly, just um, you know, we we saw the most recent take ups and the last two basis points in um in yield moves higher after we got the Jolts job opening report at UH just a couple of minutes ago, and that showed that labor market tightness seems to still be uh still be

the case. So you have, you know, between monetary policy actions, so basically less bond buying globally by central banks, and then on top of that an economy that at worst is in a steady state of of modest improvement. All of those things should lead for to somewhat better some of better inflation and UH and growth outcomes, and that

should mean somewhat higher yields. I think one of the things that's that's not likely to persist is the curve stepening, because I do think that eventually the Federal reserve um if if this continues and we start to get higher inflation, the Federal reserve will actually um meet the dot plot, which the market isn't yet pricing. And because of that, you wind up with with today's stepening probably being on wound, and actually additional flattening to two occur later in the year.

In other words, we're going to get faster rate hikes in response. Yeah, well, faster rate hikes than the market is currently pricing. The market is still only pricing about two rate hikes, and the Fed still thinks that they're going to go three. So if the FED worre to go three um, that would mean that that the market would have to catch up to the FED. Jersey thank you so much for joining us. Always a pleasure speaking with you. Jersey is chief US interest rate strategist for

Bloomberg Intelligence. Now that Congress has passed a tax bill, are they going to move on to infrastructure and what is needed with respect to the infrastructure of the United States. Here to talk about that with us is Susan's Story, President and chief executive officer of American Waterworks Company, which is based in for Key, New Jersey. It is the largest publicly traded water utility in the country. Susan, thank you so much for joining us. I just want to

start with asking you about the tax plan. UM. I know that you had noted that the extra money that you get you will put back into your infrastructure. Do you view this as possibly being a little bit of an infrastructure plan in the fact that you get more money. Well, thank you, Lisa, first of all for the invitation to participate, and absolutely the interesting thing for regulated utilities is that this tax cuts and Job Acts actually is an infrastructure plan.

And let me explain that just quickly. In the regulatory environment. Whenever we pay taxes, if it's prudently incurred, we get a pass through to customers dollar for dollar. So the less taxes we pay, the more money then that goes back to our customers, the less they have to pay. So for every dollar of O and M we saved, like taxes or interest, we get to put eight dollars of infrastructure in the ground at no impact on the

customer bills. So when you have decades needs of capital and you have a situation where you can take those O M dollars and translate those into capital investment, it's good for everybody. Um, susan story, And what if you could just give us an update on any of the active rate cases that you are currently involved And I know that at least you were focused on Pennsylvania, New Jersey and Missouri. Maybe just give us an update if

you can. Yes, sure, So Pennsylvania was resolved at the end of we are currently in rate cases in New Jersey and Missouri and looking to hopefully have those resolved this year. And will that effect or is that part of your five year strategic plan? I understand that you're going to be spending about eight billion dollars. So our capital plan is based on the needs of the business, and in many of our states we have what's called future test years where they look at the capital plans

up front. But as long as we can show that we need to make this investment, which we do. You know, in this country, of water pipe is near the end of life. Now, our replacement rate is about twice as good as a national average. But even we are at a replacement of equal to every one d and twenty years. So when it comes to pipes, plants, pumps, and cyber there's a tremendous need for capital investment, and this tax act is going to allow was to do more of

that while keeping the customer bills low. Susan, what would you say to people who say that the tax plan as drafted, the fact that it will likely add trillions of dollars to the deficit, or more than a trillion dollars I should say, to the deficit over the next ten years, that that actually reduces the chance that Congress is going to pass or or really make progress on a real, true infrastructure bill. Are you concerned about that? Do you feel like this is maybe one step forward,

two steps back? You know that that's a great question, Lisa, and I think that you know, I've mentioned for regulated utilities that they're wanting the same. I do think for the country that we need an infrastructure package that fully

leverages private investment and also partners with public entities. And one of the things Price waterhouse Coopers looked at just the water utility industry, and what they found is if you look at public water, which is of all water, for example, that if that we could, by doing some simple stuff, unleash forty three to sixty three billion dollars

in private money, and that if under Wastewater fifteen. And these are things like when a municipality decides to sell a system, if they have any tax um uh bonds that were tax exempt, they have to pay those off before they can sell their system. They can't even keep those. So there's certain things that we think an infrastructure bill can contain that will further leverage private money and not

require that the federal government fund the entire cost. But now you concerned that the prospects for that kind of bill are getting dimmer given the passage of the tax legislation. I think it's going to be interesting. Given your comment about the projections for the deficit and how that will play out. I do know, however, that both sides of the I'll understand that we have an infrastructure problem in this country. I think how what the solutions look like

will be impacted by that. But I hope for the sake of the country that we can come together and do something to incentivize the construction of more roads and bridges and the replacement of water and wastewater and other infrastructure that we so desperately need for the economy. One of the big winds I think for your company was the Right Patterson Base Air Force Base UH to take

over their their water, wastewater and the water facilities. How long does it usually take after a contract when for any changes in rates or predetermination of rates to take place PM That's a great question. So with Right Patterson UM, we are projected to take over operations in July of

this year, so typically after two years. As you just said, there's price redeterminations that if there are changes in laws, that if for example, if there's an environmental law that requires more costs, we can increase the amount of O and M. The tag changes will eventually over the life of these price reydeterminations bring those costs down, but that will allow us to do more capital upgrades on the military basis that we serve all thirteen of them across

the country. And just further, if you could speak about some of the natural disasters that the country has has been hit by in the last twelve months. You've been affected not only in California, but in Louisiana and other areas of the country. Give us an update if you can. That's exactly right. We are spread across the entire country, so typically when there's a natural disaster, it affects either

our regulated business or our market based business. Our focus is on building resilience systems that can withstand hurricanes, ice storms, flooding, the fires in California, for example. So part of that infrastructure investment is on resiliency if critical assets. We've identified fifty critical assets that serve eight percent of our country, our customers across the country, and we have a plan

to ensure that we build resiliency. For example, a floodwall in a water plant in New Jersey that serves a million people. We've just finished a sixty five million dollar project that we're protected against a five hundred year flood because we had three one hundred year floods in the period of seven years. So the issue of resiliency of our system is a critical one and again a reason that we have to get serious about infrastructure investment in

this country. Just real quick, Susan. When when analysts come on our investors who invest in the stock market come on our show, they always talk about utilities as being a bond proxy, and utilities are falling now in the stock market is a response to falling bond prices rising yields? Does that frustrate you? We know, it's interesting and and

we did fall in eight k in December. That said, because we had offered guidance on December eleventh that we need to re look at everything that the Tax Act will do to make sure that we you know, UM can at our year end call a firm not a firm, or any changes we need to. But with that said, in the past, you know, we've enjoyed an EPs growth of seven to ten percent, and we have had a dividend yield and a dividend increase that's been above ten um over a keger over the past five years. So

when you talk about a bond proxy. You're talking about a return that equivocates a bond and at list for American Water, we don't fit that profile. Thank you very much for being with us. Susan Story is the chief executive of American Water. Thanks for listening to the Bloomberg p m 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