Wall Street’s Shale Mania Is Like The First Dotcom Bubble

Texas and the Permian and Bakan geological regions. They have now put US total oil production ahead of Russia for the first time since You can credit technology, the shale revolution, and lots of money with this advancement. Here to tell us more about it is Bethanie McClain, the author and contributing editor to Vanity Fair and the author of a new book entitled Saudi America, The Truth about Fracking and How It's Changing the World. Bethany, thank you very much

for coming in. Just start off by explaining to people what you learned as you made all of the investigations to do this book. Because there's been a lot of headlines about fracking, the shale revolution, the technology. What did you find out after you did all of your investigational work. So the thing that obsessed me, the question that obsessed me was how it could be true that fracking could be changing the world and it is. It's reshaping geopolitics.

You just saw the numbers you cited, but that the industry doesn't make money, that it's on this shaky financial footing, and how could both things be true at once? And so that's the question I set out to answer. I guess what I learned. I came to this broader realization that this whole concept of energy and dependence, which has been pushed by every president since the nineties seventies, is this exalted grand goal we needed to achieve, that it's somewhat of a of a fraud today. Um, it doesn't

make sense as a broad goal. I have to wonder. You wrote the first skeptical art goal about Enron back in two thousand one. Of course, Enron collapsed under accounting fraud. Is there something that is similar about the way that the shale story is being told today? It's an interesting question. I don't. I suppose there's a certain lack of transparency in in shale, but I think you can you can

figure it out if you delve into the details. I actually think it might be the opposite and that the problems with the industry are right there on the surface. It's pretty easy to tell that the industry doesn't make any money. It's just that it's not something we want to take into account as we think about it. So it's so interesting. We've been talking about this. They used to cover debt markets very very closely, and we were talking about just this explosion of shale debt that got

absolutely punished in two thousand two sixteen. Uh, And now people are saying, well, the existing companies are in good shape, because it was sort of, you know, this was like a sort of a sweep of all bad ones and the ones that are remaining are strong and healthy. Do you think that's true or do you think there's still is a lot of fragility. I think there's some truth to it. But the wipeout wasn't what it would have been because Wall Street was there. Wall Street remained willing

to finance these companies. Banks remained willing to restructure debt. Part of that has to do with the dynamics that are keeping the industry going, which is the flood of pension fund money into private equity firms and credit hedge funds, and the credit hedge funds then invested in the distress debt of these of these energy companies, so the money was still there, it didn't go away, And I think the the the final answer to what you just said

is that the industry still isn't making money. Um. The most recent analysis I saw was a Wall Street Journal analysis I think it was either the first or the second quarter of two thousand eighteen that only five companies produced positive cash flow. Energy companies that specialize in fracking. They're valued on how much acreage they have, right, how much acreage they have plus how much production they have, not on how profitable they are how did we get there?

So people have been willing to fund shale based on this belief that it's going to be profitable one day, and so in the absence of real profits, they've come up with other ways to value it, which has been multiples of acreage looking at production growth. To me, it's very reminiscent of the first dot com boom boom, when dot com companies were valued as a multiple of eyeballs.

Because in the absence of traditional measures of profitability, if you want to value things, you have to turn to non traditional and you have to find something that's positive, right, But that's enabled this whole mechanism to work. And it's too cynical to call it a daisy chain, but it's meant that you can build fat private equity, can fund a fracking company and take it public or sell it to an already public company, and everybody can make money.

But that extract money along the way, But that doesn't mean in the end that the industry is making money. The industry's net debt in was two hundred billion dollars. It's increase from two thous five This is according to some Columbia University professor's statistics that you cited in a recent story that you wrote for The Times. For the New York Times, I'm just wondering, can you fast forward

for us? What is the consequence of the fact that these private equity and private debt funds are financing and industry that is held up with great esteem from a policy perspective, but has not made any money. So I think there are two answers to that. One is a financial answer, and it worries me. Pension funds around the country are in dire shape. They in the absence of any returns in traditional fixed income markets. They've started putting

their money into private equity firms. If the returns aren't there at the end of the day, and if the daisy chain stops in the private equity portfolios, that's problematic for pension funds around around the country, and that's a

real issue given that they are underfunded anyway. I think the broader question, though, is sort of more of an existential one, even beyond the financial repercussions of this, which is that we're beating our chest about energy and dependence and how rate it is that we're now the biggest producer of oil, ahead of Russia and Saudi Arabia. But what does that really mean if there's a risk to production, if the capital dries up and energy is Energy is

the foundation of national security. World wars have been one and lass based on access to energy. It's incredibly important, and I don't like seeing short term, short term policy and the absence of long term thinking. Just to pick up on the figure, Lisa that you mentioned, the two billion dollars worth of debt that has been raised in order to support the fracking industry. Based on your research, would that two billion dollars be better served if it

was spent investigating new sources of renewable energy. That is a really hard question to answer, because I do think that unleashing our supply of oil and natural gas has had some positives. UM, it's given us leverage, it gives Europe leverage, and negotiating with Russia over its supply of natural gas. I think that natural gas is actually more real than oil is. Um it's it's more economically viable than producing oil is. And so there's some really good

things about this. But one other thing I was really struck by and doing this book, where the number of smart investors I talked to who are not investing in oil and gas anymore because the age of renewables is coming. The only question is when, and once we know the answer to when, the price of oil will go into a cyclical into a secular decline and never recover. That's

what happened with coal. And so for us to fall behind in the race to develop renewables is for us to look at the world as it is and not the world as it's going to be, and perhaps seed American leadership in the world of the future. Bethany McLean, thank you so much for coming in really fascinating. Bethany McLean is an author and contributing an editor at Vanity Fair. Her new book is Saudi America, The Truth about Fracking

and how It's Changing the World. And she was the one who wrote the first skeptical article about and Ron. I just want to bring you some breaking headlines Goldman Sacks confirming Stephen's share as chief financial officer, also saying that they are going to name John Waldron as president. This according to The Wall Street Journal. We will bring you more throughout the day as that unfold. Coming up Bloomberg Politics, Policy, power and Law. I'm Lisa Bramwitz along

up co host Pim Fox, and this is Bloomberg. Commercial Banking in the United States, particularly in the Northeastern regions, is our focus. And Don McCree is the vice chairman and the head of commercial banking for Citizens Financial Group. They're based in Providence, Rhode Island. But Don joins us here in our eleven three oh studios, Donn, I gotta ask your thirty year veteran of JP Morgan, Right, that's right, What what caused you? What is Citizens Bank? For a

lot of people don't know about Citizens Bank. They know about maybe the changes that went on inside the banking industry in general. But tell us about Since Bank and why you decided that this is where you want to hang your hat. So Citizens Bank has been around for a very long time. UH in recent years. It was part of Royal Bank of Scotland, big British bank, which actually experienced difficulty in the financial crisis. It ultimately resulted in Citizens Bank going public about four and a half

years ago. UM. When I looked at the situation at at citizens what I saw was an exciting opportunity to be part of a ground floor build of a brand new independent financial institution. UM. The strategy we've been employing, and the strategy that was exciting to me is a growth strategy. It's an expansion strategy in terms of client base. It's an opportunity to deploy what has been a very healthy level of capital UM and it really was an opportunity to provide a service level to clients that we

think is is quite different and quite differentiating. It's an interesting time to be in banking right now. I'm just thinking about yesterday's Global Financial Service Services Conference hosted by Barclays in New York, and it did create a lot of concern that perhaps there wouldn't be the same kind of loan growth going forward that there has been in the past, and this could be a headwind profitability. What's

your take on that. So, I think the topic of loan growth has been in the forefront for for several quarters and maybe several years now. Um, there's a lot of optimism coming off the tax cuts that the administration rolled out almost a year ago now, and a lot of expectation that loan growth would be quite robust. It's

it's been relatively benign. We we actually been growing much quicker on the loan line than most of the competition, and that's been a result of geographic expansion and client expansion, and you have to lower standards as a result. No, you know, we really haven't. And I think one of the things that every banker will always balance is that question of credit and structure and terms and loan growth. And we're we have a very disciplined process at the bank and we pass on a lot and and yet

we've been able to grow. So I think what you heard at of Barclays yesterday is a continuation of a theme which is a real question around how quickly, loans are gonna are going to continue to grow in the in the marketplace, speak about mergers and acquisitions and how companies face the issue of whether they're going to grow organically or whether they're going to make acquisitions, and also about the abundance or lack there of of suitable candidates

at a suitable value. So that's a incredibly uh interesting story for us. I was on one of your shows about six months ago talking about an acquisition that we did, which was a company called Western Reserve Partners, which is a middle market oriented mergers and acquisition firm. Uh and and just a baseline, are client base is about three quarters middle market private companies or maybe maybe maybe some uh a little bit less than that. UH and R M and A practice is really aimed at both the

private equity firms and those midsized companies. Now in the midsize company space, there is extremely robust M and A right now, and which where it really drives it is the opportunity to grow, as you say, expand someone's business by combining with a like trind company. But it's often a change of control transaction where a private family is

selling out of their ownership position. We see a very robust POPE pipeline in our business, and we in fact do a survey every year of CEOs of our client base, uh, and it's kind of spiked at the highest it's ever been in terms of desire to transact, buy and sell UM Now, M and A obviously takes a long time. It's it's it's a you know, often a year long process as a company prepares and then sells itself. But what we see in our in our business is a

lot of activity in our pipelines are quite strong. You said there, it's a lot of competition. And for your business, given the clients that you are targeting, who is your biggest competition it's everybody, uh, non banks, non banks and large banks firms in other words, because targeting think about loan funds, non non bank providers of loan capital UM. So it's like direct lending absolutely. And and you know, I've been in this business, as you guys said, for

thirt or five years. There has always been us competition UM and it comes in various forms and sizes um at at at different points in the cycle. But I think you can always combat competitive environments by providing high quality service and attention topliance. Is this time difference somehow, I don't. I really don't think so. I think I think what is a little bit um different UM is there is a lack of demand, as you said, for capital um in the form of loans across the board.

So so new money financing is has been running relatively low for many years now, So there's a supply and demand disequilibrium which is basically creating the more intense competitive environment. Speak if you count a little bit about the lending that you're doing, particularly when it comes to real estate. I note, for example, the chocolate factory in Mansfield in mass You've been loaning money also for affordable housing projects. Talk a little bit about that side of the business.

So our real estate businesses is a little over ten percent of our overall business right now. I was actually with real estate clients in Washington, d C. Yesterday. UM. Our approach to real estate is really twofold. One is, as you say, we do a lot of community lending around our community reinvestment activities, and that's a big part of every bank's activities. And then on our mainstream real

estate business. Our our approaches really to select very strong sponsors and very strong developers and travel with those developers across the country. So we've been expanding our real estate in different parts of the country and it's a business we we quite like. It's there's a little bit of pressure right now given tariffs and the cost of raw materials. But uh, the feedback I got, at least in the d C yesterday area yesterday was quite strong. Thank you

so much for being with us. We'll have to have you back in to talk about the confidence and why there hasn't been more demand for loans from the private sector. Don McCree, vice chairman and head of Commercial Biking, its Citizens Financial Group and Providence Rhode Island, but he made the trackdown here to New York and our eleven three oh studios here at Bloomberg and least Abramoy. It's along with my co host Pim Fox is his bomber markets.

The Turkish Central Bank raises overnight repo rates to pent in order to forestall a decline and the value of the Turkish lira. Here to tell us more about emerging market assets and the ramifications is Vincent Signerella, our global market strategist for Bloomberg. He joins us here in our eleven three oh studios, Vincent, it's always a pleasure to have you here. Is this going to be enough to forestall continued declines in value of the Turkish lyra? I mean,

come on, who's who's kidding? Who is it? This is window dressing now always a pleasure as well, Pim, Uh No, it's not so much window dressing. This is actually very calming for the markets. There was concerned that the central bank would back off under pressure from President Urdwan, who previously made a statement that race should be going down, that up and actually through the market. Really a curve

ball with that one. And then essentially, uh we had a consensus, a very loose consensus, for three fifty basis points. So this move to this level is calming for the moment. The real question is going to come in the future when inflation begins to pick up again. Will the central bank respond in the future, because which obviously sounds high to us, didn't sound high to me in the eighties. Yeah, but you know, I want to go exactly to what

you just said. What was that all about with everyone coming out and saying they should drop rates and then just hours minutes after that the central Bank came out and so that they were raising rights. I can't honestly go into what the President of Turkey was thinking at

the moment, into his mind. You can't no idea. All right, Well, what I do want to ask you about is how much is this a turning point or potential turning point for the entire complex of em currencies, Because we are seeing a rally today, for example, in the South African rand, which a lot of people were pointing to as suffering the contagion effects of the Turkish larra falling out of bed.

So is this sort of a sign in Turkey is taking its currency crisis seriously and perhaps people will start to be a little more confident with emerging markets or is that going too far? I think confidence is probably a little too far. I think it's definitely a pause. Um, Like you said, the czar is higher up one, but we're still seeing pressure around the Argentine pay so that's down one. Brazil is off the lows of the day,

but but still down three tents of a percent. But we're definitely seeing a little bit of pressure backing off that it came back on a touch after Trump's tweet that the Wall Street Journal had it wrong that we don't need to make a deal with China. China needs to make a deal with US, and and some are basically looking at this situation with the tariffs is hard to believe if you want to bring manufacturing jobs back to the United States that these are going to be

of a temporary nature. They need to be far longer and lasting, so that could continue to weigh and and potentially continue to weigh on e M. I think, Vincent, do you remember the movie Patent? Yeah, okay, you remember that scene where Omar Bradley, you know, he's arguing with George Patton and he says, you know, I can read a map when you look at what Turkey just did raising interest rates at the same time that they are now requiring companies in Turkey in order to transact all

of their business in Turkish lira. Doesn't this mean that if you want to borrow money in Turkey it now costs you a lot more. How does that help the underlying economy? Well, it really doesn't help the underlying economy in the short term. What what the hope is and this is, you know, if if you think back to the US and our inflation situation in the eighties. The hope is actually to slow the economy. I mean by

slowing the economy is slow inflation. The idea is you need to crush this very steep inflation every trend, even if it means to slow the economy down, because you can go back to lower rates to stimulate the economy in the future. I understand, how is that going to make it possible for these comp needs to repay their dollar denominated debts and how is that going to make it possible for Turkish banks to continue to operate if

they've extended all these loans to these Turkish companies. Well, with the currency improving, it does help the dollar denominated debt because the depreciation and the currency is what affected that that sovereign And actually, as you mentioned the corporations, that's a good point because it's the corporate debt that's the issue in Turkey, not as much as the sovereign situation. So the the local companies really did need a break with the currency in order to help repay that dollar debt.

The question is doesn't continue the line. Goldman Sactor has put out a piece They're looking at five and they say, this is the sixty one retracement from the highs of August. So if we don't get back below the levels of basically six double O and we continue to hold there, the markets are likely to try the upside again and put some pressure on the government. Vince, you're a former trader. You talk with a lot of traders. How many of them do you hear actually saying all I'm going into Turkey. No,

not really, you're like, none of that? Really that many? I mean when you when you look at the overall picture, you know, the equity indexes UM that track emerging markets, Uh, they're better on the day, but still within a down trend. That the ticker that I like to look at his m x e f UM that's that's up a touch on the day, not substantially, and the MSCI Emerging MSCI Emerging Market UM stock in this it's off the lows, it's taken a bit of a breather, but it's still

in a nice down channel. So we really need a trend break, a nice down channel. In other words, it's headed for more losses. Yeah. I don't think unless we totally a nice, nice down channel. Me and someone's getting their face this year. There you go, Vincent Cignarella. Vincent Signarella,

thank you so much for joining us. As always, we love having you on global markets trategisty for Bloomberg, a squawker on the other side, as well as a longtime trader who really has that perspective um and has had some very astute commentary over the past few months in particular, so thank you. Definitely looking at a little bit of a bounce, but it is far from calling game over on the sell off in e M. We turn our attention now to the land of groceries. Shares of Kroger

down a little bit more than nine. This is the biggest decline in six months the supermarket chain, missing analyst sales estimates, margins also narrow wing. Here to tell us all about it is Matthew Boyle, us retail reporter for Bloomberg, and you can follow Matthew on Twitter at biz boil. I like that, alright, um, what's going on at Kroger. I mean, you know, one day, everything's great. They've got new alliances, they've got new joint ventures. You can order

your groceries picked them up at the store. They've got simple truth. I believe the generic brand that the store brand that's doing pretty well. What happened, Well, they're doing a lot, but a lot of this is going to take time, you know, pim. It's very high expectations were coming into this quarter. You saw what Walmart and Target did. They both had their best sales and in more than a decade, so people were getting a little bit you

know amped up. Um. You know, it's a retail renaissance, and it just kind of shows how we go from you know, uh ex in retail here. Um. But Kroger is doing a lot of the right things. They're remodeling stores, you know, they're doing deals when in China with with Ali Baba. But you know, these things are expensive. So that's why the margins are down. And this is what

I'm wondering. I mean, investors just simply short term in their view, and they don't view any of this as positive in the long round, even though it's exactly what Kroger a bit of an overreaction and the company was frantically sort of you know, qualifying it's saying, well, if you take out the impact of the story models, and if you take out the impact of the price cuts, they had made they same store sales would have been over two percent, which so would have beat you know,

beaten the street. Um, but these days, you know, retail investors don't seem to, you know how much patience for explanations like that. So you're I think, you know, you're it was a bit more pronounced. The share drop was a bit more than I had anticipated. But these days we're seeing shared declines of eight to ten percent even when companies beat estimates. So when you miss, you're going

to get punished. Do you hear from any analysts or any experts who tell you this is an opportunity to buy the stock of a company that's got what more than actual grocery store outlets in thirty five states? And also they operate fine jewelry stores that I did not know it. Yeah, I mean, they're all over these They own Turkey Hill, you know, they own uh, you know, food brands as well, though they're they're currently in the process of selling Turkey Hill. But Kroger is a very diversified,

interesting company. They've got a huge percentage of their sales in their own brands, and that's very good for That's that simple truth, simple truth, and others. Yeah, yeah, they're saying they're they're sales of simple truth. We're in you know, double digit games this year, and that's that's very much, you know, a good thing for any retailer, because store brands are way more profitable than you know, the national brands like Kellogg and Campbell. Though, I will just push

back a little bit. I mean, perhaps what investors are seeing is a company that is trying to spend. They can keep up with Amazon and the like in the Walmart, but it has just a smaller base to work from. And that if you have a smaller base at this point, even though they are behemoth, you could potentially be be really hurt. It's funny, yeah, to kind of say Kroger small and exactly the largest traditional supermarket in the nation, but yet people looking at them there well you know,

what do you got? So it does kind of show. And it's not just Amazon, it's not just Walmart. It's all the little remember that the German discounters on the low end, you know, biting and scraping and getting a little all these one of those all the you know, you you go into an all the store, a lettle store, and you go, wow, sausages right next to toasters. I mean, but look at what they're done in the UK and quite impressive, and they want to do the same here.

It's so sad that that's what counts for the hunt these days. For for humans, it's like to go in it's not it's not to have both. This, yeah, Costco is more of a treasure hunt, you know where you know all the is a bit more of a well I'm hunting and look what I found, you know, a battery charger, but hey, who I needed one anyway, let's pick it up. Could you just expand it? Because as I said, I really did not under I underestimated the

jewelry business at Kroger. Yeah, they've got they've got jewelry stores. I mean, Kroger wants you to be going in there and you know, all things to all people. If you you don't expect to be finding it there in the same way that you don't expect to find you know, uh, you know, high end diamonds at at a costco um. But you know it's there and if it if it drives a trip, if it drives an experience, which is this buzzword in retail right now, you know everybody wants

shopping to be an experience. Um, that's a very good thing. The various two diamonds. Yeah, Matt Boyle, thank you so much for being with us. Matthew Boyle is US retail reporter for Bloomberg News. 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.

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