Trade deals in china. Hello from sydney. Just past 8 a. M. Im haidi lun. This is bloomberg daybreak australia. Betty im betty liu. After 6 p. M. Here in new york. We will be watching how all the action in washington plays into the trading day. Investors striking a bearish town today. The markets following two days in a row. Theres a lot investors will be digesting. Weve been talking about this all week. You can imagine every Trading Floor will be glued to the television when james comey takes the stand on the hill and testifies. That has dominated headlines as well today. Also, looking forward to the u. K. Elections. All that uncertainty leading to the declines you see here. As np down about 3 10 of 1 . The dow, off by almost 50 points. Tumble. Aking a slight again, setting you up for a softer open in asia. Haidi thats right. Thats not even counting what we get out of the ecb. We expected guidance from mario draghi. Markets are calling this super thursday, led by the potential for political absent from the james comey testimony. Asia, say, here in looking like a bit of a softer session, at least a mixed start as we get this risk off tone. New zealand trading underway. We are seeing them down a 10th of 1 . The big story for australia is the First Quarter gdp number. We are expecting growth to have slowed to 1. 6 on the year. Some analysts are seeing a contraction. This is after sluggish consumption retail and the contribution made by export. Futures pointing to the outside. The aussie dollar holding at 75. 10. In a statement, striking billion tons, saying he continues to see 3 growth for the next couple of years. Taking a quick look around weities, you see them had gold headed for a sevenmonth high. Crude paring earlier gains, but that is showing u. S. Stockpiles continue to decline. Iron ore up about a quarter of 1 . Certainly we are seeing quite a bit of writing activity when it comes to u. S. Treasury. Flat safety starting to play out ahead of a very heavy second half of the week when it comes to global news flow. Lets get first word news with Nina Melendez in new york. Reporter qatari stocks fell again as the saudi led isolation takes hold. A band pass vessels sailing to and from qatar from using facilities. This has no restrictions as it is considered international waterway. Qatar relies almost completely on imports. Food entersf through the land border through saudi arabia. President trump is claiming some of the lead it credit for the saudi led isolation of qatar, calling it punishment for support of extremist groups. He says its proof that history trip to the middle east is paying off. It also means washington is taking sides in a dispute between key allies in the gulf. Home to americas Regional Military headquarters and 10,000 personnel. Goldman sachs boss lloyd is calling for the u. S. To spend more on infrastructure. Beijing, he tweeted, always impressed by the condition of the airports, roads, cell phone service. The u. S. Needs to invest to keep up. It is only his third ever tweet, and builds on diamonds warning that spending neglect is damaging american growth. The governor of california is wanting the u. S. Not to rest on its laurels amid rising competition from china. Jerry brown is in china, trying to forge new links on Energy Following the president s decision to pull a knack the pairs climate accord. The democratic governor leads a 2. 5 trillion economy that on its on would be the worlds six largest, just behind the u. K. They are not sitting there and making a one dad 121 trump down, china. Mind tona puts its something, they persist. I thought that was the words of someone whos looking out over the whole world and not looking inward. Tesla shareholders had voted against directors to face reelection each year. A group of Pension Funds wanted the change, seeing most Board Members are personally or professionally lee linked to elon musk. Shares extended record highs as investors meet in california, with the model three do next month. Global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. Im Nina Melendez. This is bloomberg. Haidi thank you. Now for a look at with happening in australia today. 26 years without a recession. Is it going to hold . Paul it is to be an interesting rest of the year. The First Quarter gdp numbers expected to be pretty soft. A third of 1 gain expected. Gives us an annualized number of 1. 6 . That slow down as well. It may be weaker still because we had a balance of Payment Figures yesterday, which was exports. Amid we have Capital Economics for testing half percent fall to the gp gdp number today. Jp morgan sees some chance of a negative read, expecting 1 10 ever present. Looking sluggish there. They dont seem concerned at all. They see growth at 3 over the next couple of years. Haidi im going to bring up this chart that shows nicely, 63. 71. We were talking about whether its good luck or good management, but we have done pretty well over the last quartercentury. Lets talk about corporate headlines. Chp cant catch a break. Elliott management calling for better shareholder value and returns. Now tribeca having ago. Paul everybodys favorite punching bag. For bhp. Poor bhp. Bhp of accused destroying 40 billion worth of shareholder value over poor decisions. Portfolio manager craig evans didnt hold back. Debate theres no because theres no one with substantial technical or operational experience challenging senior management. He says tribeca has enough support to force a vote, but they dont particularly want to do that, but just approached bhp. Bhp says no comment. Betty bhp suffered another setback with the restart of the iron ore mine. Thats being delayed again. Whats going on . Paul a bit of court battle in play here. Of particularr interest to the mind that needs to draw water from the river to get operations going. One mayor is the holdout. He has been blocking a state court, ordering him to make a decision in 10 days. The Supreme Court put an injunction on the decision. Tailingsll over the dam. 2015 with those flooding, 19 people lost their lives when the dam gave way. Bhp had been working to reopen the samarco mine. It doesnt look like they will get underway this year. Betty paul allen in sydney. Stocks falling a second day in a row. Down the most since midmay. We had dollar down as well. Treasuries rallying. Joining me on set with more details is su keenan with a rundown of the markets. A bit of a retreat. Second day in a row. Many strategists calling this a caution sign ahead of what they are referring to as super thursday. Not just jamess, comey, but the ecb, the u. K. Vote, many things investors need to wait for. Lets go into the big movers. Dollar general beat the view, lifted its outlook, but got slammed as amazon, this retailing giant, lowered the price for prime. A lot of similar discounters were lower. Advanced market advice sudden surge there,. That has a lot to do with the big surge in bitcoin. They say it drives sales of graphic cards. And you have Hd Supply Holding company, downture in a big way. Lets go to the bloomberg. 5332. First is the financial conditions index, which is broadly rising, but taking lowered today. The white line is the Bloomberg Financial contribution in lyrics index you know. A crossing there. A bit of a crossing caution note this week. Betty theres also this talk about super thursday. Hearing,ng, the comey and the preview of the u. K. Election. All of that is being watched, but its also a time when trump is pushing his infrastructure plan. Is there any conflict here . Reporter thats getting lost in the shuffle, but it is pretty big infrastructure. The bloomberg again p this is the weeklong push for infrastructure plans. Ants to hand over we are looking at the snp municipal bonds. That is investment grades, thinks fixed incomes, crossed with the aggregate. In the lower chart, a similar chart. The global index outperforming the msci index. We know conceptually the infrastructure play has been strong. Lets go into the particular. Steel stocks have suffered. Questions about whether trump. An get it done you will see that u. S. Steel has been flat of late. It is actually down significantly year today. If we go into one marred bloomberg chart, many of the infrastructure stocks have been giving back gains they had since the election. This is a number of engineering stocks. Haidi seeing some activity when it comes to the oil trade ahead of the wednesday Inventory Data. Reporter we are seeing oil holding up, even though we saw weakness after hours in gold and oil, but they were strong in the regular session. In the chart you can see the big tookthat oil futures several weeks ago on concerns about the opec deal. Of the dustuplot between the middle Eastern Countries and diplomatic issues should have been bearish for oil, it has continued to rise and close above 48. A lot of traders positioning ahead of the Inventory Data which will be out wednesday. It could drop for a night week in the u. S. Eia,so have data from the showing u. S. Output could break a record in 2018, 48 year record. Domestic production could top what we saw in 1979 due to the shale drilling surge. Again, oil edging back to the 50 mark. Are watching the oil prices carefully as we get those inventory numbers. Lets get it live to the bloomberg invest conference in new york. The biggest names in business giving their views on china tesla and tesla, but the focus is on trump. To the north star inc. Chairman. Some of the comments coming through, he says the first year of any president S Administration is chaos, but he manages chaos when it comes to the private sector, and hes doing an amazing job in a difficult situation. Lets get it over to this conversation w. Because he wants it the way that is. In other words, death by a thousand leaks is a consequence of attacking the institutions. When you attack the cia and fbi, and you attack congress, and you attack the diplomatic corps in the state department, all the protectacy can do is itself. Within the white house, actually, things are actually running pretty well. All of the rhetoric between jared, hes 36, hes an unbelievably soft, considered, thoughtful mind, and a trusted advisor to the president. Gary cohn, you couldnt have a in theadvisor adult sandbox. If you can run goldman sachs, you can run the economic piece of the white house. Reince priebus knows the hardware and the plumbing of washington. And steve bannon is the victor of a philosophy, whether we agree on it a not or not, hes like a buddhist monk. Reporter thats the last time you will hear steve bannon described as a buddhist monk. [laughter] hes very bright and capable and has a point of view. All these other things on leaks come from management by confusion. Theres no command control. The commandandcontrol is the president. To give you an example, the and says ioes to pei want to design a building. He says i want to use your name and im going to design the building. Then he goes to a builder. But i dont really want you to build it. I need your bond. Im going to negotiate the drywall contract. He has a Drywall Contractor come in. He has the palmer and electrical. Today, you walk into that white house and the office, baker. T james theres no differentiation between him and whats happening in all the spheres, because thats how he manages. Death by a thousand weeks is a problem. Leaks is a reagan was exactly the same thing. Its the only 12 the bureaucracy has besides budget to get back at everybody. And that eventually i think will evaporate, because what will happen to the president , wants his troops get in place remember, when i say this only 50 people, theres only 50 people. When you go to Steve Mnuchin and say we will have a repatriation tax policy, and he says great, let me go to my battery of capablece, he has people there. Theres nobody more capable and competent than he is, but its going to take another three or four months to get troops. First of all, when we talk about forever trumpers, there are probably three, jared, ivanka, and melania. Theres really nobody at the beginning who thought they president would have the choice chance. Unlike Hillary Clinton or barack obama had resources, or republicans that had teams, and had been governing, remember paysa great position, it 125 thousand dollars year, plus you got to the government ethics, can you imagine going into the government at this point in time with everything confronted . Now you have a president under fire. You have five investigations going on, you say i have a great job, be assistant secretary, give up your 1 million a year job, i will pay you 119,000 you have to go through, a hundred checks, and press interviews, at the end of the day its difficult. They are doing a great job following that resource space. , once that gets blended now we get to midterms of congress. Theres no congressional bandwidth. When you look at what congress is going to get done between now and the time they go home, you cant enter one more piece of paper. So this consensus and conciliation, they are learning on the job how to govern. Compromise ona all of these things the same time as doing what hes doing for his base. I think what happens is the president is saying my bases all of america. S,s not the forever trumpster it is the american people. You will start to see him retail. Hes changing his points of view. They are softening on some things. Hes very focused on some of the ardent things. The tweeting makes everybody crazy. Im going to actually give you a call you said about that. Just last month. You told Erik Schatzker that is tweets shouldnt be taken as offthecuff. He has actually brought thought them through more than people think. Do you still believe that . Absolutely. Absolutely. Of the president. Hes the embassy of the presidency. Amazon of the presidency. As good as bloomberg is, as good as cable tv is, social media is a form of communication which mature adults at his level in my level have not had intense use in their careers. He has a new way of communicating, which is unsettling, because president s usually have a cadence and political balance of ever saying anything. Say something beautiful, everybody will not. Everyone will say it was so poetic. It means nothing. This president is sending shockwaves. Offthecuff. When its offthecuff, hes doing it for a reason. Reporter do you think its appropriate for the president of the United States to tweet criticism of the mayor of london in the immediate aftermath of a terrorist attack . Bloke, personally if it were me, why do it . Theres no gain. Why does he do it . Because its how he feels. Hes communicating to the world, i will tell you. You can like it or not like it, but im going to tell you how it feels. Its part of what you get with the man. , so not politically correct just as the president of china comes for the first time to maralago, sitting there in between steak and chocolate cake , mcmaster leans over to the president and says we are locked and loaded. The chinese president thinks that must be some kind of dessert. What could this be . Reporter i dont know what this is. The president nods and says, continue. At that moment he decides he president ofhe china whats happening. He leans over and says, mr. President , we are 189 miles off the coast of syria. We are launching ballistic missiles. I want you to know, president of china looks at him, and he says repeat to his translator. Can you imagine that moment . Never in history has Something Like that happened. Thesaying one of warrantless moments for me i hate to see him getting beat up. Hes doing the best job he can. Daythe generals that changed everything. He became the commanderinchief that day. The generals saluted him up and ranks. E military thoughtfulness he put into that, the way he pushed it wasnt kneejerk. They spent two days into situation rooms analyzing it. He called the commander of the ship himself. He said, i want you to tell me what are the risks . We talk about sailors, the earth of these are m. I. T. Phds. Its a different world. Whether yount, believe in it, whether you dont believe in it, the military got a shot of adrenaline they hadnt had fred decade for a decade. The responsibility, the terror of wounded people and senseless lives. I saw the man stepped into a role that he now owned. I think that will happen to him all the way along the way. Reporter lets talk about moving to his legislative agenda, we talked about tax, trade, infrastructure. This is infrastructure week. Lets start with tax. One thing that i think constantly interests people is the market response to the administration so far, and continuing to price in optimistically progress on a comprehensive tax overhaul. I think the markets are still feeling optimistic. Are you optimistic they will get things through . There is no better secretary of treasury in my opinion then Steve Mnuchin. He is focused, he is so smart, so intent, and his team within the treasury admire him not for his political ability, but his brains, mind, and tenor. The congressional battle. How do you solidify these issues and get something sensible on both sides of the aisle through quickly . Its low hanging fruit for everybody. Im the most encourage by a workable and usable tax bill as i am for everything. Everybody wins. Health care is much more complicated. Im optimistic about a workable tax bill. It wont be as great as people hope, it will be as bad as in a series think. I think mnuchin and gary cohn together with budgetary confinement and congress will have to get there. The congress has got to do something. I think on a business sense, optimism, hope, boldness, when you look at transparency in the world, why is our stockmarket doing what its doing . By stock market is driven five stocks. All we have to do is invest at local and amazon. Cap ofthe market top the whole world. But transparency optimism, capital, at a time when the rest of the world is in sovereign wealth, central bank warfare, the only thing Getting Better is the Central Banks have now. Ecome the governors du jour we didnt know they were. 10 years ago, nobody cared who was the central bank or in any of these countries. Even in our country. Its a boring job. Now it dictates the pace. , we are look and say almost in the 10th year. We would have all been wrong. Everybody wants to fix Interest Rates. All of you in the audience and at home, as Interest Rates 4 ,ted to drop from 5 to everyone says, im going to lock my Interest Rates and go fix. If you had done that in the last 15 years, you would be wrong. Its an amazing phenomenon. Everything is getting cheaper. Five years, we will have driverless cars. The effect on the world will change tremendously. Haidi betty ok, that is tom withck betty speaking megan murphy giving context to President Trump and his first year in the white house saying that the first year is going to be messy, given his backing to Steve Mnuchin and gary cohn, saying that you couldnt have a better at all in the sandbox. We will have a lot more from the bloomberg invest conference in a few moments. Well hear from the founder of tennecos associates in about 10 minutes. Haidi 8 30 a. M. In sydney. Quite a bit off upside ahead of firstquarter gdp numbers coming through. Expecting to show growth has slowed in the first three months. Im haidi lun in sydney. Betty are my eyes deceiving me . Is that frost over there . It is 6 30 p. M. , you are daybreak bloomberg asia. Nina apple ceo tim cook says any tax on overseas earnings should be mandatory with proceeds spent on infrastructure. Apple has billions of dollars in cash reserves, most of it outside the u. S. Cook says he supports President Trumps Campaign Proposal for a onetime 10 levy on offshore income, which is less than a third of the u. S. Corporate tax rate. In our view, it should be a deemed repatriation. This means it should be required tax. So you are not asking the people of that have had earnings from their International Subsidiaries if they would like to bring back money. You are saying that you must pay the government xpercent now or over some period of time. Nina u. K. Prime minister he is makingays human rights legislation to fight against terrorism. Securities dominating the Election Campaign ahead of thursdays vote or she wants the power to deport foreign suspects and limit the freedoms of people deemed a threat but who cannot be prosecuted. She called the election on brexit, but recent attacks have switched the focus. Ae brazilian president faces new threat as a top Court Debates whether he and former running mate Dilma Rousseff took illegal financing. He could lose if the mandate goes against them. Hes been under rising pressure since corruption allegations emerged last month, prompting calls from his impeachment, even from his own ruling coalition. American international group, the insurer that last month hired its seventh ceo since 2005, had the outlook cut negative by s p global ratings. That is after claims costs like underwriting losses. The reduction came because aigs recent track record of delivering on strategic goals, specifically losing the insurance segment, has been subpar. Values continue to soar in japan. Ward, in tokyos central home to a shopping district, had jumped 61 and four years. In osaka, they are up by nearly half. Booming construction of apartments and Shopping Centers is driven by funding by banks. Office prices are at the highest 1984. Global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. I Nina Melendez. I am Nina Melendez. This is bloomberg. Overnight, street stocks showing a little activity when it comes to save haven assets. New zealand down by a 10th of 1 . Futures in australia setting up, looking more positive. Rb a leading rates on hold for a a littleth yesterday. Resilience coming through from statements, still seeing about 3 growth when it comes to gdp over the next couple of years or so. Futures, upset of about 15 points. Aussie dollar at 75. 13. That gdp number, we are expecting growth to have slowed to 1. 6 . 3 10 of 1 on quarter. Elsewhere around the region, the yen is strengthening. 21. Ngest since april quite a bit of price action when it comes to the u. S. 10 year. Looking at yields lowest since i believe about november. We got there report suggesting that chinese buying interests has in revived after the brief break last year. A reminder of how u. S. Stocks closed in the u. S. Overnight session. Second and the clients for wall street. More on what we should watch which with adam. Volatility remains low, even ahead of what we call super thursday. Where are you seeing activity . One interesting place is people wanting to hedge against declines coming in and the u. S. Market. We are seeing this across lots of markets. In particular, this trade coming over as a . 50 trade. We have seen it come down to multidecade lows at the moment, but now we see the number of calls relative to the number of puts his back to levels we have not seen since october. It shows you people want to find some way it doesnt have to be catastrophic declines in equities to benefit, but just small moves that we havent seen yet, that increasingly people are interested in to get bets on. We are seeing those in the u. S. Market. There are plenty of other markets across the u. S. Region. Betty thank you. Adam haigh in sydney. Lets return to the bloomberg invest conference in new york, or some of the biggest names in business are giving us their views. Scarlet fu and Joe Weisenthal are with jim chanos. More recently, as many of you know, hes been sounding the alarm on china and tesla. Lets begin with the elephant in the room, the trump administration. As ad has built himself change agent, ready to disrupt the status quo. So far, what weve seen has been more rhetoric than policy action. Substancesything, policy changes do you see coming in the next six months . First of all, thanks for having me. Where else can i get a bloomber makeover and listen to elon musk talk about the future . [laughter] so, its interesting. We all follow politics. A lot of us care about politics. At the end of the day, politics works in strange days ways in the markets. If you go back to 2009, we had elected, by many peoples views, someone to the left of vladimir a Community Organizer who would nationalize banks, raise taxes, increase the estate tax, do a lot of really business unfriendly things. After a few rocky months, the stock market tripled. We have elected ostensibly the most probusiness president , at least selfdescribed, in modern probably only matched by george w. Bush. Remember what happened under bush. We had the mba president nba president. We were coming in at the end of a long economic expansion that would continue. Instead , we had to a sessions under his watch, including the worst financial crisis in modern memory. It doesnt always work out the way you think. Events conspired to overtake people. Joe i feel like thats a good lesson. I want to come back in a minute to talk about specific domestic policies. As scarlett mentioned, you have been well known in recent years for your comments about china, President Trump himself has made many comments about china on the campaign trail and now. A little bit different. Joe once again, little different than what people expected, but what do you see emerging in that relationship, and does it change in any way, the way you see things playing out . Thats one of the interesting things about the administration. China was the that man in 2016 in the campaign. Bogeyman in 2016 in the campaign. Then in maralago, the president and xi jinping seemed to be best buddies. This is one of the things that have caused most of us watching it is geopolitics. We are stock guides, not macro people. I will make that disclosure and caveat. This policy could change tomorrow. I think that is something that has a lot of people a little bit uncertain, and that you have this currency manipulator, trade , and now all of a sudden china is our best friend in the western pacific. Know. T i think clearly people are focused on north korea, as they should be. But the South China Sea is still being developed militarily by china. You have the chinese currency stabilizing postmaralago, which i think is a good thing. But we will have to see. This is an administration that seems to make it up as it goes along. What their policy will be six months or a year from now, i have no idea. Scarlet we cant safely say the threat of a trade war was china has been removed . I dont know that a trade war with china i think anything that will bring tariffs is kind of a dumb idea. Freetrade guy, but i think that will extend well beyond china. That will extend to partners in north america, europe. We seem to be picking lots of fights these days. China seems to be one we are not picking. We seem to be concerning trade partners everywhere else in the world. Andneral rise in tariffs drop in global trade would have to be bad news. Speaking of the domestic situation in china, it appears regulators and the government are embarking on a deleveraging campaign, recognizing theres a lot of that debt bad debt in the banks and structural issues. What does that do for your thesis . What do you make of that . Only in china would growth in banking assets of 15 , twice the gdp, be considered deleveraging. Steel production is still rising 5 a year. Orn china says deleveraging supplyside reform, we are going to cut capacity, they have been saying these things as long as ive been following china, over seven years. When you look at the numbers and remember, we are comparing bad , there isbad apples still substantial growth in credit and capacity. All the things they claim they are trying to rein in doesnt happen. Haverticular, when you bank credit, banking assets, forgetting the shadow Banking System for a second, still threex gdp, the model is still the same, debt driven. Last year, we think they added about 5 trillion or so in new credit dollars, in new credit to the system, which is somewhere between 40 and 50 of gdp. I keep saying, if the u. S. Economy added 8 trillion or 9 trillion in new credit, we would be growing at 5 or 6 , too. Theres not a lot to that. People ask, do you believe the numbers in china . When it comes to gdp, i kind of do. Thats the problem. Given the model, you stick a shovel in the ground, borrow money, put up another building, it would add gdp. Said,t on the company carson block of muddy waters told bloomberg that a lot of companies that are listed in hong kong, he thinks they are committing fraud, often combined with stock manipulation. Would you agree with . That . Mutual friend called china the people republic of madoff. [laughter] done a think anyone has better job of describing china than that. Its amazing. As much as you look at National Accounts and scratch your head, when you look at the actual corporate Balance Sheets and reports,s and annual its amazing. Even the socalled national champions, the biggest stateowned companies, seem to never earn their profits in catch cash, have a byzantine labyrinth of subsidiaries that get swapped around willynilly. Then on top of that, you have the chinese Corporate Governance system. When you buy a Chinese Company in the west, typically you are buying shares in a Holding Company in the caribbean that has an operating agreement with the actual operating business in the peoples republic. As long as they want to agree to make good on your economic ownership, they will. If not, they wont. Your records is negligible. This is something people keep forgetting over and over again. Coming back here, one of the areas that has been pretty lucrative for shortsellers and darius ways has been the health care space. Pretty big names. What is it about u. S. Health care fundamentally that lends spotting these opportunities . It is a system designed to be gained. Thats whats frightening. Its the best system in the world, but it is this hybrid of socialized and Free Market Health care. My friends tell me, why do you want to see a singlepayer option or why . Do you think the free markets the best way . We dont have Free Market Health care. We have a bizarre system of fee for service, and lack of eating. For example, Medicare Part d, charge providers whatever they can and often get reimbursed for it. So on one end of the health care spectrum, we had tremendous rent seeking behavior. Thats what we thought obamacare would take care of ins take care of. Instead, obamacare became focused on coverage. I asked the writer of the bill in 2011, why did you not push for singlepayer . She said something interesting. She said, dont worry, its coming in five to 10 years. She said, when people realized just how much their copays are going to go up in the next handful of years, the public will get outraged. Its almost as if that was a feature to the bill, not a bug. Thats with getting people now. Thats why theres such outrage and the town halls, no matter whether you are republican or democrat. The average american, who 80 of get through our employer, is beginning to realize how much this costs. We are not doing 10 copays anymore. Its hundreds of dollars for a drug or thousands for an operation. Thats whats beginning to put political pressure on the system. Scarlet do you see any potential reforms coming out of washington dc . The house has already cost past this portion of the bill. It is supposedly starting from thetch that would close loopholes. Believe it when i see it. I dont know what might happen. Theres a couple of moving parts. The dropping of essential Health Benefits or giving states a waiver to drop them under medicaid and under the exchanges would kill a number of is mrs. Who have businesses left grown up under the concept of, you have to pay for this. Thats one area we are focused on. I think its going to be really hard to get a lot of what the republicans want to do on this completely in the free market, because we dont have a free market. Health care and other industrialized companies figured this out decades ago. Free market does not apply to health care because we dont shop for like consumer goods. If your doctor says i think you need this test, by and large, you get the test. You dont go to minneapolis and check what the doctor will say. You listen to your doctor. So we dont shop for this stuff free market. Its not a free market system. At the end of the day, i still kind of suspect we are going to end up in some kind of basic Major Medical package thats going to be part of the basic package for all americans. It may not happen in 10 years, but i think inevitably, we are going there. Joe to move it back from politics and theory for a second, i noticed you said you are focused on companies that may be in trouble with the potential rollback of essential health care benefits. Can you give us insight into specifics . Who is vulnerable to a rollback . One area we would focus in on is the kidney dialysis business. I think that business is really heading for difficulties. Joe we have a chart here. [laughter] kidney dialysis. Amazing how that happened. I should say that any , younies you see chart of should assume we are sure that stock. The kidney dialysis business is interesting, because we have Obamacare Exchange insurance officials on record saying kidney dialysis is almost singlehandedly breaking the exchanges. Blue cross of california has said that for every single dialysis patient they have, they need 3800 healthy lives to cover it. It is amazingly expensive. But not in a way you would think. The way the companies have prospered in a weird way is they are actually trying to push medicare and medicaid patients were they reimbursement is much lower into obamacare. Where they get to three times. He reimbursement rate taking an elderly person on medicare, why would they go into obamacare . It would cost them a fair amount of money. Well, they get third parties to pay a big chunk of the premium, the former charities. Guess who donates to some of those charities . So this is one of these rent seeking behaviors that i think is going to go by the wayside. I think these excess returns. One of those companies up there actually has a slide in their investor deck that says, 90 of their business is medicare medicaid, and that loses money. 10 of their business is commercial, and that makes 110 of operating profits. Joe everybody can go search for that. I think they can figure it out. Scarlet has that gained momentum due to other people pressing on that . I cant mention networks, i know its no good on bloomberg, but theres a wonderful sunday night weekly news show on a Cable Network chaired by a british guy that hit a 15 minute segment about one of those companies about a month ago. We were stunned when we saw it. We had no idea anybody else cared. They did a pretty gal good job of walking you through exactly what an issue this is. So theres health care. Lets move onto another company you have spoken publicly about, which is tesla. Company is holding its annual Shareholders Meeting right now. They are probably a putting for their fiveyear return. They are probably launching themselves to mars right now. Perhaps. The stock has launched itself. It went from less than 30 five years ago to more than 350, a return of more than 1000 . Despite the uptick in profits and cash burn. Joe and i were talking about this. You have been public on tesla for a while. What would have to happen for you to throw in that hell and say, i give up, its not going to work . I would have to see that Company Actually begin to make money selling products. I should point out we were also solarcity that he bought in. That worked out a little better than tesla. The fact of the matter is, this is a company that burns lots of cash. We think they are going to be burning close to 750 million to 1 billion a quarter. It has not finished the factory. Batteries are made by panasonic. I had of it, the big test, the model three, it has been losing money selling 120 thousand dollars cars. It hopes to make money telling 35,000 cars, which we think it will be a lot more than that. You have an executive departure when i seenly longer in the last two years is valiance. People leaving left and right. They are not waiting around for the company, even the stock price notwithstanding. We will see. They will be competing with Real Companies in 2018. I noticed opening remarks by mr. Musk, talking about transforming to an Energy Solution company, so hes trying to reposition the company as something other than an automobile company. It is an automobile comfortably company with a moneylosing solar roof subsidiary. In addition, he will have to raise a lot of money. Rule of thumb is it takes about . 50 in capital for every dollar of automobile revenue. If hes going to be doing and000 model threes, 100,000 of the model ss and xs, he will need something on the order of 30 billion in revenue. He will need about another 10 billion in capital to do that. So the teslarians should brace themselves. Joe whats the most likely way the tesla story ends . Is it something that in the model three doesnt live up to the hype . He actually starts making money. [laughter] joe in terms of your thesis becoming validated, would it be more of this investor strike . If conditions change, theres a market downturn if the model three is not popular, its going to hurt. Thats the one everyones waiting for. Its the one that average person x, ifnt afford the s or they can be a part of the solution, its a problem. Without at the end of the day, he has to make a car for the masses that is successful. Thats what we will watch. Scarlet you cited tesla as a poster child for this market, where valuations are premised on whats to come rather than what the companys business is. And wehere else can talk about sectors or kinds of companies do you see that happening, where everything is premised on whats to come . Theres a number of them out there. Sector obviously is where most of those companies, itcall it. Com 2. 0 we call two point oh, where old Business Models revamped 15 years later are sold to internet will the revolutionize the way in which they sell things or do things. Probably the biggest impact is going to be in finance, are its already in finance, with the advent of big data and artificial learning. Passive versus active investing. All these things are hitting every business. Cycle,bull side of the everybody see the opportunities. But what we found out after 2000 was that when you have lots of capital going towards disrupted Business Models, you have lots of is this is that get decimated, too. Old Business Models are destroyed by the advent of the data or online retailing, or whatever. For every winner, theres usually a loser. Thats the darkside of the disruptive capitalism coin. I think its a good thing, generally speaking, but one of the reasons why we have a business. Joe speaking of quantitative finance and ai, we talk a lot about this all the time, particularly on the long side or Market Neutral site. How do these trends affect you on the shortselling side . Beasley, lots of things business, notance is hedge of things fund pressure, and nonout for producing strategies are being unmasked for what they are. Passive eta chasing or market hunting. Or marketasing hunting. I think thats good for investors. As it relates to the shortselling business, theres something we noticed. We noticed it in a number of our shorts in the past handful of years, particularly ones we couldnt figure out with 260, and we saw a lot of funds in those stocks at the end. It dawned on us that a lot of these models, not all, but a lot of the models were some combination of momentum, and we are taking just simple input into the theory garbage in garbage out. Valeant was pumping out pro forma cash epa numbers that had no conception of reality. People are putting in valuation numbers. It is only at whatever, 18 times this number, growing 35 a year. But it was doing neither. The computer didnt know that. The computer was looking at the numbers the company was spitting out. In those models, it got picked up as a cheap stock. I think thats going to be one of the things where machines will learn from that, if anything. Now, we see a lot of those situations. I think its one of the reasons we have seen an explosion in really, really questionable earnings presentations that are now taken companies, and that are reporting pro forma numbers left right and center it to make them look as good as possible. Some of that might be for the machines. Scarlet can you give us an example of where you see the most egregious of that . Almost across the board. Take a look at situations tor of point to, men deign companies of breakfast cereals, where they just add back everything every quarter. How many quarters has caterpillar taken restructure packages . I suspect if you have been doing it for 20 eight quarters in a row it may be 20 eight quarters in a row it may be recurrent. Joe there is an extra
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