Decoding Fed & BoE Moves and Big Earnings from Tech to European Banks

Hello and welcome to the end of week wrap-up in global markets. What have we got in store for this conversation ahead? Well, we've had two major central bank decisions, one from the US Federal Reserve and the Bank of England. Both held interest rates steady, but that's never the part of which traders and investors are looking at, so we'll look to unpack that story. We've then had two of the tech titans, Microsoft their shares were relatively unimpressed by the top and bottom line beats, while Google shares actually fell around 6% after their search revenues missed. So we'll have a look at those results. Meanwhile, over in mainland Europe, we've had some banks report. So rather than talk always about US banks, we'll give— shed a bit of light on their European peers. Deutsche Bank were up 4% on earnings. But BNP Paribas, the French bank, fell almost 10%. So quite a big divergence between the two. Meanwhile, the oil giants continue to chug along. Shell beat expectations on Thursday, full-year profit, announcing a 4% increase in dividend, share buybacks, la da da da da. So we'll have a look at the oil majors, and I think some interesting decision or conversation points that we can discuss about what does this year look like for a company of that particular sector, given what's ongoing still, um, in the Middle East at the moment, in the Red Sea. So that could be also particularly interesting. And then finally, if we have time— don't worry, we will make time— is Delaware court has found Tesla CEO Elon Musk's compensation package valued at just shy of $56 billion Guess what? They've deemed it to be a little bit excessive. So we'll have a quick word on that as well. But Piers, perhaps we could start with the central bank theme. Um, and yeah, take, take your pick, BOE or the Fed.

Uh, let's go, let's go BOE. I know we kind of normally fed the Fed's the Fed and forget everyone else, but, um, Which is still true, but let's talk about little old Bank of England. Yeah, because obviously that's hottest off the press here. So it was like a couple of hours ago. We're recording this on Thursday afternoon. So, but yeah, I mean, not, I wouldn't say there's too much surprise coming out of either of these central bank meetings, but on the Bank of England, the one element of surprise, I guess, was that, well, So remember that you have 9 people on the, uh, Monetary Policy Committee. Okay, they're the people who meet every 6 weeks, chew over the latest data on the economy and so on, and then write, what should we do about it? Should we change policy or not? And then they all vote. And so there's 9 members that vote, and they vote, should we raise rates, keep them on hold, cut rates? And if you want to move rates, by how much? So it's very democratic. And so we had a bit of a split because you actually now got all 3 of those scenarios covered across the 9 people. So that was a bit of a surprise. And so let's talk about— so at the hawkish end of the spectrum, so that's those that still want to be raising rates because they still fear that even though inflation has been dropping very nicely indeed, you've still got some super hawks on that committee who are like saying, look, it's above target still. Yes, it's been dropping, but it's still above target. We should be continuing to raise rates. And that was Jonathan Haskel and Catherine Mann. So those two, there's two on the committee who voted for a hike. Then there's, hang on, let me do my maths here. So there's six, including the governor himself, Bailey. They all voted to keep rates unchanged at 5.25%. And then you had one who's really swung and said, right, we should cut immediately. Dingra, Swati Dingra has come in and said, right, let's cut, let's cut, let's cut. Time, it's time. So yeah, it's quite interesting. It's pretty unusual to get all three directions covered across nine people. So I guess that was the surprising part.

For a stat then, the decision marked the widest division in direction of policy. You'd have to go back to 2008.

Ah, is that right?

Yeah.

Well, since you had all three directions.

I think all three directions. Yeah.

Wow. Okay.

So it's been, it's been, it's been a while.

Yeah. I mean, yeah, go on.

So yeah, there, there was some other comments then. So I guess, yeah, unique in its release in the way that the Bank of England, you kind of get a lot all at the same time. So you've got the statement, which carries then their interest rate announcement. The statement carries some description of conclusion of their discussions. You then get the other parts, the vote split you've discussed, but then you also get the minutes at the same time. You also get the projections on every alternate meeting, and it all came at the same time. So was this more of a case of, yes, That is a bit surprising, but the bigger story here is about what are they thinking then about the timing of rate reductions going forward? I mean, the main things I saw on those other points that stood out in their commentary was that further tightening would be required if inflation proved persistent, um, was dropped in terms of the actual statement in itself. So we'll adjust monetary policy as warranted by economic data. That's, that's pretty, so decoded, that's pretty vanilla, isn't it? For data dependency. Yeah. And then they said how long to leave rates unchanged. So I, what is the timeline for cutting rates is what that's trying to ask.

Yeah.

And they said, well, we'll, that's under review, which is again, kind of straight out of the dictionary of central bankers of keeping every option open, right? So you're kind of saying, we'll look at income data, we will keep it under review. It could be meeting to meeting, it could not be.

And this is where basically, Mark, this is why you need markets, because financial markets really take that qualitative information, these kind of nuanced sentences and the double, triple negatives and these monetary policy setters trying to really land it very neutral and in the middle so they're not committing one way or the other and then in the future they're going to look stupid if it doesn't turn out like that. They're very careful, but markets really take that qualitative input and then really quantify it. The best measure is then that In the rates markets, you can now say that in terms of the potential for a rate cut, um, it's still May for the Bank of England. We're expecting— so the markets went into this meeting with the expectation that the meeting in May will be when they start cutting. It was a 62% chance of a rate cut in May. After the meeting a couple of hours ago, that percentage chance has dropped to 55%. That pretty much sums it up. You know, overall there's a slightly less chance of a rate cut in May, but that's still the most likely meeting where they'll start their cutting cycle. So minor, minor stuff here, to be honest. Yeah.

All right. Well then for the, for the Fed. So within the Fed, you mentioned some terminology there. So Monetary Policy Committee, MPC. Of the BOE. Yeah. So for the Federal Reserve, it's the FOMC, the Federal Open Market Committee. So just think of this as a, a meeting group in the context of a team amongst thousands of employees in different divisions within a business. So the FOMC are the ones we care about essentially. So with the Fed, they voted unanimously to leave rates on hold for the fourth straight meeting. So 5.25% to 5.5% Fed funds rate target. So very much as expected. Let me just go over a couple of the key comments and then you can pass judgment. So officials revamped the post-meeting statement, dropping a reference to possible additional firming of policy, indicating that it would not be appropriate for the Fed to cut rates, quote, until it has gained greater confidence that inflation is moving sustainably towards 2%. So that phrase in itself, is that, is that just specifically targeted to markets?

Yeah, basically, yes.

Um, and so what's that saying then?

It's basically saying, look, I think the Fed are just— Powell was very— he seemed very relaxed in his meeting. Uh, so they're in a great place. Powell's loving it. He's absolutely loving it because basically growth's solid, inflation's coming down. We're just cruising perfect, perfectly, perfect speed. Okay. And he's basically saying, well, look, markets, we're on the perfect speed here. Yes, you want loads of rate cuts immediately, but he's just trying to say, I don't necessarily expect us to start cutting rates in March because remember, for the, for the Fed, the probabilities were slightly different compared to the Bank of England. So for the Fed going into the meeting, or actually you've got to go back a couple of weeks now, I would say where March was the most likely month the rate cutting cycle would begin, uh, going into this meeting that had just fallen off because actually it was 42% chance of a March cut as the meeting started. By the end of the meeting, it was down to 35%. A tiny adjustment in the percentage probability. That's just really— Yeah, that's what Powell was ultimately trying to do. The only other point, I've been banging on about this real rates thing. Um, which is, um, yeah, which kind of came out of the Fed themselves a couple of months back. Um, one of the Fed members— God, I've forgotten his name now. Um, anyway, kind of flipped from being normally pretty hawkish to actually a little bit dovish, and that helped with that big Fed pivot in December where they really quite aggressively started to go, yeah, we're going to cut, we're going to cut. Obviously, since then, we've had data that's shown the US economy stayed much stronger than we thought. That Fed urgency to cut, well, that urgency has just come off a little bit. But there's this real rates argument, which is to say that really you should be looking at real interest rates, which is basically the Fed funds rate, which is the rate they set. Remember, that's in a range between 5.25% and 5.5%. Okay, that's the Fed funds rate, but real rates, i.e., the— what's the real impact on the economy? You got to take into account inflation. So you take the Fed funds rate minus the inflation rate equals the real rate. So if you've got the Fed funds rate staying unchanged, let's just call it 5.25%, unchanged, unchanged, unchanged. And in the meantime, inflation's dropping sharply. Well, then that equation, Fed funds rate minus inflation, if inflation is dropping, well, then the real rate equals going up. So there's one camp out there of economists, of investors, and a portion of the central bank themselves who are saying, look, if we leave rates unchanged, we're actually increasing real rates. So we should be cutting interest rates to maintain real rates at a constant level. This is one camp. Powell addressed this point directly in the press conference for the first time because this has become a bit of a thing.

He must have heard you. He must have seen the post you put out.

My LinkedIn post, yeah, Wednesday morning. Yeah, he obviously saw that and thought, right, this needs addressing.

Yeah, he must have woken up. He must have had a notification on his phone.

Basically, he said, in theory, yes, real rates go up as inflation comes down. You are correct. But he said that doesn't mean we can mechanically adjust policy. He basically said there's a whole bunch of other factors that need to be considered, including other, like, I guess, T-notes, T-note yields. What's the 10-year government bond yield? That has a meaningful direct impact on the economy and the cost of borrowing. So that's something slightly different that we need to factor in. You need to factor in behavioral stuff, human beings. If you're in a high inflation or— yeah, human beings might behave differently compared to what the black and white numbers say on the page. So he said, look, it's a bit more nuanced. Basically, I think he's saying, look, guys, March, it's not going to happen. We're probably going to wait till May. Reading between the lines to start the rate cutting cycle. Okay.

So this, this was like a, a management of communication exercise for Powell. He's pretty skilled and experienced at this.

Yeah.

Pulled it off pretty smoothly, cemented the pivot and policy direction, pushed back against market pricing a touch. And we move on.

In a nutshell, spot on.

All right, well, let's move on to something a bit more exciting then. So we'll talk about a couple of earnings. Let's go tech first, and then we can talk a little bit about the, the bank stocks and then the oil major Shell. So, uh, Microsoft— I mean, I, I always do a post where I list out the kind of performances and on the kind of line items of their, uh, kind of financial statement, earnings per share, revenue, Intelligent Cloud division, Azure, their cloud services, everything beat expectations and the shares fell a tiny, a tiny amount, I must say.

Yeah.

That was on the post-release day. That was earlier this week. So was this just a case, talking Microsoft specifically, of strong numbers The stock is magnificently priced and therefore it's just, it's great, but it's fine. So it should be great.

Well, yeah, it's probably, you know, what's priced into the Microsoft share price is stellar, extraordinary, phenomenal performance. So you can't beat that, right? It's not possible. So it's amazing, their performance. I mean, their numbers are amazing. But yeah, it's another thing to say is from a share price reaction, there's this old, good old saying called buy the rumor, sell the fact. Basically, Microsoft shares have been ramping higher for the whole of January. They've gone from $366, which was the low on the 5th of January. That's the low of the year. So $366, They rallied up to $409. Okay, in the meantime, last week breaking the $3 trillion barrier, um, by the way, um, and, and overtaking Apple to become the biggest company. Um, so look, share price has been going up and up and up, and often what you see is when you see the good news, you book a bit of profit. So you can sometimes get that counterintuitive, really strong earnings report, but share price comes down because people have already bought going into it expecting greatness. There's the greatness we thought, we're sat on a nice profit, bank some of it. So it just comes off a little bit. So that was on— when was their release? 2 days ago, right? I'm just looking, the market's just opened and Microsoft's up 2%. Today so far. So it's recovered more than 50% of the post-earnings sell-off. I guess you could say Microsoft is in a long-term uptrend, the share price, that is. And you're going to get noise. We've just had a bit of noise, but there's nothing in this report to suggest that that long-term trend is going to change.

Yeah. Okay. So Google or Alphabet, So let's have a discussion then. Are they facing a noise moment or are they facing something potentially more systemic? So to give you the numbers, they had a relatively strong end to the year. Earnings per share beat, their revenues beat, Google Cloud even was higher than Wall Street estimates. However, their business still somewhat geared around ad revenue, and that did miss expectations. That came in at $65.52 billion, about $500 million short. But is this a story where investors are looking at Google through two different kind of scenarios? One, how's it performing in the ad revenue space? In context of the business makeup or its composition of revenue stream in the current macro and future macro environment. And then two, it still doesn't seem to be a great deal of like AI product impact on their revenues here.

I think, yeah, Google continued to be going through their worst period for many years. You could even say couple of decades, which is almost their entire history, to be honest. They're, they're really under threat. Um, to put that into context and talk about share price reaction here, so Microsoft, we've just said about a great year. If you go back to the bubble, we had a bubble in 2021, the tech bubble. Share prices just went crazy on the tech side. And so a lot of people reference the 2021 high when you're looking at tech share prices today. Microsoft are trading 20% above their 2021 high, new all-time highs. Okay, Google or Alphabet still trading below 2021 highs, so relatively their share price is trading at quite a bit of a discount to Microsoft's if you're looking at this latest swing higher for tech over the last 12 months. So it's underperforming already. Does this earnings report really— where does it put us on this whole— on your thesis around Google losing the race on AI? Is that going to continue? I guess on that front, we're kind of waiting. They've been behind and we're kind of waiting. We're waiting for an AI sort of— they call it Gemini Ultra. Okay, this is gonna be launched this year. It's an advanced upgrade to its chatbot called Bard. Okay. And you can think about Microsoft's Copilot, which has been the absolute forerunner in really bringing AI to the masses on a subscription model. Now, what was interesting, Nadella, that's the Microsoft CEO, did give us the number of, um, So he said that they now had 53,000 Azure AI customers. So you see that, you know, Microsoft have already started to monetize AI. They're really the first. Google have not monetized AI really. And so is that going to come? Yes. But how good is their product going to be? Is it going to be Can it compete with Microsoft or not? So this is all still a massive unknown. So it's so hard to really make a judgment on that. From the ad revenue, which has historically been Google's engine, that's been the majority of their revenue, that the proportion of their revenue being ads, that has been dropping, but it's still easily the biggest. Their total revenue is $86 billion. $65 billion of that is ad rev. Okay. And it dropped. Their ad revenue dropped, which is incredibly unusual. You need growth and really growth at a good pace to maintain tech valuations, right? So declining revenues and even YouTube, which is kind of their sort of poster child. Ad revenue on YouTube was $9.2 billion, which was only just above expected $9.16. So, you know, their share price dropped 7.5% on Wednesday. And I would say you can point to the whole ad revenue thing. It's very cyclical ad revenue. So if there's a— it's very sensitive to the ups and downs of the economy, and ad revenue can fall quite quickly if we start slowing down as an economy, or if definitely if we start going into a recession. So is their ad revenue dropping in Q4? Is that a signal that the global economy is slowing? I mean, the US economy is still strong, but its growth rate is slowing. So is there a signal there? I think we'll find out tonight because— is it tonight? I think Facebook or Meta are releasing their earnings. So they're also the other big tech giant. Whose revenues are dominated by ad revenue. So what happens to Facebook's revenue figures tonight? Is it the same as Google? In which case, okay, fine, it's not either of these two. It's perhaps actually a really good measure that the broader macro situation is starting to really slow. If Facebook's ad revenue tonight is really strong, well, then that really highlights that Google are not only losing the race on the AI side, they're actually also starting to struggle at the core part of their business.

Okay. So very meaningful then for Meta when that does land.

Yeah.

An interesting comment to conclude from the Microsoft CEO. He said, and I think this was kind of like somewhat aimed at the Google CEO saying, we've moved, i.e., Microsoft, we've moved from talking about AI to applying AI now at scale, which is pretty much where they are in terms of the, the race at the moment, isn't it?

Absolutely.

Okay, well, look, let, let, let's, um, move along then to some of these European bank stocks, because we had a bit of a divergence between the German bank Deutsche Bank and the French bank BNP Paribas. So Deutsche, who came out Thursday morning, uh, their profits were basically down less than expected, but they've come out with a pretty clear cost-cutting exercise. I think they're cutting multiple thousands of, um, non-client-facing roles, I think it was, uh, going through the next 2 years, hiking share buybacks, lifting dividends. So feels pretty comprehensive what they're doing here in terms of the strategy shift. I know you've talked about before.

Yeah, I, I would describe this Deutsche Bank thing as, yeah, they've been through a long, like a decade feels like, is it that? Yeah, probably is a decade's worth of turnaround strategy, which by and large they've completed and in the end executed it as, as planned. It took way longer than they thought. This is restructuring, this is divesting. Coming back to their core, you know, sorting out internal teams and structures and divisions, you know, all this stuff. Okay, done successfully. Well done. What the problem is, their share price, whilst it has recovered now, it's still actually trading at a massive discount compared to industry peers. So one of the key kind of valuation metrics we use for banks is their book value, and Deutsche are trading still at 0.4 times book value. So I think this latest message in this earnings report is, right, you know, actual restructuring done. Let's now actually start engineering our share price higher. What, what can we now do to specifically engineer our share price up? So it's increased dividends. They said, right, we're going to triple dividends, buy back more shares. We're going to streamline a little bit as well. Most of the other banks are doing it. We might as well follow suit. So they're going to cut some jobs and so on, right? But it's—

just to jump in quickly. So when you say, uh, dividends and buybacks, what is the latter and who is the— who are the bank doing that for?

Right. Well, so share buybacks is when you, as a business, if you've got surplus capital, then, um, there's various things you can do with it, right? You could invest it. So that means, right, which part of our business can we grow faster by investing in it more? That might be, I don't know, increasing headcount. It might be increasing sales and marketing spend, you know, these kind of things, right? It's using your money to try and grow your business. That's one way. Another way is to very much more directly literally go out into the secondary market and buy your own shares. And basically this is removing those shares from circulation. So these share buyback programs is reducing the supply of your shares. And when you start to have these earnings reports, remember they release their profits, but the way they release profit is it's profit per share. So you take their total operating income, that's a certain amount of euros in Deutsche Bank's case, Right, divide that by the number of shares equals your earnings per share. But if the number of shares that you are dividing by, if that number is decreasing, your denominator's decreasing, it's a way of engineering a better looking EPS. Okay? So it's like financial engineering, less supply, price goes up. So, so really it's very directly reducing the supply of your shares. To increase the value of those shares that are left. So it's directly beneficial to your shareholders, as is dividends. Obviously, if you're a shareholder, that's just straight. We're not going to invest in the internal growth of the business. We're going to literally give it to the shareholders. Here you go. And you'll have a payoff and the shareholders will have income coming into their share account.

So it's a double kicker essentially on that front. And then what this, following a similar pattern to what we're seeing with US banks, whereby rulings are coming in where they can start to take down their emergency SVB funding and redeploy that to shareholders.

Right, exactly. Yep. So, you know, I think it's really, we're into the next chapter for Deutsche Bank where they want to get that book value now, work specifically on the book value. And can they get that back up towards 1, you know, back on par with some of the US heavyweights that have just been destroying European banks for the last decade?

Okay, well, look, BNP didn't fare so well. I mean, I'm not sure what parts of the report that you saw, but surprise drop in fourth quarter income pushed back a key profitability target. I also saw that a large portion of the miss was due to, uh, setting aside €645 million to cover losses tied to risk on financial instruments. Uh, from what I read, that was related, well, half of that sum related to a long-running case involving Swiss franc mortgages in Poland that they were involved in. Uh, which turned out to be costly for borrowers when the currency soared against the zloty. So just made that trade go sour and they've taken a hit on it.

Yeah. I mean, they've just been taking more risk. You know, and I think when these bets don't pay off, yeah, I mean, looks bad, looks really bad. I think Deutsche Bank have learned from that. They, you could argue, were taking way too much risk for their own good. 10 years ago. Now they're back on the straight and narrow and fine. They're working their way back. But yeah, BNP, their share price down 10% here. And as you said, downgrading 2025 targets, which was definitely disappointing. So, you know, and they've dragged down a lot of the other French banks, like SocGen's down 3%, Crédit Agricole's down 2%. Off the back of this BNP Paribas news. So the other French banks kind of getting dragged lower here as well. So yeah, not so good from the French.

Okay, well, let's shift over to Shell and, you know, these numbers in comparison. So we're talking about how great Deutsche were. They reported a Q4 net profit of €1.3 billion. Shell reported adjusted earnings of $28.25 billion. That was, I must say, for the full year though of 2023. And that near $30 billion was in fact a near 30% drop compared to their highest ever annual profit of obviously $40 billion that we had in the prior year. But the idea here being is that, that number for the quarter was higher than expectations, but I guess, I mean, please do add if there's any other metrics that you saw of interest, but one of the things I thought was quite interesting was got the first month of the year in the book. Geopolitical volatility remains elevated. I mean, the situation doesn't seem to have particularly moved on a great deal. If anything, still continues to deteriorate. Doesn't look like there's any resolution in the Red Sea. Or Gaza. So oil gas prices like to remain fairly unpredictable. Now, this all sounds quite obviously negative from a humanitarian perspective, but from an oil profit perspective, I just said there that they're, you know, they've made this money, but it was the year before. And obviously that then starts to bring in the Russian-Ukraine conflict where these oil majors made more money than they've ever made. By a long country mile. So is this current geopolitical situation, and in the context then of the soft landing narrative, decreasing of interest rates, China stepping in to stimulate the economy to avert activity slowdown, is it looking pretty good for these oil majors again this year from what we can see visibility at the moment?

I think, yeah, I think so. I guess they're hedged as well when you think about the Suez Canal, because you've obviously got an issue there, goods flowing east to west. That's a problem. But for Shell, you've got this situation where ultimately, whilst it might cost them more to ship it, well, the price is going to So it's an interesting hedge for them. But yeah, I mean, I would say that ultimately my favorite stat from this earnings report, my favorite stat was their cash flow. They announced a second, it's only their second highest ever. This is cash flow, like cash on a Cash readily available to hand, $54.2 billion was their current cash flow, which kind of blows your mind. I actually did the math here because obviously interest rates have gone up. So you can stick this cash into like money market accounts now and maybe you can generate like 5% interest. So if they just put their cash in a money markets account, just from the income at 5%, they'd be earning $2.7 billion per year just on their cash. You mentioned that, you mentioned their annual profit. Their quarterly profit was $7.3 billion. Again, to kind of blow these numbers, they just, they're just so large, it kind of loses any meaning. So I tried to give it a bit of meaning by saying, wow, okay, well, how much is that per day? Actually, they clocked $81 million profit, that is per day on average through the quarter. Yeah, these big oil giants, they are still absolutely sort of— they're juggernauts. Whilst obviously the longer-term structural shift to green is obviously a big challenge for them, In the meantime, right now they're still, you know, going along very nicely. And actually they did mention it was their giant liquefied natural gas business that performed particularly strongly in the quarter. So yeah, geopolitical risk. Yeah, obviously they've got global downturn risk because as economies slow and if they go into recession, then energy demand drops. So the demand for their product is cyclical. So in 2023, it was very happy days. In 2024, it's looking okay so far. But yeah, there are always these risks on the horizon. But right now, when you've got $54.2 billion in the bank, it's a pretty decent buffer.

Not asking for investment advice because that's not what we do, but Does Shell sit from a top level in a good place in your, in your basket, given, I guess, this push for decarbonization where it seems like the American firms are pretty intent on making hay while the sun shines in the fossil fuel world?

Yeah.

And yes, the transition seems to be taking longer. However, if US companies are just not interested, slightly short-sighted over a long-term horizon, and then BP for, is just going through the mill of leadership strategy crisis. So is Shell the one that sits and stands out to you amongst some of those, those majors?

I think so. Well, I think the European lot you would probably say are a little bit more, um, their green agenda's slightly more real, um, and more important, let's say, on their long-term strategy to-do list than the Americans. Um, it's not to say the Americans aren't investing in that area as well, but yeah, Shell are definitely investing on the green side. I think they spent 9— I think, I think I'm right saying they spent 9 billion last year on green energy initiatives. So obviously they're slowly turning and diversifying away from fossil fuel stuff. Um, I think historically, if you're in the UK, right, Shell and BP for many, many, many years have been one of those kind of cornerstone items in your portfolio because they're big dividend payers. You can guarantee, right? Shell have been— I don't know, you'll have to— someone will have to look it up for me, but Shell have been paying dividends for a million years. So it's as good as a kind of fixed income as you could possibly get from an equity stock, right? So yeah, they pay a lot of dividends, so you get a lot of income out of owning Shell, and they're obviously one of the majors. And so Definitely, you'll find Shell in a huge portion of UK portfolios. And that's not going to change. Okay.

There you have it. All right. Well, look, let's finish on Musk then. I haven't got anywhere in terms of preparation for this topic. So I'm going to let you lead this one and then I'll give you my thoughts when I have more details.

Well, it wasn't— I don't have too much detail either, other than pissing myself laughing when I saw a headline in the FT, and the headline was, "What the $56 billion Tesla pay deal setback means for Elon Musk and his empire." I was like, what, $56 billion pay deal? And I dug into it a little bit, and basically this goes back to 2018. Where Tesla weren't having a great time of it. They were really struggling to hit their growth targets in terms of unit production. They were having a lot of production scale issues. Sales were tough. They weren't having a great time of it. There was a risk. People thought, well, Musk is losing a bit of interest. His SpaceX project seems to be really flying. Maybe he's just going to ditch the whole Tesla thing, or at least not pay as much attention to it. There was all these things, right? And so at that point, Tesla and the board got around the table and said, look, we need to really, you know, we need to make a proper go of this. Can we properly scale to become that car giant, you know, dominate the EV space and indeed the automotive industry, full stop? And so they set in place a bit of a plan. And with that came 16 separate financial targets. Okay. And like a lot of CEOs, you get targets. If they're reached, it triggers payouts. Okay. These payouts often come in the form of share options. All of the big CEOs, all of them will have share options based on targets. Okay. So Musk, um, was the same. So he had 16 separate targets. This was all set in 2018, and basically he's hit 12 of the 16 targets, which has meant that the share option— most of these share options have vested. It's just that this equals 10% of the company, so he's just had 10% of the company's shares basically vesting. To put simply, it's complicated. To put simply, he now is owed 10% of the company. The thing is, though, that equals $56 billion worth. And basically, this went to court. One of the shareholders filed a lawsuit in Delaware. Delaware is where Tesla, the company, this is where it was set up. Okay, so legally, Delaware is the kind of home of Tesla. It's not the home for anything else. The main manufacturing side in the US is in Texas, right? So anyway, a shareholder said, hang on a minute, I'm filing a lawsuit. There's no way Musk should get $56 billion. That's going to dilute my holding. There's no way a CEO should be earning this amount. I'm taking it to court. Delaware, a Delaware judge has gone, actually, you know what? You are right. Now here's the problem. You've got this legal contract set up in 2018, and in 2018, the whole board signed it. And the, some of these targets were like insane. There's no way in on earth they're gonna reach them, except he wrote, he smashed most of them. So you gotta say that Tesla's performance, you know, warrants some kind of very large, you know, well done pat on the back here. Um, but it's all legally drawn up. All right, the Delaware judge, their angle for throwing this out is to say that Musk had an oversized influence on the board even though he owned 20% at the point of that contract being drawn up, which is a long way off a majority. Basically, the judge is saying he had, if you like, an oversized influence over and above the 20% that is on paper because of his shareholding, because all of his disciples are on the board. Board, he has so much control over them, it's as good as him having a majority say on what happens. So basically the judge is saying he used his influence over his board to get this through in 2018, even though it's legally down on paper, shouldn't be allowed.

So it all makes sense now. So the Delaware court decision was pending. So last week then, knowing that this was coming down the pipe in the coming days, You just said then that that would equate to 10%. He asked last week for 12%. So he's already negotiating his 10% pay deal by threatening in the earnings report a little bit more, right? That, so he's already coming down to, to that level to be more palatable. And then at the same time, a dual threat of saying, I'll also pull my AI, the future growth engine of this stock with me if you don't do it.

Yeah, there's many, there's multiple pieces to this puzzle, but ultimately it's coming to a middle ground where a deal could be made. In the meantime, Musk has got pissed off with this Delaware judge and he's asked his Twitter, on Twitter, on X, he said, let's have a vote. Should I move Tesla in terms of where it was inaugurated in Delaware? Should I move that to Texas? Yes or no? 87% of his disciples on X said yes. So he's now going to move the business legally to Texas, and then apparently he's going to have a shareholder vote on whether he should get this package or not.

So yeah, even though that sum is outrageous, but putting it into context of his wealth, his earnings, that amount, and if you were to take the percentage split and then put it into other normal human beings like us, for example, um, he could definitely do with $56 billion though, right?

Well, he's got a bit of a hole in his account after the, yeah, disastrous X purchase.

What did he pay for X?

$44.

Okay, gets a bit of change then on the back of it.

Yeah. It's a little bit of upside. But look, here's the final, maybe final stat. Back in 2018, right, the value of Tesla's company, the market cap was $59 billion. Okay. They set his target, one of these 16 financial targets was to hit $650 billion. Okay. So more than 10x. And everyone was like, chances of that, you know, in the next 5 years, basically zero. Except that by 2021, the market cap got to about $1.2 trillion. Not only did he— not only did it more than— not only did it more than 10x to hit the target, it then went double that on top. I mean, you could say that was a bit of a bubble, of course.

I was going to ask you, is there detail line by line of the 16 points? Because then that starts to me to explain his behavior i.e., when to trigger that clause, trying to utilize social media and leverage something like the Reddit community to then get my stock into the meme community. That could, you know, that makes sense then that he'd engineer this talk about crypto. The whole crypto part of Tesla was to feed into that narrative. To start to create then a company that's not valued on traditional financial principles.

Yeah.

And I, I just wondered that 16 list, I'd love to see it, to see, well, can I work out any other behavioral quirks he has that aren't actually so random because he's just fulfilling a remit to get paid?

Your top 3.

Okay.

The one I've just said, market cap, then there's revenue. So the target— so bear in mind, in 2018, revenue was $12 billion. The target was $175 billion. Okay, so again, more than 10 times. That's been hit. Uh, the other one was profits. Um, so in 2018, the profit was $400 million, and his profit target was $14 billion. So these are crazy high bars, except they've been hit.

Yeah, yeah. I guess at the end of the day, to put me in my place, I mean, he's, he's selling stuff, product, and that's equating to dollars. So, um, as much as you can engineer to juice the share price, he's still got to ship the vehicle.

So, but when you're both together, right, right, then you're— that's a, that's a recipe for a very nice share price pump.

Ludicrous.

All right, cool.

We'll wrap it up there. Thank you very much, uh, Piers. Again, for everyone for listening, thank you. Enjoy your weekend. Uh, please do feel free to drop us a comment if that's available, if you're listening on Spotify or wherever we share this. And then don't forget to follow and give us a rating. That'd be much appreciated. But yeah, take care everyone. Thanks, Piers.

See you later.