Ep.73: Will The Fed Hike 100bps & Is Elon Musk In Trouble

Hello and welcome to episode 73 of the Market Maker podcast episode. We're a day early than normal, Thursday the 14th of July, but Piers and I are otherwise engaged on Friday. But given everything that's happened in markets this week, we thought, gotta jump on and discuss some of these major things. So quick, um, announcement, I guess, before I begin. As usual, we'd super appreciate it if you could Leave us a review or rate the podcast depending what platform you're on. It really does help us get this out to as many people as possible. It's super appreciated by the both of us and all of the team. It's super quick and easy, so just hit that 5 stars if you don't mind, would be amazing. But otherwise, let's just quickly review the week and then I'll go into the 3 major topics that we'll talk about. So, good Couple of headlines, a quick whip around the markets. The inevitable happened. So the euro hit a 20-year low. It's hit parity. It's gone below that, in fact, briefly for one point in time. Comes amid all of the things Piers and I have talked about for many weeks, the economic situation, record high inflation, but also Russia and that critical gas pipeline, the Nord Stream 1, in a so-called maintenance period has made people particularly anxious as well about what could happen next week. Does it come back on? What does that mean then to kind of stoke the fire of inflation further and the kind of downside consequence that could have on euro area growth? The other problem for Europe is your main man Mario Draghi is having a bit of a headache because Italy is at risk of imploding once again. Political instability, very common in Italy. Giuseppe Conte, the Five Star leader, has said he no longer backs Super Mario's cross-party government. Italian stocks have underperformed against their European peers. If you're looking at bond yield spreads, so the Italian bond, the BTP, against the Bund, it's the widest in about a month at the moment. And there is a no-confidence vote happening right now, in fact. So probably you'll, you'll know the outcome of that by the time perhaps you listen to this. And then elsewhere, Biden, he's going to arrive in Riyadh tomorrow on Friday. It's being dubbed Mission Impossible, and the reason why is he's going for a two-pronged plan to bring down oil prices while still punishing Vladimir Putin. And big ask for many different factors. But yeah, big U-turn obviously from 3 years ago. I think Biden was quite vehement in calling out Saudi in terms of human rights and things like that. And here he is now, as of course the consumer in America is feeling the pinch of high fuel prices. Then we've got US bank earnings. They're out this week, just about to kick off actually any moment. So if we're still on the pod, I'll let you know the top line figures. JP Morgan Stanley are going to hit the tape shortly. I've got some of the others as well at the end of the week before it really ramps up. Overall, what are we expecting? Well, Q2 estimated earnings growth rate for the S&P stands at 4.3%. So for context, 4.3% might sound— well, okay, it's going up, but that level in fact would mark the lowest earnings growth rate reported by the index since Q4 of 2020. So when we were really feeling the brunt of the first, most onerous lockdown that we had on COVID. And then finally on the weekly wrap, the former Chancellor Rishi Sunak and the Trade Minister Penny Mordaunt have emerged as the front runners for the Conservative leadership race. That was in the first round where they basically eliminate all the other candidates who throw their hats in the ring. Conservative MPs will reduce that number in a second round of voting today, and MPs must cut that field to 2 candidates by Thursday of next week. And then, yeah, the 3 major topics though, that they weren't even the big things. The big things were, of course, um, red-hot US inflation data, the Bank of Canada surprising the markets with an almighty 100 basis point hike over and above expectations, and then Elon Musk trolling Twitter on Twitter, no less. And so they're the 3 major things that we're gonna, we're gonna talk about. So we'll kick things off then with the US CPI report. If you didn't catch it, essentially the latest figure came in at 9.1%. So on a year-on-year basis, pretty broad-based advance, the largest gain on the headline figure since the end of 1981. Expectations in the market sat at 8.8%. So that 9.1 even busted the top end of the most kind of highest estimate on the street. Um, very quickly the market moved to price an acceleration of Fed rate rises. Probability now of the Fed going 100 basis points in a Canada-esque way is now priced at 76% as of this morning.

That high, right?

Yesterday and overnight, Fed's Bostic— so it's always good to keep an eye on what the Fed speakers say in the aftermath of such new information— Bostic said everything is in play in reference to combating price pressures. He's not a voter. Who is a voter? Mester. She also spoke last night. She said consumer price report was uniformly bad and that the central bank will need to go well beyond the neutral level of rates. What do you think?

That's a kind of cocktail of bad news, isn't it? I mean, yeah, that report yesterday was exactly what the Fed didn't want, is exactly what the whole of the US didn't want. It's exactly what everyone didn't want, unless you happen to be super long the US dollar, or short tech stocks or something. I mean, this is— yeah. The point is that it was— not only was it higher than expected, I mean, that's obviously bad, but it's just the idea that this uptrend in inflation is not only continuing, it's maybe even accelerating. And then you think, Well, I think two things why that's so surprising and therefore alarming. The two things are, well, the rate hikes that we've already seen have done nothing, literally nothing to tame this inflation beast. And all right, the Fed were a little bit late to the party, the rate hiking party, but they hiked in March. 25 basis points. They hiked in June— sorry, they hiked in May, uh, 50 basis points. They hiked in June, 75 basis points. That's a lot of hiking, and no, inflation's still ramping higher, right? That's number one. Number two, that caught— so the headline inflation reading, 9.1%, okay? So that means prices in June 2022 were on average 9.1% higher than they were in June 2021. And in that basket of goods, when I say prices, it's the prices of all the stuff that we kind of buy on a day-to-day basis. One of the big components in the basket is energy. Now, when I go and have a look at things like the oil price, well, what happened in June? Well, actually, the oil price went down. So you've got deflation from the energy, certainly from the oil side. For example, oil was trading— WTI crude was trading at about, let's just call it, $112 at the start of June. By the end of June, it was trading more like $101. We're now down at $93, but that's been in the first 2 weeks of July, right? So energy prices down. You look at natural gas, that came off even more sharply. I mean, natural gas moved from like $8 let's just call it $8.50. By the end of June, it was down $5.50. So energy prices really came off. Also, other commodities like wheat, wheat prices came off sharply. Most commodities dropped in June is my point. And that's been one of the factors that's been driving this inflation problem. And yet, Despite that, so despite rate hikes since March, commodity energy prices particularly coming down, we've still got total headline inflation moving higher and the rate it's moving higher is getting faster. So this is why it's concerning because we just don't know. It makes the second half of 2022 just even more uncertain. I mean, what's going to happen? I mean, is inflation going to peak? Or not, actually. Is it going to continue to trend higher? Is it going to accelerate even further? And so we're in this sort of environment where we just don't know what's going to happen. We thought inflation might have peaked in March, April, but no. And so I guess this presents a real conundrum for the Fed and presents a massive risk for the economy. And yeah, so it's that uncertainty that, that's breeding the kind of market sentiment.

So one of the comments then that the governor of the Bank of Canada said, and I guess we can bring that in because the two kind of we can talk about in combination almost.

Yeah.

So the governor Tiff Macklem said the objective when he was in a statement kind of justifying the rationale behind why they were so forceful in that hike of 100 was to achieve a soft landing. And that's achieved by, quote, front-loading interest rates now. We're trying to avoid the need for ever higher interest rates down the road.

Yeah. So in normal monetary cycle, in normal, you know, interest rate cycles, Historically, going back, if you want to just strip it down to basics, the way it normally happens is that as the economy is growing and getting strong, this leads to demand for goods going up. Because people have got jobs, they're getting pay rises, they're getting bonuses. So they're spending more money. So demand increases, driving up inflation. So then the central bank comes in, and tries to dampen demand to engineer more sustained growth. Because if you just let growth do its own thing and it gets out of control, that demand really ramps up, inflation shoots higher, and in the end, the inflation spike creates the recession because people can't afford to buy as much anymore. Demand gets corrected lower, and that creates a recession. That's that boom-bust cycle, right? Now, normally central banks, they're normally what we call behind the curve. They're behind the inflation curve. They normally act too late and then therefore don't actually achieve what they're trying to achieve, which is contain inflation. Okay? They normally act too late for two reasons. Number one, there's a lag between between the interest rate hike and then that actually dampening demand. And it's hard to measure. Some people say it's about a 6-month lag, which is maybe why my point earlier is a bit invalid where I say, well, hang on, the Fed have already been hiking rates and yet inflation is still going up. Well, yeah, there is a lag, right? So normally when they see inflation rising, it's kind of too late. They start hiking, but because of the lag effect, inflation gets away. The other one is it's political. Rate hikes are not popular. It means it costs more to borrow money. And so the electorate don't like that. So there tends to be a little bit of political pressure on the central bank to not hike. Anyway, so look, they're normally behind the curve. So I guess what the Bank of Canada are doing and what they said yesterday and what they did yesterday is really acknowledging this fact that 'Normally, we're behind the curve historically. So let's actually for once get out in front of this problem by raising interest rates way more rapidly.' So that front-loading idea, and that will basically contain— in the end, it's like short-term pain for long-term less pain. I'm not going to say long-term gain because we're going to get a recession. So it's shorter-term, larger pain. It's like, I guess, one analogy might be when you've got a plaster on, like you cut your arm or something, you put a plaster on. And then at some point, you need to take the plaster off. It hurts taking a plaster off. So you can either try and just inch it off like centimeter by centimeter, slowly peeling it off. Pain over a long period, or you could just whip it off in one day. I guess the Bank of Canada just ripped off the Band-Aid, and they've gone for the big one. They've hiked by 1%, 100 basis points, and that they're trying to get ahead of this inflation problem that they know they're behind.

Yeah, to give that a bit of context, not only is that the largest rate hike by the Bank of Canada in 24 years, It's the first G7 country to move by that magnitude. So does— have the Bank of Canada now done Powell a favor? They've opened the box now. And does that make it easier then for him to shoo in, if he wanted to, 100 without disturbing markets because they can desensitize a fraction by the fact that this has already happened elsewhere? Is there any truth in that, do you think?

I think there is. I actually, personally, I can't quite make up my mind yet. I need to digest this more about what the Fed do at their meeting at the end of July. So we're less than 2 weeks away from the Fed's meeting. Before yesterday— so the 2 key things that happened yesterday, just to repeat, inflation in the US, the inflation figures were much higher than expected. And then the Bank of Canada went and hiked by 100 basis points.

Okay.

If you go back the day before that, then what we were expecting from the Fed at the end of July was that they would hike rates by 75 basis points. Okay. That's what the Fed have been telling us. That's their forward guidance. Right. Now, here we are 24 hours later, and we're talking about, are they going to hike now 100 basis points? Inflation's worse. Bank of Canada have opened the door to this idea. They've set a precedent now, 1%. Actually, doesn't that then grease the rails for the Fed to follow? So that makes sense. But there is one counterargument, which is how much are the Fed worried about their own credibility? Because the Fed have had, I'd say, one of the worst years If you take middle of 2021 to the middle of 2022, that 12-month period, I'd say the Federal Reserve had one of their worst years in my career, which spans 20 years, just in terms of just getting it wrong. They didn't recognize that inflation— they underplayed the inflation problem last year. And maybe, I don't know, are they overplaying it now? I don't know. We'll see. But I guess the point is that they've been guiding us to 75 basis points. If they now go and do 100, does that— I think in some quarters, people will further downgrade their respect and credibility for that central bank. However, I said I can't decide because I think in other quarters, people will go, you know what? Actually, I think that's brave. Check the inflation data, they should be more aggressive. And actually, take your hat off to the Fed. I agree, you should go 100 basis points. You've got even more respect from me now. And I think there's a real divide between those kind of parties. So I can't decide. I probably think the Fed should go 100 now. This inflation beast, it's clearly out of control. I guess one further point to make, what happens to— just put the Fed to one side. What happens to inflation in the second half of this year, irrespective of interest rates? Commodity prices are dropping. Does that naturally call a top to the inflation trend and inflation starts to decline? There's obviously risk against that. There could be another escalation in the Russia-Ukraine situation. I don't know, uh, Putin could just turn off the tap to Europe in a retaliatory effect, which could lead to these commodity prices ramping back up again, right? But at the moment, they've just come off a little bit. Um, does then the consumer side— so remember, you've always got two sides to price. There's supply and then there's demand, right? The two forces that drive price. And obviously price change, that's inflation. So that supply side is talking about the Russia-Ukraine situation and what happens to the supply of energy and stuff. It's also— you got to be mindful of any flare-up of COVID again in China where there may be another lockdown, right? These are unknowns that might or might not happen in the second half of the year. We've got to be mindful and keep an eye out, but we can't predict. Right? So what you can maybe predict better is the demand side. And so far this year, the demand side, certainly in the US, has been surprisingly strong. Consumers are out there buying stuff, even though prices have gone up. And I think there's two reasons for that. Number one is they've had a lot of savings through COVID. Number 2, they had a big fat stimmy check. The government's given them money. So they've gone out there and continued to buy. Secondly, I think it is a behavioral thing. Once you're used to a certain lifestyle, you want to maintain that lifestyle. And even if it means you're eating into your savings, you're going to get out there and you want to go out for dinner, you want to go to the movies, you want to go on holiday. I've been away for 2 years. You want to do these things. And yeah, it's more expensive, but you know what? I'm going to do it anyway. So that's been the attitude for the first 6 months. But what happens on the demand side in the second 6 months of this year will be super interesting. Will those savings dwindle to nothing? Will people actually have to start cutting back? And there's one stat that I want to bring to the table, um, on this topic, which is the US consumer confidence figure. Which— let me get it back up— it dropped to a level of 50 in the month of— this is for the month of June, and that is the lowest reading on record. That's actually a consumer confidence reading that is lower, way lower than COVID crisis, and in fact is lower than the financial crisis in 2008 and 2009. It's actually basically matching the levels seen in the '70s and the '80s when we had this disastrous economic stagflation situation. Consumer confidence says demand is going to weaken.

Yeah, and just to make sense of this, this data set is called the University of Michigan Consumer Sentiment, and what it measures is how consumers feel about the prospects for their own financial situation, how they view the prospects for the general economy, over the near term and their view of prospects for the economy over the long term. So this is a really bad state of mind.

Yeah. And there is one thing to say though, what seems to happen though, even though, I mean, consumer confidence levels have been super low for a few months now, it's still trending lower, right? But even though it's very behavioral again, right? These consumers being surveyed and asked questions about their own economic situation now, and then their future expectations. And when they're answering, they're obviously doom and gloom. Ah, no, yes, we're really worried about inflation and XYZ, and this leads to a really low reading on that sentiment gauge. But then after they filled in the survey, they open the front door, go down the high street, and spend loads of money. So they're still behaving in a way that's different to what they're describing their feelings are. But that can't go on. That disconnect can't continue for long. So for me, the uncertainty is the demand side and how quickly does that unravel.

Well, one of the other things I was looking at earlier this week and I was writing about was we've obviously had Prime this week, Amazon Prime Day, which isn't a day. It's 2 days, such as what retailers do to juice these consumer events. But I got thinking, and I was thinking, I wonder if there's any analytics I can look at about the performance of 2022 Prime Day comparative to then, trying to just see behavioral patterns. 'Cause Prime's one of those days where people sit on the sidelines and wait. So what type of purchase behavior? And there's a company called, Numerator, and they're basically a real-time data, like, shopping traffic analytics, essentially. And a couple of stats for you that kind of will probably help with context. This situation is, um, of those who shopped both this Prime Day and last, 27% spent more this year, 73% obviously then spent less, the same or less. Inflation also impacted 83% of Prime Day shoppers. 33% said they waited for the sale to purchase a specific item at a discounted price. 25% passed on a good deal because it just wasn't a necessity. Yeah, two of the most top 5 in-demand products for this Prime Day, what do you reckon?

Um, a Now you've put me on the spot here. I'm trying to think of some kind of products that you might need for an emergency kind of economic disaster, like tinned food to put in your bunker so that you can survive the disaster that's coming. No. What? Go on, tell me.

Dishwasher pods. What? And Amazon Basics trash bags. Wow, tough times. These are tough times.

They were, they were the two most—

they were two— they placed on as two of the top five items, right?

So they like— so that is a consumer staple, right? Bin bags. I mean, all right, it's a first world problem. You're dishwasher tablets, but these are like consumer staples. It's like stuff you need. So that's really telling. Stuff that you want, i.e., don't need, that's more kind of consumer discretionary items. And if they're not on the list, then that's a classic. That right there tells you that consumer confidence is now actually having an impact on consumer behavior, which means the demand side's weakening. Which means the recession's coming. And the final big question is, does the demand-side collapse deal with the inflation problem? Does inflation then come back down? If so, great, soft landing. The Fed can get back to— they can hike into the end of the year and maybe even start cutting next year. The big, big, big disaster would be if we get the demand-side collapse, and inflation doesn't come back down. And this might happen. I mean, you might think, well, how is that even possible? Well, just quickly, one thing would be check the labor market in the US. There's 10 million job openings still, record off the scale. The number of job openings— so that's the number of jobs that are being advertised, but people aren't taking. Right? And It was at 11.4 million, so it's come down. But you've got us, particularly in the hospitality sector, they're desperate. Airlines, there's flights getting canceled left, right, and center. Why? They just can't hire people. So how do you solve that hiring problem as a company? Well, you're going to have to increase the salary that you're offering. And eventually, you increase it, and increase it, and increase it until eventually someone starts to bite. But that means wages go up. Up super fast. That could lead to a force that continues to drive inflation higher. And that's this whole thing around inflation becoming entrenched. And that's the worst-case scenario where we get straight up stagflation, where growth declines and we're in a recession, demand side collapses, but inflation stays high because of that wage situation. And it just continues the lack of supply of goods.

Yeah. And the inversion between the 2-year and the 10-year yields in the US, now the deepest since the year 2000.

Yeah.

And then people coin these all the time, the inversion, and it's done it multiple times recently as we've gone through this latest episode, if you like, of markets reacting to the inflation situation.

Yeah, that whole— so yield curve inverting, as we've said a few times, it's like that classic recession alarm bell. So for the last 50 years, every single recession in the US, every single one, bar none, has been preceded by the yield curve inverting. Now, there is a lag between the inversion and the actual recession happening. And I think it's I think it could be up to 15 months, I think, is just off the top of my head. But look, the fact that the curve has inverted by more than at any other point this century definitely tells you that— look, it inverted earlier in the year. That's your alarm bell. It's just like now the alarm bell sirens are just blaring across the entire planet. The alarm has just got louder. I think that does signal an increased likelihood of a recession. I think it just says maybe the recession's coming sooner. I think that deeper inversion just says markets are pricing for a recession to happen sooner now than perhaps we had previously thought.

All right. Well, look, let's move off the top-level macro and let's talk a little bit about Elon Musk, who was called a bullshit artist by none other than the Donald. I don't know if you saw that.

Oh wow, I didn't see him.

Donald have been having a ding-dong. Um, Trump's been messaging on, uh, or posting on Truth Social, and then, um, he's been getting hounded then in response by Elon. Elon can't help but bite at these things.

Okay, can I— wait, wait. Getting called what? What did Trump say? A bullshit?

He called it— he called Elon a bullshit artist.

Wow. Yeah, of all the people.

And he was— I can't remember, I can't remember the string of text he said, but it was something like— I saw a picture of it and it was like, you know, his cars, his autonomous cars crash, his satellites blow up, his like— he had a whole string of like all the things. Then he said when Elon was coming for his like credits of the US government for a handout, like a subsidy, he would have been on bended knee like kissing my ass if I asked him to, because it was this whole thing about whether he voted Republican in the past.

And so, right, yeah, yeah.

But look, we're talking of Elon, Twitter. Twitter filed a forceful complaint against Mr. Musk on Tuesday, alleging that he's treated the $44 billion offer for, for Twitter as an elaborate joke. The complaint accuses him of a long list of material contractual breaches— breaching financial obligations, misusing confidential information. The list is quite extensive. Musk's primary reason for walking away from the deal, according to his lawyers, um, as we heard at the end of last week, was that the company failed to provide enough information about the calculation of how many bots are there. And there's— this has been quite openly discussed by Musk himself on, on Twitter, using memes to troll the Twitter board, no less. Um, the two parties, I was reading this morning, could settle or negotiate a deal at a lower price than the $54.20 originally agreed. Where do we sit at the moment? Well, shares have shed about a quarter of their value since this whole episode began. They trade about 37% below the offer price at the moment. If we cast our mind back to peak pandemic, they were trading up at $77 apiece for Twitter shares. As I said, they're now trading— Well, the last price print as of last night, Twitter shares was $36.75. Yeah. What's going on here? Like, what can you take away from Elon Musk? And I've talked about him a lot, but is this an elaborate joke? Is he gonna get penalized? I mean, he's got away with everything so far. He's paid, he's paid what would be big sums for some people, but it's kind of chump change for someone like him. for tweets and inappropriate things he said about SEC filings and all the rest of it. Does he come a cropper this time or not, do you think?

Well, I think he's in the most precarious position he's been in to date. I think he's in a bit of trouble here, actually. Now, whether— best— I think best case scenario for him, well, maybe is that This all gets settled out of court where they agree on a lower share price, and Musk goes ahead and executes the deal. So yeah, his original bid was a total of $44 billion, which was at a share price of $52.40. That's the only— I'd say that's the best case. Is that the best case scenario for Musk? Possibly. But the thing is, I mean, does he want it anymore? I mean, did he want it in the first place? I mean, there's that whole story we were kind of spinning earlier this year about just how can Musk get out of his Tesla holding, because he's kind of locked in. Because if the founder and the cheerleader says, guys, I'm selling, then the whole market would sell and the share price would collapse and his fortune would kind of go with it. And so And one of the conspiracy theories is he's engineered this entire sort of ruse, not to buy Twitter, but just to providing an excuse for selling some of his Tesla shares. Because yeah, guys, look, I've got to raise money to go and buy Twitter. So that's why I'm selling, nothing to do with Tesla. So he's gone ahead and I think he sold, what was it, $8.5 billion worth of his Tesla shares. By the way, at a price that is way higher than where it's trading now. He started selling back in April where it was at $1,000, Tesla. It's now trading at $700. So you could say it's— at its extreme, it's one of the most genius exits in history. That's one extreme end of the conspiracy theory. And he doesn't want Twitter at all. However, I mean, the problem he's got I would say is that— I mean, just to kind of quickly go back for those that have forgotten about the details. So Musk started to secretly build a Twitter shareholding kind of back in March. OK. And by the way, that's when the Twitter share price was trading even below still where it is today, by the way. So it's like in the kind of mid-$30s.

Right?

He started building a stake secretly. And he got up to 9.1%. So by— I think it was by the end of March, early April, he owned 9.1% of Twitter that he'd been building in the background, breaking regulations along the way. Because you're supposed to file and make the regulator aware that you're owning such a portion. He failed to do that. He missed the timeline. So he's in trouble anyway, right from the start. He then— and then he said to the board of Twitter, look, I've got such a large stake, I want a seat on the board now. I want to say in how this company's run. And the board are like, what? No way. And he basically gave the board of Twitter 3 options. Give me a seat on the board, or I'll take over your entire business, or I'm going to start a competitor. Deal with it. So the board said, all right, fine. Come and have a seat on the board. OK, so they gave him a seat on the board, only for then for Musk to go, no, I don't want the seat on the board, thanks. Instead, I'm going to buy you. And he set about a hostile takeover. OK, this brought the board to the negotiating table. And here's Musk's problem, because he very quickly put together a legal contract for this deal. That they kind of signed off on. And there's— I mean, it looks like it was done pretty hastily, and there's very little sort of exit ramps for Musk. And here he now finds himself, he's trying to pull out of the deal, and Twitter are going, 'You can't do that. You're legally obligated to buy us at the agreed price.' And probably one of the things that's come back to bite him was his hastiness to draw up that purchase agreement without thinking too much about kind of trapdoors and exit strategies that he could have. So yeah, he finds himself now with a big, fat, chunky lawsuit. And I guess, yeah, I mean, This is where his tweets are also coming back to haunt him. Have you seen some of the tweets that— Well, I saw him in this lawsuit.

I saw in the FT they had some pictures of some of the pages from the filed suit. And there's just pictures of his tweets saying, OK, point number 59. It's another tweet. 60, he tweeted this. He then tweeted that. And when you actually look at it like that in the blind cold of day and you see these lists of tweets, it's pretty damning.

And so they— and the quote alongside some of the pictures of all of these memes and whatever, this is in the lawsuit. The lawsuit says, for Musk, it would seem Twitter, the interests of its stakeholders, the transaction must agreed on, and the court process to enforce it all constitute an elaborate joke. So they're trying to paint this picture, and with a huge amount of evidence, that Musk is just playing this richest man in the world, just messing about, getting a few kicks and giggles. But actually, to the normal person, this is creating a huge amount of damage. And legally— Musk is not in a strong position.

Yeah, and I think one thing that I think would make Musk nervous is the fact that from the law firms that they've got involved, um, I think one of them is Quinn Emanuel, I think it might be one of them, but these are— I mean, these are expensive lawyers. These are the best lawyers on the planet kind of level.

The lawyers always win.

One of the things that I was reading was around the idea that, you know, Twitter have been very, uh, confrontational with this response and their formal complaint. Would they do that if they weren't crystal clear about the figures? Well, if they come out in the future, if it was 20% like Elon has suggested, which is without substance. Would they pursue this at that level with this type of speed?

I think you make a very good point. There's no way they would be this aggressive, Twitter, if they didn't have solid evidence that the number of accounts that are bots is what they say it is, which is I think around about 5%. Right? Yeah. Um, Musk tweeted— another tweet that's in the lawsuit filing is that this was on the 17th of May. Musk tweeted, 20% fake/spam accounts, while 4 times what Twitter claims could be much higher. This deal cannot move forwards. So again, and apparently Twitter's position is, we have provided plenty of evidence, all of the evidence that's needed to prove that bots are at 5%. Musk doesn't care. He's basically using this bot thing as a kind of a reason to pull out, and it's a poor excuse. And basically what they're saying in the filing is— and the legal technical here is that Musk has breached— this is Twitter's lawsuit, all right? This all needs to be taken through court or not and proven or not. But Twitter are saying Musk has breached his obligation to do everything he could to secure financing for the deal. Basically, obviously, as part of this bid for $44 billion, Musk had to come up with a financing structure. Where are you going to get the money from? There were lots of different elements of it. And part of it was, right, I'm going to sell some of my Tesla stock. Another part was, right, I'm going to borrow money using my Tesla shares as collateral. But of course, in the meantime, Tesla shares have collapsed. They've dropped 30%. So it's like Musk is now maybe thinking, well, I don't really— maybe I don't want to sell Tesla. The banks are going, well, I don't want to really use collateral that has a price that volatile. I'm not comf— like Morgan Stanley, I'm not comfortable with lending you money. Against Tesla shares anymore. So this whole financing thing has kind of unraveled a little bit. Maybe that's the real reason Musk doesn't want this now, and he's trying to get back out, and he's trying to use the bot thing as the excuse. But one thing you mentioned, the lawyers. I mean, yeah, in the legal side of things, they're— you know, Musk is not in a strong position here. And interestingly though, well, two things that are interesting. There's a precedent for this. So there was a company called Deco-Pack Holdings, which I'm sure no one's heard of. But there was a court case in March 2020 where a company called Kohlberg Co, who had bid for Deco-Pack, and then tried to pull out. The court ruling in March 2020 forced Kohlberg to go ahead with the deal as it was previously agreed. OK? Now, the judge that presided on that case is called Kathleen McCormick. And guess what? She's going to be on this case.

Is this the Delaware thing?

Yeah.

Right.

Secondly, The lawyers that acted on behalf of DecoPac Holdings, who won that case, Musk has hired them. So Musk's lawyers were the winning lawyers on that precedent case, even though they won on the other side. They were representing the company that was being bought. Well, now Musk's hired them to represent him, the person who's trying to pull out of the deal. So this thing's amazing. This story just keeps on giving.

The one thing that I can't help but feel is that, forget Twitter, Tesla, I can't see— the evidence is so overwhelming to be long-term bearish on that stock. I just can't see it. Yeah. I mean, I know that this is a really divisive comment I'm making, but you cannot have someone who has shown the behavior of Elon Musk over the past 6 months have anything to do with a company of that magnitude if that company is to have success in the future. Irrespective of the fact that at the moment— I mean, at the moment they've got their back against the wall. They've cornered themselves by being so influenced by a singular individual, but they have to take some damage to get rid of him because he is a problematic person for any maturing, matured business if it wants to be successful in my eyes. And this is without even talking about the EV space and competition and all the rest of it. I just can't see it. I can't see long term how Tesla can survive with him involved.

Yeah, I mean, I think I agree. I mean, it's interesting that, look, Musk is a maverick. He's an out-and-out maverick. He's an inventor. He's a designer. He's an engineer. He's a genius on one level. It's just that as this Tesla thing has grown and grown and grown, it becomes less about having that genius maverick engineer, and it becomes about the cool, hard, really difficult job of running and operating a global business. And all the regulatory and the governance and all the XYZ stuff, which he hates, all of the stuff that comes with that, that's not him. And the bigger they get, the more of a the more damage he's doing and the more of a risk he becomes. Now, what I'm interested to know is, do you think he was always like this? It's just that his platform has grown and now he's got X number million followers on Twitter and he's the richest man in the world and the media want to write stories about him all day, every day. But was he always like this, or has he morphed into this? Has he become quite arrogant?

I think they, they all morph, surely. I mean, you look at Bezos when he was in the garage in the late '90s, and he's like this total dweeb, like total dweeb. And then there's that meme of him walking out when he's got like a gilet on with nothing underneath, and he's busting out some huge gun muscles, and he's got a massive explosion behind him, if you can get me. And it's like he's turned into this like Arnold Schwarzenegger figure from this dweeb. Yeah, of course, I think they change. You would change. That's human behavior. You're going to change. It's going to take that whatever was in you, and it's going to amplify out. Because yeah, I mean, I'd be hard pushed to find someone who's not altered by that situation.

OK, so you're basically saying Elon's got to go. That's not going to be a popular comment. You know that, right?

Yeah, but that doesn't mean he can't have success and go on to do other things. Like he should go—

he should concentrate on SpaceX.

I don't know how he can retain employees at Tesla as a company culture, as a managing, like, a board of directors. They must be— it must be a situation if he goes in a boardroom and he goes— he just literally, someone speaks, he goes, shut up, because it must be a completely one-dimensional overarching control from him. Otherwise they would have got rid of him.

Yeah, dictatorship.

Yeah, and a business can only run like that for a short period of time.

Well, yeah, this Twitter saga could well be the one step too far for Mr. Elon. Time will tell.

So I've got a call from Bill Gates. He wants to talk about the position. Hold on. All right, so we'll end it there. Um, thank you for, for listening. Hopefully that was interesting, and hopefully I've not pissed off alienated me. You know, I'm sure a lot of people think the complete opposite to me, and that's, that's fine. That's what makes a market, ladies and gentlemen. Um, but yeah, thanks for listening, and, uh, we'll see you next week. Thanks, Piers.

See you guys, have a good weekend.