Earnings Season Recap #22

Stay up to date with the latest trends in the world economy by reading our gathered highlights from the recent earnings calls from Citigroup, Bank of America, Wells Fargo, Morgan Stanley, and Goldman Sachs. Additionally, Elon Musk describes what he considers to be the potentially biggest asset value increase in history.

Observations on the banking system and recent events, operating performance for Citi’s core business segments, and predictions for a shallow recession.

Revenue +12%
Net Income +7%
*margin 21% (22)
ROE 9.5% (9)
ROTCE 10.9% (10.5)

-> “The U.S. financial system remains unmatched globally”: Well, 2023 is shaping up to be another interesting year. Given the tumultuous events of the last few weeks, I'm going to share some observations, and then we'll turn to what was a good quarter. First, our banking system as a whole is very strong. While a small handful of institutions still have challenges to overcome, the U.S. financial system remains unmatched globally. And I feel confident saying that as someone who has worked in many different systems around the world. The U.S. system comprises a healthy mix of community banks, regional banks and larger global banks, including Citi. We all have important but different roles to play, serving different clients with different needs and on different scale. I would also point to the rapid response by state, federal and international regulators, that help reinforce confidence in the system at a very critical juncture. I'm pleased that Citi has been a source of stability for the financial system and a source of strength for our clients. That's not an accident. We are in a position to play this role because our strategy is delivering a simpler, more focused bank. We benefit from a diversified earnings base and resilient business model. This is reinforced by our robust balance sheet management, liquidity position and strong risk management frameworks. We are disciplined in how we run the firm, from client selection to capital planning. – Jane Fraser, CEO & Director (01:28)

-> Observations on the banking system and recent events: And it's also thanks to our people, and I want to express my pride in our colleagues around the world who worked tirelessly last month to serve clients as they turned to Citi as a port in the storm. Recent events have shown that prudent asset and liability management is absolutely paramount. While Mark is going to walk you through our approach and our focus on interest rate risk, liquidity and capital, I do want to mention a few things myself. In terms of assets, our loans are high quality and short duration. We have highly liquid investment securities and a significant amount of cash. We have over $1 trillion worth of available liquidity resources, including $584 billion of HQLA and an LCR of 120%. And we maintain a diverse set of funding sources, including over $1.3 trillion of deposits across corporates, consumers, industries and regions, many of which are operational in nature. Indeed, the cornerstone is our institutional deposit base, which comprises about 60% of our deposits. Most of these deposits are particularly sticky because they sit in operating accounts that are fully integrated into how our multinational clients run their businesses around the world from their payroll to their supply chains to their cash and liquidity management. – Jane Fraser, CEO & Director (02:58)

-> Expect a shallow recession later this year: We operate a strong risk framework that looks at both assets and liability concentrations across client segments, industry and region. And we're confident in the size and nature of our exposures, given our very rigorous stress testing. We also diligently manage counterparty risk, which is critical given the interconnectedness of financial institutions. We are in a strong position to navigate whatever environment we face, which is particularly relevant given the degree of uncertainty today. The Fed continues to use rate policy to battle inflation, which has been more than stubborn in services even as we see signs of cooling in labor and manufacturing. We expect the recent event to be disinflationary and credit to contract. We believe it's now more likely that the U.S. will enter into a shallow recession later this year. That could be exacerbated in depth and duration in a more severe credit crunch. – Jane Fraser, CEO & Director (05:15)

-> Operating performance for the 5 core businesses: In Services, TTS has continued to go from strength to strength with revenues up 31%. Noninterest revenue was up 11% quarter-on-quarter on the back of increased cross-border activity and good performance in commercial cards due to the rebound of corporate travel. Securities Services wasn't too shabby either, up 23% as we executed on new mandates, onboarded new AUC and benefited from higher rates. Within markets, our fixed income revenues were up 4% from a year ago. We benefited from excellent performance in rates and continued engagement from our corporate clients. The first quarter of 2022 was no slouch, as you may recall, but this quarter was our third best in a decade. Equities was much weaker, however, down markedly in both derivatives and cash, although it still had revenues north of $1 billion. Banking was down again, but there were signs of the beginning of a pickup, including increased activity in the investment-grade market. In U.S. Personal Banking, our cards businesses gained momentum as all drivers continued to normalize to pre-COVID levels and beyond. Branded cards and retail services saw revenues up 18% and 24%. [...] Finally, while revenues were down again, we remain confident about the prospects of our Wealth business. Despite the challenging headwinds, growth in Citigold accounts, client acquisition and client advisers were all solid, and we expect these drivers to flow through to revenues later this year and beyond. We also saw the early signs of a long-awaited Asian recovery. We built credit reserves this quarter on the back of growth in revolving balances in cards and poorer macro outlook. – Jane Fraser, CEO & Director (07:25)

Predictions for a recession, the pace of payments, the most tangible headwinds, and more.

Revenue +13%
Net income +15%
*margin 30.8% (30.6)
EPS +18%
ROE 12.5% (11)
ROTCE 17.4% (15.5)

-> Strong results across the board: During quarter 1, importantly, the organic growth engine continued to perform. Let me first summarize some points, and I'll turn it over to Alastair to take you through the details of the quarter. Bank of America delivered strong earnings, growing EPS 18% over first quarter '22. Every business segment performed well. We grew clients and accounts organically and at a strong pace. We delivered our seventh straight quarter of operating leverage, led by a 13% year-over-year revenue growth. We further strengthened our balance sheet with our CET1 ratio increasing to 11.4%. Regulatory capital ended the highest nominal level in our history to $184 billion. We maintained strong liquidity. We ended the quarter with more than $900 billion in global liquidity sources. We are in good returns for you as our shareholders with a return on tangible common equity of 17% and 107 basis points return on average assets. Tangible book value per share grew 9% year-over-year. We did this as the economy slowed. – Brian Moynihan, Chairman & CEO (01:50)

-> Predicts a shallow recession: Our research team continues to predict a shallow recession that will occur beginning in the quarter 3 of 2023. It's interesting, if we look at our consumer behavior, payments by consumers continue to drive the U.S. economy. We've seen debit and credit card spending at about 6% year-over-year growth pace, a little slower but still healthy. But remember, card spending represents less than a quarter of how consumers pay for things out of their accounts at Bank of America. Overall payments from our customers' accounts across all sources were up 9% year-over-year for March as a month. Year-to-date, they're up about 8% for the quarter. – Brian Moynihan, Chairman & CEO (03:05)

-> The pace of payments bounced back: After slowing the back half of '22 a bit, we saw the pace of payments pick back up in quarter 1, especially in the latter parts of the quarter. Consumers' financial positions remain generally healthy. They're employed with generally higher wages, continue to have strong account balances and have good access to credit. As you think through all the tightening actions of the Fed, the flows to alternative yielding assets, investments and the disruption of the past quarter, our deposits continue to perform well, ending the quarter at $1.9 trillion. If you think about it, that's about the same balance we had in mid-October of 2022. So we've seen these balances stabilize and remain 34% above they were prior to the pandemic. The team has managed well during these periods of remaining focused on the things we can control to drive value through our franchise. I thank them for a very strong quarter, near-record earnings with strong returns. – Brian Moynihan, Chairman & CEO (03:40)

-> Strong non interest revenue despite three headwinds: For the quarter, we generated $8.2 billion of net income, and that resulted in $0.94 per diluted share. Our revenue grew 13%, and that was led by a 25% improvement in net interest income, coupled with strong 9% growth in sales and trading results, excluding DVA. Our non interest revenue was strong despite 3 headwinds. First, we had lower service charges as commercial clients paid lower fees for treasury services, since they now receive higher earned rates on balances. And obviously, that allows us to invest those funds to earn NII. On Consumer, we had lower NSF, insufficient funds and overdraft fees as a result of our policy changes announced in late 2021. Second, we had lower asset management fees, and that just reflects the lower equity market levels and fixed income market levels. Third, investment banking fees were lower, just reflecting the continuation of sluggish industry activity and reduced fee pools. Now all that said, despite these headwinds, each of the fee categories saw modest improvement from the fourth quarter levels. – Alastair Borthwick, CFO (05:04)

-> Dividends and buybacks: The AOCI included more than $0.5 billion increase from improved valuations of AFS debt securities, and that flows through CET1, and the remaining $2.5 billion due to changes in cash flow hedges doesn't impact regulatory capital. During the quarter, we paid $1.8 billion in common dividends and we bought back $2.2 billion in shares. Turning to regulatory capital. Our CET1 level improved to $184 billion since December 31, and our CET1 ratio improved 14 basis points to 11.4%, once again, adding to our buffer over our 10.4% current minimum requirement as well as the 10.9% minimum requirement that we'll see on January 1, '24. That means in the past 12 months, we've improved our CET1 ratio by 100 basis points, and we've supported our clients and we've returned $12 billion in capital to shareholders. – Alastair Borthwick, CFO (07:40)

Consumer spending, buybacks, reflections on the recent banking crisis, and more.

Revenue +17%
Net income +32%
*margin 24% (21)
EPS +35%
ROE 11.7% (8.7)
ROTCE 14% (10.4)

-> Consumer spending and buybacks: We will continue to monitor the trends in each of our loan portfolios to determine the future action is warranted. Both commercial and consumer average loans were up from a year ago, but were relatively stable from the fourth quarter. Consumer spending remained strong with growth in both debit and credit card spend, but spending began to soften late in the quarter. The decline in average deposits that started a year ago continued in the first quarter primarily driven by customers seeking higher-yielding alternatives and continued growth in consumer spending. We did see some moderate inflows from the few specific banks that have been highlighted in the press but those inflows have abated. Our CET1 ratio, which was already strong, increased to 10.8% even as we resumed common stock repurchases in the first quarter buying back $4 billion in common stock. – Charlie Scharf, CEO (03:14)

-> Thoughts on the recent banking crisis: Let me share some thoughts on the recent market events impacting the banking industry. [...] I'm proud of everything our employees have done during this historic period to be there for our customers. We believe banks of all sizes are an important part of our financial system as each is uniquely positioned to serve their customers and communities. It's important to recognize that banks have different operating models and that the banks that fail in the first quarter were quite different from what people think of when they think about the typical regional bank. These particular banks had concentrated business models with heavy reliance on uninsured deposits. Our franchise and those of many other banks operate with a broader business model and more diversified funding sources. It is times like these that the many benefits of our own franchise become even more clear. Our diversified business model provides opportunities to serve our customers broadly, which reduces concentration risk across the different elements of risk. Most importantly, our customers benefit from our size and the range of banking services we provide, which helps us build a full relationship with individuals and companies. We also have strong capital and liquidity positions, which include a mix of deposits and access to multiple funding sources and our continued focus on financial and credit risk management allows us to support our customers throughout economic cycles. – Charlie Scharf, CEO (04:07)

-> Consumer financial health trends are gradually weakening: Net loan charge-offs continue to slowly increase to 26 basis points in the first quarter but were still below pre-pandemic levels. Commercial net loan charge-offs decreased $16 million from the fourth quarter to 5 basis points. While losses improved, we continue to see some gradual weakening in underlying credit performance, including higher nonperforming assets. We are proactively monitoring our clients' sensitivity to inflation and higher rates and are taking appropriate actions when warranted. We are also closely monitoring our commercial real estate office portfolio, and I'll share some more details on our exposure on the next slide. As expected, we've seen consumer delinquencies and losses gradually increase. Total consumer net loan charge-offs increased $60 million from the fourth quarter to 56 basis points of average loans, driven by an increase in the credit card portfolio. While most consumers remain resilient, we've seen some consumer financial health trends gradually weakening from a year ago, and we've continued to take credit taking actions to position the portfolio for a slowing economy. – Mike Santomassimo, CFO (14:06)

-> Expects more stress in the office market over time: Given the increased focus on commercial real estate loans, especially office, we provided more details on our portfolio on Slide 6. We have $154.7 billion of commercial real estate loans outstanding at the end of the first quarter with 35.7% of office loans, which represented 4% of our total loans outstanding. The office market continues to show signs of weakness due to lower demand, higher financing costs and challenging capital market conditions. While we haven't seen this translate to meaningful loss content yet, we expect to see more stress over time. As you would expect, we have been derisking the office portfolio, which resulted in commitments declining 5% from a year ago, and we continue to proactively work with borrowers to manage our exposure, including structural enhancements and paydowns as warranted. – Mike Santomassimo, CFO (15:30)

-> Net interest income: First quarter net interest income was $13.3 billion, which was 45% higher than a year ago as we continue to benefit from the impact of higher rates. The $97 million decline for the fourth quarter was due to two fewer business days. Our full year net interest income guidance has not changed from last quarter as we still expect 2023 net interest income to grow by approximately 10% compared with 2022. And Ultimately, the amount of net interest income we earned this year will depend on a variety of factors, many of which are uncertain, including the absolute level of interest rates, the shape of the yield curve, deposit balances, mix and repricing and loan demand. – Mike Santomassimo, CFO (19:02)

The volatile capital markets, capital allocation, and why Goldman is optimistic for a turn regarding the economic reset.

Revenue -5%
*Investment banking -26%
*Investment management +11%
*Commissions and fees +8%
*Market making -10%
Net income -18%
*margin 26% (30)
EPS -18%
Annualized ROE 11.6% (15)
Annualized ROTE 12.6% (15.8

-> The worst of the volatility is behind us: We delivered solid performance in a challenging environment. We produced net revenues of $12.2 billion and generated earnings per share of $8.79 and an ROE of 11.6% and an ROTE of 12.6%. The first quarter was certainly volatile, particularly for the banking sector after a fairly benign operating environment at the start of the year. In March, we witnessed the collapse of two regional banks in the United States. Stress quickly spread to a number of institutions across the financial sector, where we saw ratings downgrades and steep valuation declines in very short order. These stresses were not limited to the U.S. as we saw when regulators help arrange the combination of Switzerland's two largest financial institutions. It's important to appreciate the size of the disruption. Some of the market moves during the period were staggering, particularly in interest rates. To give you a sense of the magnitude, there have been just 4 days in the past 25 years that have seen 2-year yields moved by 50 basis points or more intraday. One was in September 2008, and 3 of them occurred in mid-March this year. Monday, March 13, was the biggest 1 day move in the U.S. Treasury 2-year yields in over 35 years. As we sit here today, it appears that the worst of the volatility is behind us. Prompt action by regulators was vital in bolstering confidence and stabilizing market sentiment. – David Solomon, CEO (01:04)

-> Global Banking & Markets performance and strategic M&A outlook: Global Banking & Markets produced revenues of $8.4 billion in the first quarter, which generated an industry-leading ROE for the segment of 16.6%. Advisory revenues of $818 million were down 27% amid lower industry completions. Underwriting revenues continue to be below recent averages and were lower year-over-year. Despite the difficult backdrop, we were #1 in the league tables for completed M&A and high-yield debt underwriting. We also ranked second for equity and equity-related underwriting. Our backlog fell quarter-on-quarter, primarily in advisory, but we remain cautiously optimistic on the outlook for the second half of the year and 2024, particularly for strategic M&A. We also expect investors will need more certainty before financing markets reopened broadly, but we have seen an increase in underwriting dialogues in the first 2 weeks of the second quarter. FICC net revenues were $3.9 billion in the quarter, down 17% as one of our strongest sets of results in rates was more than offset by significantly lower currencies and commodities revenues, which were very strong in the first quarter of 2022. – David Solomon, CEO (06:58)

-> Share repurchases: In the quarter, we've returned $3.4 billion to shareholders including common stock repurchases of over $2.5 billion and common stock dividends of roughly $870 million. While we expect to continue to focus on sustainably growing our dividend, we would note that repurchases in any given quarter will vary. Though we find our stock price attractive at current levels in light of the current environment, we expect to moderate our repurchase levels in the second quarter relative to the first quarter. In conclusion, our first quarter results were solid in the context of a volatile environment. Our robust financial position allowed us to focus on serving our clients and helping them navigate this period of market disruption. Across our leading businesses in Global Banking & Markets, and Asset & Wealth Management, we remain well positioned to continue to support our clients and execute on our strategic priorities. With that, we'll now open up the line for questions. – David Solomon, CEO (14:27)

-> Generally, a reset turns after 4 to 6 quarters: Now with respect to financial sponsors, we're still going through a reset. I'm encouraged by the fact in the quarter, we saw 1 or 2 deals where, were kind of the bid offer between the value that the financial sponsor could achieve and the financing price came to meet. There was a good data point and a sell down of the legacy deal in the market. I would say the financial sponsor activity is still muted, and there's more upside as the reset on both value and financing cost continues. I think we're going to get there. I'd expect more in the second half of the year unless it was a much more pronounced economic disruption because it just takes time for people to reset. We've now kind of gone through 5 quarters of reset. And so generally speaking, historically, you kind of see these things turn on after 4 to 6 quarters. So I would just expect more of a base level of activity from what's been very, very muted. – David Solomon, CEO (17:15)

Capital allocation, why we’re not in a banking crisis, predictions for interest rates, and the two biggest risks.

Revenue -1.9%
*Institutional Securities -11%
*Wealth Management +11%
*Investment Management -3.5%
Net income -19%
*margin 21% (25)
EPS -16%
ROE 12.4% (14.7)
ROTE % 16.9% (19.8)

-> Period highlights and buybacks: The first quarter of 2023 was very eventful for our industry, but not so eventful for Morgan Stanley. Firm delivered strong results with revenues of over $14.5 billion, net income of $3 billion, ROTCE of 17% and net new asset flows of $110 billion. At the same time, we bought back $1.5 billion of stock while maintaining a CET ratio of 15.1%. In many ways, it was an excellent test to Morgan Stanley and the opportunity to show the strength and stability of our business model. [...] While the performance of the overall business was strong, the results reflected the impact of the environment. In Wealth Management, positive flows of $110 billion were a very strong result, reflect continued growth in the model together with the flight to quality. This obviously gives us a good start to our 1 trillion every 3 years target. Investment management also benefited from diversification as long-term outflows moderated, and we saw strength in Parametric and also on the liquidity product. Overall margin in the Wealth Management business was 26%, impacted by modest increases in credit reserves, slightly lower growth of NII versus forecast and ongoing integration expenses. We continue to focus on the levers within our control with an eye towards expense management. In ISG, underwriting and M&A remain very subdued. As I've said previously, these are revenues delayed, not dead. Already, we're seeing a growing M&A pipeline and some spring-like signs of new issuance emerging. – James Gorman, Chairman & CEO (01:50)

-> “We are not in a banking crisis”: Let me just touch briefly on the turmoil and the banking sector. In my view, we are not in a banking crisis, but we have had and may still have a crisis among some banks. I believe strong regulatory intervention on both sides of the Atlantic led to the cauterization of the damage. I consider the current issues as not remotely comparable to 2008. I was pleased that Morgan Stanley, along with the other large U.S. banks, became part of the solution by providing an uninsured deposit line of $30 billion to First Republic Bank. Someone who lived through the darkest days of 2008 where Morgan Stanley was seen as part of the problem, it's indeed rewarding to be here 14 years later as part of the solution. – James Gorman, Chairman & CEO (01:20)

-> MS sees a choppy earnings season ahead: I expect the markets to remain choppy through this earnings season and for the next several months. However, absent any geopolitical surprise or limited progress on bringing down inflation, I think 2023 is likely to end on a constructive note in most areas. Morgan Stanley is very well positioned not just for 2023, but for several years ahead as we see significant growth opportunities across all 3 of our client platforms. – James Gorman, Chairman & CEO (03:30)

-> Investment banking and underwriting: Investment Banking revenues decreased year-over-year to $1.2 billion. [...] Equity underwriting revenues were $202 million, down 22%, largely as a result of depressed IPO activity. While IPO and follow-on activity remained muted, issuers selectively accessed market windows. Fixed income underwriting revenues were $407 million. Results were supported by an open investment grade market and opportunistic loan activity. Clients are engaged as we help them navigate an uncertain backdrop, and our investment banking backlog is building. Financial sponsors continue to look for opportunities to invest. Within underwriting, we are encouraged by the issuance activity during constructive windows. Of course, further conversion from pipeline to realized is predicated on clarity around macroeconomic conditions, stable financing markets and increased corporate confidence. – Sharon Yeshaya, Executive VP & CFO (06:09)

-> More on the banking crisis and outlook: The fallout resulting from the events in March is not indicative of the systemic stress that the industry faced during the global financial crisis. Our clear and consistent strategy allowed us to enter this environment well positioned. The outlook for the remainder of this year is difficult to predict. We are keenly aware that opening and functioning markets and economic stability are integral in aiding confidence moving forward. In the interim, we remain focused on supporting our clients and attracting assets to our platform. With that, we will now open up the line to questions. – Sharon Yeshaya, Executive VP & CFO (17:03)

-> The two biggest risks and interest rates: I think the two wildcards out there are geopolitical risks, which we can't really handicap. My gut is that the U.S.-China relations while having their moments of tension remain overall stable through this year, and global trade remains stable. The second risk, of course, is that the Fed's actions don't bring down inflation, while the evidence so far is that it is bringing down inflation, but they're probably not done. I think it's likely we'll see at least one more and possibly two more rate increases. That gets you to sort of high 5%, 6% type interest rates, which is not shocking. And if we get through that, again, many people are calling for a modest recession, it might be, I don't know, obviously. But my gut is, whether it's a modest recession or we dodged that bullet, sort of doesn't matter that much. What really would matter is if inflation is not tamed, it has to go much higher than people are expecting. You go into a much deeper recession. – James Gorman, Chairman & CEO (25:57)

Energy storage and full-self driving, the softening lithium carbone market, how Tesla is affected by the macro situation, and what Elon believes to be the biggest asset value increase in history.

Revenue +24%
*Automotive+18%
*Energy generation & storage +148%
*Services & other +44%
Gross profit -17%
EBIT -26%
*margin 11% (19)
FCF -80%
* margin 2% (12)

-> Q1 recap: Model Y became the best-selling vehicle of any kind in Europe and the best-selling non-pickup vehicle in the United States. And this is in spite of a lot of challenges in production and delivery. So it's a huge credit to the Tesla team for achieving these great results. It is worth pointing out that the current macro environment remains uncertain. I don't think I'm telling anyone anything, I think people already know, especially with large purchases such as cars. And while we reduced prices considerably in early Q1, it's worth noting that our operating margin remains among the best in the industry. We've taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin. However, we expect our vehicles, over time, will be able to generate significant profit through autonomy. So we do believe we're like laying the groundwork here, and then it's better to ship a large number of cars at a lower margin, and subsequently, harvest that margin in the future as we perfect autonomy. This is an extremely important point. Let's see. Regarding the Cybertruck, we continue to build Alpha versions of the Cybertruck on our pilot line for testing purposes. It's a great product, and we're completing the installation of the volume production line at Giga Texas, and we're anticipating having a delivery event, a great delivery event probably in Q3. – Elon Musk, CEO (00:56)

-> Energy storage and full self-driving: Our energy storage deployment reached nearly 4 gigawatt hours in Q1. This is, by far, the strongest quarter ever. And this growth was achieved thanks to the ongoing ramp at our Mega factory in Lathrop, California. There's still some way to go to reach the following rate of 40 gigawatt hours per year. And then we additionally announced the start of a new Mega factory in Shanghai. As we've expected, the stationary storage growth will actually significantly exceed the vehicle growth. Regarding Autopilot and Full Self-Driving, we've now crossed over 150 million miles driven by Full Self-Driving beta, and this number is growing exponentially. This is a data advantage that really no one else has. Those who understand AI will understand the importance of training data and how fundamental that is to achieving an incredible outcome. We're also very focused on improving our neural net training capabilities as is one of the main limiting factors of achieving full autonomy. So, we're continuing to simultaneously make significant purchases of NVIDIA GPUs and also putting a lot of effort into Dojo, which we believe has the potential for an order of magnitude improvement in the cost of training. – Elon Musk, CEO (03:15)

-> Full self-driving will be available already in 2023: I can kind of answer the details on the FSD take rate, but it's a tricky pricing question, because the value of a car that is autonomous is enormous. So in a way, the price right now is an option value on an autonomous vehicle. And that will ultimately be very significant. For those that are using the FSD beta, I think you can see the improvements are really quite dramatic. There'll be a little bit of two steps forward, one step back between releases for those trying the beta. But the trend is very clearly towards full self-driving, towards full autonomy. And I hesitate to say this, but I think we'll do it this year. So that's what it looks like. – Elon Musk, CEO (23:05)

-> Elon on the softening lithium carbone market: On the lithium front, to emphasize, the choke point is much more on refining capacity than it is on mining. The theme is very common throughout the world, including in the US and really it's just a very common element on earth, is lithium. So, it's much more a question of where is the refining capacity and can the refining capacity keep up? That's really what matters more than where is the lithium ore. It's everywhere basically. I think that same question also extends to refining of the cathode and to some degree, refining of the anode. And this is why we, at Tesla, we're building our lithium refinery capability at Corpus Christi and our cathode refinery outside Austin. It's worth noting, I hope other companies do the same thing. We will have, by far, the most lithium refining capability and the most cathode refining capability in North America, I think, probably more than everyone else combined by a lot. So, can other people please do those work? That would be great. We're begging you. We don't want to do it. Can someone please? Like instead of making a picture-sharing app, please, we're trying, lithium, mining and refining, heavy industry, come on. – Elon Musk, CEO (27:15)

-> There are two primary macro-related factors affecting Tesla: I mean there's really two macro factors that are tricky. The biggest being the interest rate. So if there's a very high Fed rate or interest rates are very high, every time the Fed raises the interest rates that's equivalent to increasing the price of a car. It makes the cars less affordable because people are able to buy cars as a function of what they can afford on a monthly basis. So it's just almost directly equivalent to a price increase, is there any kind of interest rate increase. Then the other factor is whenever there is uncertainty in the economy, people will generally postpone new capital purchases like a new car. This is a natural human reaction. So if people are reading about layoffs and whatnot in the press, they're like, well, they might be worried about -- they might be laid off. So then they'll naturally be a little more hesitant than they would otherwise be to buy a new car. Now this is just the nature of the auto industry. But there is -- there will be a trans amount of pent-up demand for new cars. So it goes through cycles. – Elon Musk, CEO (32:54)

-> The biggest asset value increase in history: I'd look at Dojo as kind of a long-shot bet, but if it's a long-shot bet that pays off, it will pay off in a very, very big way. But potentially, yeah, potentially in a very, very big way, Like in the multi-hundred billion dollar level. But I think it's like still putting it in the long shot category, but long shot with a multi-hundred billion dollar potential outcome. So it's a bet worth making, but not one you can sort of say like or take it to the bank type of thing. Although, these days take it to the bank, it's maybe not as secure as it used to be. So obviously, big believes in heat pumps. And that is on all this that over time is to do a really good heat pump for homes and commercial offices and stuff. And we have the technology that's really good. But it's still a back burner item. Our focus is very much on vehicles, autonomy, stationary storage, basically solving sustainable energy and solving autonomy, which would be like solving autonomy, if we're able to have a fleet of several million vehicles that with a software update can be potentially worth several times their original value, if that happens, that will be the – and I think it will happen, that will be the biggest asset value increase in history, I think. – Elon Musk, CEO (35:03)

-> Barriers to entry within the EV market: Assuming I could wax on about for a while because really, people didn't understand that the best short-selling argument against Tesla for the longest time was the fact that Tesla does not have an existing fleet, and that the reason incumbents succeed and newcomers fail the auto industry, the biggest reason is that the incumbents have a large fleet, and they're able to sell new cars at close to zero margin and then sell spare parts at a very high margin, sort of razors and blades type thing. And so the only way to actually succeed for a newcomer to succeed is to have a product that is so compelling that people are willing to pay a premium over the incumbent product. And in the absence of electrification and autonomy, I don't think a newcomer can succeed. – Elon Musk, CEO (01:00:16)