WEBVTT - Tariffs Only Address a Short Term Goal, Rose Says 0:00:09.840 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:33.480 Bloomberg dot Com, and of course on the Bloomberg. Bill 0:00:33.520 --> 0:00:35.640 Lee with us now from Washington. William Lee was City 0:00:35.680 --> 0:00:38.680 Group for years and now at the Milken Institute. Bill. 0:00:39.120 --> 0:00:40.640 To me, it looks like a trade war. I think 0:00:40.640 --> 0:00:43.319 there's really no other way to put it, yuh, And 0:00:43.479 --> 0:00:46.840 it was skirmish, Tom right. The skirmish is to get 0:00:46.880 --> 0:00:49.479 people's attention so that they can be really attentive at 0:00:49.479 --> 0:00:52.000 the bargaining table. And I my hope and prayer is 0:00:52.040 --> 0:00:53.680 that that is where the end game is going. Is 0:00:53.880 --> 0:00:55.639 what are we going to be negotiating over? I think 0:00:55.640 --> 0:00:58.480 the media is poorly explaining it. To use John's numbers, 0:00:59.360 --> 0:01:02.520 hundred bill in but then there's a tariff on that. 0:01:03.040 --> 0:01:05.760 If it's five percent or one percent or three percent 0:01:05.880 --> 0:01:09.360 or ten could it really be twenty five percent? Are 0:01:09.400 --> 0:01:14.039 we are we going back to days of twenty five tariffs? 0:01:14.480 --> 0:01:17.360 I don't think we'll ever revisit the smooth holidays where 0:01:17.400 --> 0:01:20.000 it's tariff on tariffs, and you get these huge percentages 0:01:20.080 --> 0:01:21.880 and and you know when you get a lot of 0:01:21.880 --> 0:01:24.920 small percentagers together, that's real money we're talking about. And 0:01:24.959 --> 0:01:27.640 so so I think that's kind of escalation. We've learned 0:01:27.640 --> 0:01:29.880 the lessons from in history, and everyone has learned them 0:01:29.880 --> 0:01:31.760 even in high school. But one of the things that 0:01:31.800 --> 0:01:35.800 we need to keep in mind is we the negotiating 0:01:35.800 --> 0:01:38.399 strategy is you've got to get the attention of the 0:01:38.400 --> 0:01:42.160 other side. And and the five agenda of China is 0:01:42.240 --> 0:01:45.600 bio medicine, robotics, high tech stuff and and the fact 0:01:45.640 --> 0:01:49.480 that we even touch on their on their prize possessions 0:01:50.120 --> 0:01:52.320 brings their attention to the table. And I think that's 0:01:52.320 --> 0:01:55.240 the strategy of the administration going forward. And Bill, just 0:01:55.280 --> 0:01:57.120 to backdrop to all of this, the U s economy 0:01:57.160 --> 0:01:59.880 looking rock solid, the Chinese economy looking a little bit 0:02:00.000 --> 0:02:02.560 self done. So to me about what's happening there, thank you. 0:02:02.760 --> 0:02:04.560 I think one of the things that we keep we 0:02:04.600 --> 0:02:07.040 forget is first, China's half the size of the US. 0:02:07.080 --> 0:02:11.519 And number two, China's growth is based upon massive over investment. 0:02:11.800 --> 0:02:14.359 The essentially, when when you think about the investment to 0:02:14.440 --> 0:02:18.040 GDP ratios in China, it's multiples of what the U 0:02:18.120 --> 0:02:20.639 s has. Now that adds to their productivity. Yes, it 0:02:20.680 --> 0:02:23.359 gives them the great advantage going forward, but it's deprived 0:02:23.400 --> 0:02:26.000 the citizens of a lot of consumption. And and the She, 0:02:26.440 --> 0:02:30.440 the She administration recognizes that they have to address consumption 0:02:30.560 --> 0:02:33.040 in China. And so so that's where I think the 0:02:33.080 --> 0:02:35.680 US has got some advantages because we know that they 0:02:35.760 --> 0:02:39.919 need more consumptions goods and services high tech UH services 0:02:39.919 --> 0:02:43.000 of the sort of five G type type environment. And 0:02:43.000 --> 0:02:45.200 and quite frankly, in that race, in the five G 0:02:45.360 --> 0:02:48.160 world race, China and the US are starting at the 0:02:48.240 --> 0:02:51.120 same place in the starting line. There's no advantage U 0:02:51.160 --> 0:02:53.600 has has over them. In fact, I think the Chinese 0:02:53.600 --> 0:02:57.519 advantages over US. So so they but the domestic market 0:02:57.520 --> 0:03:00.000 is where the US wants to go, and our domestic 0:03:00.040 --> 0:03:01.839 market is where the Chinese want to go with their 0:03:02.040 --> 0:03:05.520 five G services. And now the game is how do 0:03:05.600 --> 0:03:07.720 we set the rules of trade going forward? So Bill, 0:03:07.760 --> 0:03:09.280 I want to sort of explore what this means for 0:03:09.280 --> 0:03:13.000 the macro backdrop. In early the world economy is on 0:03:13.040 --> 0:03:15.680 the rocks, some people predicting a recession, and the response 0:03:15.680 --> 0:03:19.440 globally was as follows, the FED completely capitulated on its 0:03:19.480 --> 0:03:22.440 plans to raise interest rates that year multiple times, and 0:03:22.639 --> 0:03:26.400 the ECB expanded QWI and did all kinds of things. 0:03:26.400 --> 0:03:29.360 The Chinese but the foot to the pedal right to 0:03:29.400 --> 0:03:32.200 the floor to boost credit as well. Now we're starting 0:03:32.200 --> 0:03:36.160 to see those forces reverse. Twenty seventeen was global synchronized growth. 0:03:36.680 --> 0:03:38.800 Eighteen looks a bit more fragile, and the things that 0:03:38.840 --> 0:03:42.840 boosted things through sixteen starting to reverse. Does that concern 0:03:42.880 --> 0:03:45.600 you a little bit? Bill, Well, what's concerning is the 0:03:45.680 --> 0:03:48.920 nature of growth right now and going forward, US is 0:03:48.920 --> 0:03:51.600 going to be the engine of growth for the global economy. 0:03:51.760 --> 0:03:54.080 Where that's that that myths of synchronized growth we saw 0:03:54.160 --> 0:03:58.080 before was Europe trying to get a two handle on growth, 0:03:58.160 --> 0:03:59.560 right I mean, we're talking about the U s and 0:03:59.600 --> 0:04:02.480 like being able get three and four handles. The European 0:04:02.520 --> 0:04:06.240 economy because of the the eurosclerosis that has always had, 0:04:06.960 --> 0:04:09.040 has never been able to get a two handle or 0:04:09.240 --> 0:04:12.000 anything better and to sustain a to handle and and 0:04:12.000 --> 0:04:14.360 and we're seeing evidence that that is not gonna happen 0:04:14.560 --> 0:04:16.880 yet again. And they can refer back to this subpart 0:04:16.920 --> 0:04:19.760 Growth Bill. In the time we've got left to do 0:04:20.000 --> 0:04:23.320 un NAFT. We've got Mexican pace so nearing twenty one. 0:04:23.320 --> 0:04:25.720 It's been there before, but this has been a real 0:04:25.800 --> 0:04:30.120 weakening pay so. Is that part of a collapsed naft 0:04:30.120 --> 0:04:32.960 to debate or is that just about dragging and central 0:04:32.960 --> 0:04:37.080 bank divergence elements of both. I think that the NAFTY 0:04:37.160 --> 0:04:39.440 negotiations has gotten a lot of uncertainty in it because 0:04:39.480 --> 0:04:42.000 now we start to hear about bilateral deals with Canada 0:04:42.160 --> 0:04:45.320 and in Mexico. But I think the key to the 0:04:45.360 --> 0:04:48.600 to the pay so is, like every other emerging marketing currency, 0:04:48.640 --> 0:04:53.200 is when the US magnetouer global capital sucks and everything 0:04:53.240 --> 0:04:56.000 and that all the strengthens, that means that the emerging 0:04:56.080 --> 0:04:58.640 market currencies are gonna collapse more than the developed market 0:04:58.680 --> 0:05:03.159 economies because US continues to be the center for capital 0:05:03.200 --> 0:05:06.440 markets and capital flows. And every entrepreneur out there knows 0:05:06.560 --> 0:05:08.800 that you're not gonna go to Argentina to the raised capital. 0:05:08.800 --> 0:05:10.920 You're gonna come to New York Stock Exchange and lists there. 0:05:11.240 --> 0:05:13.760 And even as US firms are going to private capital, 0:05:13.880 --> 0:05:16.000 foreign firms are coming to list more and more in 0:05:16.000 --> 0:05:18.320 the US. Billy, thank you so much from our Washington 0:05:18.400 --> 0:05:20.960 vire on one fm. Uh, and of course with the 0:05:21.040 --> 0:05:38.640 Milk and Institute. Uh, this is a joy. Another exceptionally 0:05:38.680 --> 0:05:42.480 strong briefing from Foreign Affairs Magazine. Which world are we 0:05:42.520 --> 0:05:45.680 living in? Is it the world of the Red Sox? 0:05:45.760 --> 0:05:48.120 Is the world of Yankees? No, it's certainly not the 0:05:48.160 --> 0:05:51.000 world of the New York Mets for those that follow baseball. 0:05:51.880 --> 0:05:55.279 It is the foreign policy world that we live in now. 0:05:55.320 --> 0:05:58.720 Gideon Roses with us with his new Foreign Affairs Magazine. 0:05:58.760 --> 0:06:01.960 The essay from Graham Allison with his important book A 0:06:02.040 --> 0:06:05.840 year Ago Destined for War is stunning. We had the 0:06:05.880 --> 0:06:09.160 Soviet Union. Thus we had a space race because we 0:06:09.160 --> 0:06:12.200 were competing with the Soviet Union, and we have the 0:06:12.240 --> 0:06:16.000 development of what we know is our foreign policy because 0:06:16.000 --> 0:06:18.280 we were competing with the Soviet Union. Then there was 0:06:18.320 --> 0:06:22.560 an interloade. And your whole issue is about the now? What? 0:06:22.560 --> 0:06:24.200 What is the now? What? Well, so this is a 0:06:24.200 --> 0:06:26.480 great question. Over the last couple of years, a lot 0:06:26.560 --> 0:06:29.920 of the certainties and assumptions that people had on all 0:06:29.960 --> 0:06:32.640 sides of the spectrum had brought to the debate over 0:06:32.680 --> 0:06:35.800 American farm policy, the international economy, the future of the 0:06:35.800 --> 0:06:39.480 global political system had basically been upended by voters in 0:06:40.120 --> 0:06:45.400 Western countries who have overturned Brexit and UH Trump selection 0:06:45.800 --> 0:06:49.680 and a bunch of different policies and a bunch of 0:06:49.680 --> 0:06:52.159 of the rise of populoust nationalism and problems in the 0:06:52.160 --> 0:06:56.640 liberal international order. Basically, what that means is all bets 0:06:56.640 --> 0:06:59.320 are off going forward, and everybody is riled up and 0:06:59.320 --> 0:07:02.080 things are very bull But the question of what actually 0:07:02.160 --> 0:07:04.840 is driving all the turbulence and where things will go 0:07:05.560 --> 0:07:07.799 is unknown. And so what we did is we tried 0:07:07.839 --> 0:07:13.200 to scope out the future by offering six potential narratives 0:07:13.320 --> 0:07:16.880 of what is the turmoil and change that we're living in, 0:07:16.920 --> 0:07:19.120 where is it going? And the argument here is some 0:07:19.160 --> 0:07:20.960 of the people say it's just the return of great 0:07:20.960 --> 0:07:22.800 power politics, like Graham Allison and we have a wonderful 0:07:22.800 --> 0:07:26.000 place by Steve Cotkin about look what you thought of 0:07:26.040 --> 0:07:29.040 as the liberal international order was just the American moment 0:07:29.080 --> 0:07:32.360 of great power which we organized in our way. UH. 0:07:32.440 --> 0:07:35.040 Others saying no, all the critics of the American order 0:07:35.040 --> 0:07:37.160 in the post war system have been wrong in the past, 0:07:37.360 --> 0:07:40.600 This too shall pass. Others saying no, it's tribalism the 0:07:40.720 --> 0:07:44.360 dominant now. Amy Chua from Yale has a good argument no. 0:07:44.520 --> 0:07:47.080 Others say Marx was actually not wrong, but just early 0:07:47.160 --> 0:07:49.440 what did you expect from capitalism? You know, the richer 0:07:49.440 --> 0:07:52.560 getting richer, the poorer getting screwed, and everybody's rising up 0:07:52.560 --> 0:07:55.720 in protests. So it's an attempt to scope out what 0:07:55.960 --> 0:07:58.120 is the future that we're living in, and we know 0:07:58.200 --> 0:08:00.160 there's the real answer right now is we don't no, 0:08:00.320 --> 0:08:02.160 And that's why this is an interesting moment in general. 0:08:02.200 --> 0:08:03.880 What's so interesting were the week that you and I 0:08:03.920 --> 0:08:06.119 have had? It really the two weeks we've had. Yeah, 0:08:06.480 --> 0:08:09.120 is we're sort of jumping from moment to moment. Well, 0:08:09.160 --> 0:08:12.520 let's hope the future is not socialism, Gideon. Well, you 0:08:12.560 --> 0:08:16.240 look at Corbin and uh, you know Sanders and a 0:08:16.280 --> 0:08:19.080 bunch of people in the US. Uh, there are ideas. 0:08:19.120 --> 0:08:23.120 Everybody seems to agree that the old conxisting ideas haven't worked, 0:08:23.120 --> 0:08:25.360 and people are searching for new ideas, but no one 0:08:25.520 --> 0:08:28.240 has good new ideas yet. So we hope that the 0:08:28.320 --> 0:08:31.200 mistakes don't get repeats. Socialism suddenly isn't a new idea, 0:08:31.360 --> 0:08:33.760 it's a felt experiment. But I would have thought smooth 0:08:33.760 --> 0:08:36.480 holly and and international tariffs and a trade war were 0:08:36.520 --> 0:08:38.640 old ideas that we rejected as well, and so both 0:08:38.720 --> 0:08:40.400 right and left seemed to be going back to the 0:08:40.480 --> 0:08:43.640 bad old ideas of the past rather than coming up 0:08:43.679 --> 0:08:45.480 with new ones for the twenty one century. Do you 0:08:45.520 --> 0:08:49.520 really think we're going back towards smooth holy question. So 0:08:49.559 --> 0:08:52.360 the big question on trade policy now is is trade 0:08:52.400 --> 0:08:54.920 policy is going to follow the Iran model or the 0:08:55.000 --> 0:08:59.000 Korean model. A year ago, the Trump administration made the 0:08:59.120 --> 0:09:00.880 entire world thing that it was on the brink of 0:09:00.920 --> 0:09:04.000 a nuclear war in Korea, and it turns out that 0:09:04.160 --> 0:09:06.960 they were responding to a real problem just by generating 0:09:06.960 --> 0:09:10.680 a lot of hoopla and then walked away with a 0:09:10.760 --> 0:09:13.960 photo op and no actual deal and some headlines. If 0:09:13.960 --> 0:09:16.840 that ultimately is what happens on trade, then you'll end 0:09:16.920 --> 0:09:18.760 up with a compromise, just like you ended up with 0:09:18.800 --> 0:09:22.760 the compromising Korea. It's fine on Iran, however, he actually 0:09:22.800 --> 0:09:25.080 lived up to his promises, is starting to rip up 0:09:25.160 --> 0:09:28.040 the Iran deal and causing real problems. And so we 0:09:28.120 --> 0:09:30.520 just don't know whether these guys are screwing around with 0:09:30.559 --> 0:09:33.040 the mobile trading system for short term by that oural 0:09:33.080 --> 0:09:36.880 advantage to achieve a point, or are they actually really 0:09:36.920 --> 0:09:39.680 going to risk destroying the whole edifice. But do you 0:09:39.679 --> 0:09:42.480 think it's helpful using the words smoot holy when the 0:09:42.520 --> 0:09:45.320 average tariff I think was about forty percent. I mean, 0:09:45.320 --> 0:09:49.440 the average tariff right now is mid single single, mid digits. 0:09:50.080 --> 0:09:52.200 The whole point is where we're going. And what made 0:09:52.200 --> 0:09:54.760 smooth Holly bad was not just the size, it was 0:09:54.840 --> 0:09:57.680 the theory behind it. And yes, what we're doing now 0:09:57.800 --> 0:10:00.600 is very small and absolute terms, but it's the same 0:10:00.679 --> 0:10:03.360 damn theory. But the theory is behind it right now. 0:10:03.400 --> 0:10:05.240 And as you know, Giddon is the end goal. The 0:10:05.400 --> 0:10:07.760 end game is that ultimately they want the Chinese to 0:10:07.760 --> 0:10:09.720 to open up. They want to tried barry us down, 0:10:09.720 --> 0:10:12.719 don't they. Yes, But here's the question, do they Well, 0:10:12.720 --> 0:10:14.760 actually you say you know what they want, We don't 0:10:14.760 --> 0:10:16.360 actually know what they want because a lot of it 0:10:16.760 --> 0:10:18.920 about it, haven't they what? I've been quite clear about 0:10:18.960 --> 0:10:20.720 what they want. They want the Chinese to open up, 0:10:20.720 --> 0:10:22.800 they want the tried barriers down. Yes, but that's a 0:10:22.840 --> 0:10:26.040 short term goal. The question is cannot be achieved without 0:10:26.120 --> 0:10:29.319 destroying the entire long term system. The US has a 0:10:29.480 --> 0:10:32.840 major power in the system that has refused to use 0:10:33.240 --> 0:10:35.840 because it didn't want to use its power to extract 0:10:35.920 --> 0:10:38.880 bilateral rents from everybody else. It wanted to have a 0:10:38.920 --> 0:10:42.200 system that actually worked. What this administration is doing, whether 0:10:42.240 --> 0:10:45.040 it's dispute resolution procedures of the w t O, whether 0:10:45.080 --> 0:10:46.880 it's the trade things, whether it's trying to bring in 0:10:47.000 --> 0:10:50.280 national security, what they're basically doing is using every bit 0:10:50.320 --> 0:10:54.480 of leverage the United States can to extract gains from 0:10:54.520 --> 0:10:58.400 everybody else. And that is maybe a short term tactic 0:10:58.440 --> 0:11:00.520 that might work to achieve some pause that have goals 0:11:00.559 --> 0:11:02.520 for the United States, but it comes at the cost 0:11:02.559 --> 0:11:06.120 of the entire system being undermined going forward. Gideon, thank 0:11:06.120 --> 0:11:09.280 you so much, Gideon Rose. Congratulations. Which world are we 0:11:09.320 --> 0:11:11.360 living in again? Folks? And you've heard me say this 0:11:12.040 --> 0:11:15.240 before Foreign Affairs Magazine, and Bill Lee was raving about 0:11:15.280 --> 0:11:18.400 it earlier with the Milk and Institute. It's kind I'm 0:11:18.400 --> 0:11:21.920 gonna call it fifteen essays, and it's the kind of 0:11:21.960 --> 0:11:24.720 thing where you find three or four which are just 0:11:24.880 --> 0:11:28.200 jewels that really framed for you the debate. And your 0:11:28.400 --> 0:11:31.480 three or four essays can be different than John Farrow's, 0:11:31.520 --> 0:11:34.400 can be different than mine, But the answer is you 0:11:34.520 --> 0:11:38.680 find a set of ideas in each issue. And John 0:11:38.720 --> 0:11:42.360 Ferre I know you don't care with your Ronaldo vision, 0:11:42.760 --> 0:11:46.720 but actually the fonts almost big enough where you can 0:11:47.280 --> 0:12:03.400 mortals like me can actually read it. Ijsa we glosses tongue. Jonathan. 0:12:03.440 --> 0:12:06.400 I've never been up there, but I am told you 0:12:06.480 --> 0:12:12.400 go up past Admiralty Island and it is spectacular and 0:12:12.520 --> 0:12:19.600 it's southern Alaska above Vancouver. Juno, Juno, Alaska. Would you 0:12:19.640 --> 0:12:22.040 like to go? I I yeah, I sort of would. 0:12:22.080 --> 0:12:24.280 I mean, I don't you know, have any like I 0:12:24.320 --> 0:12:26.240 don't have to be there tomorrow or anything like that. 0:12:26.280 --> 0:12:30.120 But very cool, you know, joining us now from Juno, Alaska, 0:12:30.600 --> 0:12:35.160 PRIAMR with TV Security. Why are you in Juno? Is 0:12:35.200 --> 0:12:41.520 that where the rate conundrum comes together? It's beautiful here, 0:12:41.600 --> 0:12:45.160 but you know, I'm here to meet investors a huge 0:12:45.200 --> 0:12:48.320 macro week with the ft in d cb um, so 0:12:48.840 --> 0:12:51.160 investors want to talk. But I have to say it's 0:12:51.160 --> 0:12:55.400 a very good place. It's light here twenty yeah, I'm 0:12:55.440 --> 0:12:57.960 actually outside. That's the way it is in the surveillance 0:12:58.000 --> 0:13:00.360 world for me and John Farrell. The sun comes up 0:13:00.360 --> 0:13:08.040 early as well, always dark first. We're right, we're done 0:13:08.040 --> 0:13:11.280 off Argentina there. Well, you look at the volatility of 0:13:11.280 --> 0:13:14.840 the Argentinian Pasa Mexico out of twenty one and such. 0:13:15.360 --> 0:13:18.480 I would suggest much of this comes across as druggy 0:13:18.640 --> 0:13:23.200 yesterday and waiting until the summer of two thousand nineteen 0:13:23.280 --> 0:13:27.199 to do anything. But it's really the combination of what 0:13:27.240 --> 0:13:31.640 we saw from Powell and drag, isn't it It is? Yeah. 0:13:31.679 --> 0:13:34.079 I think EM is sort of having this one I 0:13:34.080 --> 0:13:36.640 would say, almost triple Vanny here. So they've had the 0:13:37.160 --> 0:13:41.160 high reel rate in the US. Uh, then they've had 0:13:41.520 --> 0:13:44.120 e CB ending QUEI and you know, all the idiots 0:13:44.120 --> 0:13:46.520 and credit issues as well. And and the dollar doesn't 0:13:46.520 --> 0:13:49.120 help because if the dollar continues to strengthen in US 0:13:49.240 --> 0:13:51.880 rates continue to write, you know, I think money is 0:13:51.920 --> 0:13:54.240 going to come out of risk cassettes everywhere, and so 0:13:54.360 --> 0:13:56.719 e M is one of those. Italy was another one. 0:13:56.760 --> 0:13:58.760 Who knows, you know, what's next. But I think that's 0:13:58.760 --> 0:14:03.439 the problem with them here. Even the solid fundamental EM 0:14:03.480 --> 0:14:06.439 economies I think are potentially going to struggle because in 0:14:06.520 --> 0:14:09.160 a less liquid market, if you don't want to get 0:14:09.160 --> 0:14:11.920 out of EM, you sort of sell everything. It's hard 0:14:11.960 --> 0:14:15.400 to see why the Federal Reserve should back off anytime soon, 0:14:15.600 --> 0:14:18.560 especially when they telegraphed what they were going to do 0:14:18.960 --> 0:14:21.600 very very well and from a mile away. And what 0:14:21.640 --> 0:14:25.040 was the response from Argentina to raise their inflation target, 0:14:25.120 --> 0:14:28.680 the response from Turkey the president Dwan saying he wanted 0:14:28.760 --> 0:14:33.000 lower rates the factly help themselves? Have they right now? 0:14:33.080 --> 0:14:35.880 I think, um, you know e M has to deal 0:14:35.960 --> 0:14:39.360 with you know, what do they do without flows? So 0:14:39.720 --> 0:14:42.680 as as you start getting this risk of outflows picking up, 0:14:43.120 --> 0:14:45.680 I think they have to start reading interest rates. But 0:14:45.760 --> 0:14:48.400 it actually hurts the economy. So there is in a 0:14:48.600 --> 0:14:50.600 in a little bit of a bind. I think with 0:14:50.680 --> 0:14:52.840 the fact that global queue is ending this and I 0:14:52.920 --> 0:14:55.320 think that's you know when when you talk about Powell, 0:14:55.400 --> 0:14:58.000 I think the FED absolutely wants to keep hiking. From 0:14:58.000 --> 0:15:01.840 a domestic standpoint, have to look at global spillovers and 0:15:01.880 --> 0:15:05.200 a financial condition statement e M. At some point it 0:15:05.320 --> 0:15:07.400 is going to spill over into the US as well. 0:15:07.600 --> 0:15:12.280 Within this is what inflation adjusted rates do. What is 0:15:12.360 --> 0:15:16.920 the TV call on what American real rates will do 0:15:17.320 --> 0:15:22.440 given this massive transatlantic divergence? Right so, I think we're 0:15:22.440 --> 0:15:24.880 a little bit out of consensus. I am long tenure 0:15:24.880 --> 0:15:28.360 real rates. I think US tenure rates above one per 0:15:28.360 --> 0:15:31.280 cent or a problem even for the domestic economy because 0:15:31.280 --> 0:15:35.160 if you look at real wages, we've had no real uh, 0:15:35.200 --> 0:15:38.440 you know, growth in real wages. I think that's the problem. 0:15:38.480 --> 0:15:41.440 So if mortgage rates rise, um, you know, even if 0:15:41.440 --> 0:15:43.920 the economy is strong, I'm not sure the consumer can 0:15:43.960 --> 0:15:47.080 actually keep paying up I a mortgage rate. So we've 0:15:47.120 --> 0:15:50.760 had a decent rise in real rates. I think at 0:15:50.760 --> 0:15:52.880 some point it's it's going to be self limiting. I 0:15:52.880 --> 0:15:55.360 think one per cent tenure real rates is that level 0:15:55.440 --> 0:15:57.560 beyond which I think the economy is going to struggle 0:15:57.560 --> 0:16:01.080 to handle further increases. And we've talked to you about 0:16:01.080 --> 0:16:03.120 the curve in the past two s tens is now 0:16:03.160 --> 0:16:05.920 broken down to about thirty six basis points. We just 0:16:06.000 --> 0:16:09.040 keep grinding lower. And I have a lot of investors 0:16:09.040 --> 0:16:10.840 and a lot of our listeners will always write and 0:16:10.920 --> 0:16:13.040 so it's different this time. It's different. This time. You 0:16:13.040 --> 0:16:14.920 don't get an economic signal from the curve in the 0:16:14.960 --> 0:16:17.600 way that you did, say a decade ago, and Change 0:16:18.200 --> 0:16:20.480 taught to me about the signal you take from the 0:16:20.480 --> 0:16:22.320 difference between a two year note yield and a ten 0:16:22.360 --> 0:16:26.840 year yield of thirty six basis points, right, So I 0:16:26.880 --> 0:16:29.520 think there are some special factors this time around the 0:16:29.520 --> 0:16:32.640 fact that the U S surgeries is largely issuing in 0:16:32.680 --> 0:16:35.720 the front end. That's a big difference. Um. The other 0:16:35.760 --> 0:16:39.520 thing is that it's all the pension demand, so there 0:16:39.520 --> 0:16:41.920 aren't some idios and radic factors. But I would say 0:16:41.960 --> 0:16:44.880 still the curve is the single best indicator that if 0:16:44.920 --> 0:16:48.200 you looked at any one market indicator, the best indicator 0:16:48.240 --> 0:16:51.520 of a recession has been the curve um and and 0:16:51.520 --> 0:16:53.480 and then I would just say that it's the markets 0:16:53.520 --> 0:16:56.640 sort of lack of conviction around how much can the 0:16:56.680 --> 0:17:00.400 FED go above neutral and what exactly is neutral. So 0:17:00.440 --> 0:17:03.760 I think what was interesting was even though Draggy actually 0:17:03.760 --> 0:17:06.919 potentially increase for guidance, the FACT took a lot of 0:17:06.920 --> 0:17:09.520 that for guidance out. So what the market saying is 0:17:09.520 --> 0:17:11.520 sure the fact can hide two more times this year, 0:17:11.880 --> 0:17:14.720 a couple more next year. Beyond that, if the bet 0:17:14.720 --> 0:17:17.960 continues to sort of jam on the brakes, I think 0:17:17.960 --> 0:17:19.760 the economy is going to slow down. Therefore the curve 0:17:19.800 --> 0:17:21.760 will continue to flatten. So that's why I think there 0:17:21.800 --> 0:17:24.280 is a macro segnal here the curve gets to zero, 0:17:24.280 --> 0:17:27.040 I think we're working at the market sting don't go further. 0:17:27.400 --> 0:17:30.480 What does all this mean for something? Is is fundamental 0:17:30.760 --> 0:17:34.359 is real estate in the mortgage rate because I and 0:17:34.440 --> 0:17:36.399 I get the curve dynamics and the ten years not 0:17:36.440 --> 0:17:39.719 going to move that much. But does it mean that 0:17:39.840 --> 0:17:44.360 mortgage rates stay lower than we normally think? I think 0:17:44.440 --> 0:17:47.000 lower on a historical basis, but I do think mortgage 0:17:47.000 --> 0:17:48.840 spreads are going to widen. The FED is letting the 0:17:48.840 --> 0:17:51.800 mortgage portfolio run off, so that is going to put 0:17:51.880 --> 0:17:54.639 some put question on mortgage rate. Mortgage rates have already 0:17:54.720 --> 0:17:57.000 this in a pretty big amount, so I think. And 0:17:57.240 --> 0:17:59.560 along with the salt thing, It's still too early to 0:17:59.640 --> 0:18:02.680 tell what does soul due to home prices um, but 0:18:03.320 --> 0:18:07.040 that plus higher morge dates, I think it starts becoming 0:18:08.000 --> 0:18:11.719 a pretty big headwind for the housing market pretty much. 0:18:11.960 --> 0:18:14.560 Gregg cant Shall with thee T Security's head of Global 0:18:14.600 --> 0:18:34.040 Interest from June to Alaska, Meeting investors or interview with 0:18:34.080 --> 0:18:37.760 The Day on Corporate Finance, on corporate Transactions, Craig Moffatt, 0:18:38.320 --> 0:18:41.240 Moffatt Nathanson. We were honored that Michael Nathanson would brief 0:18:41.320 --> 0:18:44.720 us forty eight hours ago, and Craig Moffatt does as well. 0:18:44.920 --> 0:18:48.920 Craig lex in the Ft today had a price to 0:18:49.000 --> 0:18:53.400 EBADT seventeen times for this transaction. Comcast is trading at 0:18:53.560 --> 0:18:58.600 seven times uh ead uh. This trade goes at seventeen 0:18:58.680 --> 0:19:01.720 times right now. Are either of these parties going to 0:19:01.920 --> 0:19:06.159 overpay for Fox? Well, it's a great question, Tom, and 0:19:06.200 --> 0:19:09.439 I'll tell you you know what what The Comcast stock 0:19:09.560 --> 0:19:13.160 is has rebounded a bit in the last few days. 0:19:13.200 --> 0:19:16.600 I think in part because people are at least gratified 0:19:16.640 --> 0:19:19.680 that they didn't open with too crazy a bit to 0:19:19.760 --> 0:19:23.320 start this process. Um. But look, let's face it, Comcast 0:19:23.320 --> 0:19:25.960 stock has been select over the last couple of months, 0:19:26.000 --> 0:19:29.800 and it's precisely because of that valuation disparity, and you 0:19:29.880 --> 0:19:33.359 talked about it. Investors are frustrated it. Why didn't they 0:19:33.400 --> 0:19:35.399 just buy back their own stock? If they're going to 0:19:35.560 --> 0:19:38.240 lever up, why didn't they bibar stock, which would have 0:19:38.240 --> 0:19:41.600 been vastly more creative than this transaction within your wonderful 0:19:41.640 --> 0:19:44.359 six patient note this morning, we protect the copyright folks 0:19:44.359 --> 0:19:46.440 of our client. Our guests were not going to send 0:19:46.440 --> 0:19:50.040 it out to you call Monfatt, Nathanson, Craig, you made 0:19:50.119 --> 0:19:53.159 very clear that the way this is a creative is 0:19:53.200 --> 0:19:57.480 to eat but uh an operating income growth. It's revenue growth, yes, 0:19:57.960 --> 0:20:01.760 but it's really about two billion dollars synergies and keeping 0:20:01.800 --> 0:20:05.479 the operating income line going. How does Mr Roberts do 0:20:05.600 --> 0:20:11.400 that if he wins? Well, look, let's first to put 0:20:11.400 --> 0:20:13.280 a finer point on it. The biggest reason it's a 0:20:13.320 --> 0:20:16.480 creative is because borrowing costs, although they've come up a 0:20:16.560 --> 0:20:19.520 little bit, are still so low, and so almost anything 0:20:19.600 --> 0:20:21.680 is a creative if you're willing to really lever your 0:20:21.680 --> 0:20:25.040 balance sheet. And again that's why I say, while it's 0:20:25.040 --> 0:20:27.760 a creative, it would have been vastly more creative to 0:20:27.880 --> 0:20:29.720 lever up and buy back stock if that's what you 0:20:29.760 --> 0:20:33.000 wanted to do because of that big valuation disparity. Now 0:20:33.040 --> 0:20:35.399 that said, what do you do with this asset? I 0:20:35.480 --> 0:20:39.359 think what what Brian Roberts and Comcast is looking at is. 0:20:40.720 --> 0:20:43.120 Remember this is in the context of also having made 0:20:43.119 --> 0:20:47.120 a bit for the global distribution assets of Sky, which 0:20:47.160 --> 0:20:50.840 are connected but also somewhat separate. I think he sees 0:20:50.880 --> 0:20:56.720 them both as necessary but insufficient, independently um pieces of 0:20:56.760 --> 0:21:00.679 a strategy that that is about trying to global with 0:21:00.800 --> 0:21:06.679 distribution and then dramatically ramping up proprietary content production in 0:21:06.720 --> 0:21:08.800 the hope that you can create a model very much 0:21:08.840 --> 0:21:11.359 like Netflix, where you produce your own content in your 0:21:11.359 --> 0:21:14.080 own studio and distribute it to your customers via your 0:21:14.119 --> 0:21:17.040 own distribution platform. To do that, you need a lot 0:21:17.040 --> 0:21:19.120 of scale, And I think that's what he's looking at 0:21:19.160 --> 0:21:22.160 with both of these pieces. Craig I was looking at 0:21:22.200 --> 0:21:25.920 the numbers and uh, Comcast would become the second most 0:21:25.960 --> 0:21:29.160 indebted non financial company in the US if it goes 0:21:29.200 --> 0:21:32.359 through with this transaction, boosting its debt from sixty billion 0:21:32.359 --> 0:21:35.679 dollars to a hundred and sixty billion dollars. It just 0:21:35.800 --> 0:21:38.040 raises a question, especially at a time when the media 0:21:38.040 --> 0:21:41.680 outlook is so uncertain, what's the likelihood that Comcast gets 0:21:41.720 --> 0:21:45.359 downgraded substantially and ends up as an over leveraged company 0:21:45.440 --> 0:21:48.960 that has to split up and is struggling. Well, it's 0:21:49.040 --> 0:21:51.520