WEBVTT - Netflix Must Cut Prices To Compete: Needham's Martin 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penl Podcast. I'm Paul swing you, 0:00:05.360 --> 0:00:07.680 along with my co host Lisa Brahma wits. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money. Whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penil podcast on Apple 0:00:15.520 --> 0:00:17.959 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:21.280 at Bloomberg dot com. Taking a look at Netflix here 0:00:21.320 --> 0:00:24.200 to date the stocks up only eleven percent, lagging the market. 0:00:24.640 --> 0:00:26.760 We had a downgrade today Laura Martin need Um Company 0:00:26.800 --> 0:00:29.640 downgrading the stock to equivalent of a cell stocks off 0:00:29.640 --> 0:00:32.800 about one point four percent today two dollars. Again, only 0:00:32.840 --> 0:00:36.000 up about year to date. So we are fortunate to 0:00:36.080 --> 0:00:38.599 have the one and only Laura Martin in our Bloomberg 0:00:38.600 --> 0:00:40.519 and an Actor Broker studio. She's a senior annalyst for 0:00:40.560 --> 0:00:42.840 Needham and Company. Laura, thanks so much for being here. 0:00:43.400 --> 0:00:47.640 Um why the downgrade? So what we're saying is that um, 0:00:47.800 --> 0:00:50.879 Netflix must have a second tier that is in the 0:00:50.960 --> 0:00:55.200 five to seven dollar price point, not not just it's 0:00:55.680 --> 0:00:58.840 nine six dollar premium tier. Now that Disney and Apple 0:00:58.920 --> 0:01:01.080 haves five and seven dollar tears and that's where Peacock 0:01:01.160 --> 0:01:05.200 is rumored to come as well when it launches in May. 0:01:05.280 --> 0:01:06.880 And we think the best way to do that is 0:01:06.920 --> 0:01:10.759 not to lower their core price, but to add add advertisements. 0:01:10.840 --> 0:01:14.160 And we calculate that if they added six minute ad load, 0:01:14.160 --> 0:01:17.040 they could generate six dollars per sub per month, so 0:01:17.080 --> 0:01:19.720 that way new people could be attracted to this service. 0:01:20.040 --> 0:01:22.400 A lot of people steal the signal. Now they borrow 0:01:22.440 --> 0:01:24.840 their parents passwords and they borrow their friends passwords. They 0:01:24.840 --> 0:01:27.600 could start paying directly, but it wouldn't hurt the average 0:01:27.640 --> 0:01:30.440 out of Netflix. We could could stay at thirteen dollars 0:01:30.440 --> 0:01:33.720 a share um because and we calculate that if they 0:01:33.760 --> 0:01:37.920 don't have a price point commensurate with other streaming options, 0:01:37.959 --> 0:01:41.120 they will lose four million U S subscribers, which are 0:01:41.160 --> 0:01:44.839 three times as profitable as international subscribers. So you said 0:01:45.040 --> 0:01:49.760 sell uh and and you point to some fundamental problems 0:01:49.840 --> 0:01:52.840 with its capital structure. I'm wondering what you think the 0:01:52.920 --> 0:01:56.960 trigger would be for the significant decline in prices too. 0:01:57.080 --> 0:01:58.880 I think your target is two hundred and sixty dollars 0:01:58.880 --> 0:02:02.320 to share two d sixty yep, So what's the catalyst? 0:02:02.480 --> 0:02:06.200 So our our concern is that if Netflix begins losing 0:02:06.320 --> 0:02:09.600 US US subscribers, given that it lost a hundred and 0:02:09.600 --> 0:02:11.680 twenty six thousand subs in Q two and it was 0:02:11.720 --> 0:02:14.440 down ten percent and twenty four hours, is that the 0:02:14.560 --> 0:02:17.320 stock would be revalued. It would lose its growth stock 0:02:17.400 --> 0:02:20.840 credentials and become traded on e V to ebit DA. 0:02:21.360 --> 0:02:23.920 So the closest company, and we cover all the fangs, 0:02:24.040 --> 0:02:27.280 the closest company to them is a fifteen times e 0:02:27.360 --> 0:02:29.600 V to EBITDA, which is a two sixty dollar price. 0:02:30.080 --> 0:02:32.480 There you go. Alright, so talk to us about it's 0:02:32.560 --> 0:02:37.079 really really early days of this increased competitive environment for streaming. 0:02:37.320 --> 0:02:41.040 Disney just launched. You mentioned Peacock from Comcast coming next year. 0:02:41.480 --> 0:02:44.760 Any early sense of how this might shake out in 0:02:44.800 --> 0:02:47.240 the streaming wars? Yeah, I think we do have a 0:02:47.280 --> 0:02:50.080 sense because Disney is already at Disney has announced it 0:02:50.120 --> 0:02:53.360 added ten million subscribers in the first twenty four hours. 0:02:53.360 --> 0:02:56.720 We have app um Nextus saying it's added sixteen million 0:02:56.800 --> 0:03:00.440 subs um adding a million subs a day. So our 0:03:00.480 --> 0:03:03.440 point of view is that some of those subs will 0:03:03.520 --> 0:03:06.040 churn out of Netflix for some period, and all you 0:03:06.080 --> 0:03:09.280 need is fort of you Netflix subs to churn out 0:03:09.320 --> 0:03:12.520 for an extra three months and Voi LA four million 0:03:12.880 --> 0:03:15.760 subs times twelve months a year at thirteen dollars each 0:03:15.880 --> 0:03:18.840 leave your revenue. So that's and that's really harsh. And 0:03:18.919 --> 0:03:21.480 a company that's trading at seven point two times revenue, 0:03:21.480 --> 0:03:23.600 which is where Netflix trades. All right, I'd love to 0:03:23.639 --> 0:03:26.720 take a bigger picture look at this field as we 0:03:26.800 --> 0:03:30.880 do get the advent of all of these new streaming services. 0:03:30.880 --> 0:03:35.520 How many do you think each household can legitimately pay for? 0:03:36.040 --> 0:03:38.360 What's the threshold? I mean, are there just going to 0:03:38.440 --> 0:03:42.360 be three big survivors that everge from this? Yes, So 0:03:42.440 --> 0:03:45.160 the average household today it takes three point two. And 0:03:45.200 --> 0:03:47.640 when you ask them, they don't put Amazon Prime in 0:03:47.680 --> 0:03:49.840 there because they think they're paying for Prime subscription, not 0:03:49.920 --> 0:03:53.560 at Prime TV subscription. So it's three point to excluding 0:03:53.600 --> 0:03:57.000 Amazon Prime TV. Okay, so three point two. So then 0:03:57.320 --> 0:03:59.920 I think if you are one of the fort of 0:04:00.000 --> 0:04:03.480 American consumers that owns an iPhone, which is the wealth 0:04:03.600 --> 0:04:06.760 is you're going to add a service or two, no problem. 0:04:06.880 --> 0:04:10.720 The problem is the other and that six of homes 0:04:10.760 --> 0:04:12.880 either A doesn't pay for TV at all because they're 0:04:12.920 --> 0:04:15.560 not they can't afford any TV, or they're gonna churn 0:04:15.640 --> 0:04:19.400 faster out of Netflix to substitute Disney this year, or Disney, 0:04:19.640 --> 0:04:22.039 like The Mandalorian is a huge show right now, Disney 0:04:22.080 --> 0:04:24.320 for three months, they're gonna watch The Mandalorian then go 0:04:24.360 --> 0:04:26.400 back to Netflix. They're going to be more cautious with 0:04:26.440 --> 0:04:28.679 their money and not just add an ad an ad. 0:04:28.880 --> 0:04:31.920 And that adds to Netflix churn, which is horrible at 0:04:31.960 --> 0:04:34.599 a seven multiple of revenue for Netflix all let's which 0:04:34.600 --> 0:04:37.719 scares a little bit. Viacom and CBS UH just close 0:04:37.839 --> 0:04:40.520 their deal to this week now trading on their simple 0:04:40.680 --> 0:04:43.760 V I A C. I think you've covered both companies 0:04:43.800 --> 0:04:45.799 for a long time. You were there when they were together, 0:04:45.800 --> 0:04:47.400 when they were split, now they're back together. What's your 0:04:47.480 --> 0:04:50.160 view of this recombined viacom so, I think people are 0:04:50.200 --> 0:04:53.359 underestimating the margin expansion potential here. I think there's a 0:04:53.360 --> 0:04:56.120 lot of costs they can take out. Obviously they understate 0:04:56.160 --> 0:04:58.599 that for employee benefits, but I think you'll see them 0:04:58.600 --> 0:05:01.800 take out third percent more costs than they've admitted to 0:05:01.800 --> 0:05:03.680 the street, which means that they're going to be able 0:05:03.720 --> 0:05:06.000 to grow the Ibada and EPs line. And I do 0:05:06.040 --> 0:05:09.080 think it's a stock that trades on EPs UM. I'll 0:05:09.120 --> 0:05:11.080 be very interested. I think they're going to have a 0:05:11.200 --> 0:05:14.880 stronger streaming service together than they did a part, and 0:05:14.920 --> 0:05:17.280 I think they're going to basically dominate the TV if 0:05:17.279 --> 0:05:22.120 you like Fox, which is dependent on the linear TV ecosystem. 0:05:22.160 --> 0:05:24.720 I mean it trades are a huge higher premium to 0:05:24.800 --> 0:05:27.239 these two stocks. But these two, these two companies together 0:05:27.320 --> 0:05:30.839 have a much bigger portion of Comcast and Charter and 0:05:30.920 --> 0:05:34.479 Altiice's bundle. Just real, quick ten seconds. Do you think 0:05:34.520 --> 0:05:37.200 that Netflix has a chance of going out of business 0:05:37.720 --> 0:05:41.600 if it does not adapt to the modern environment. I 0:05:41.600 --> 0:05:44.560 think more likely as they start losing US subs, which 0:05:44.560 --> 0:05:47.560 are three times as profitable, and then they have trouble 0:05:47.640 --> 0:05:51.440 growing international subs fast enough that are profitable because their 0:05:51.440 --> 0:05:55.120 international subs they're adding today are three dollar subs in India, 0:05:55.400 --> 0:05:58.479 so they can grow the revenue. But if they get 0:05:58.520 --> 0:06:02.640 marked down to not be a a stock um, bankruptcy 0:06:02.760 --> 0:06:04.440 is a long way. But I do think that the 0:06:04.520 --> 0:06:07.839 US profits are really buying the business helping the business today. 0:06:08.080 --> 0:06:13.880 A very uh thoughtful answer, analytical and thoughtful and insightful, 0:06:13.960 --> 0:06:15.680 Laura Martin, Thank you so much for being with us. 0:06:16.240 --> 0:06:19.159 Laura Martin is senior analyst at Native and Company. Joining 0:06:19.200 --> 0:06:36.240 us here in our interactive broker studios. Well underneath the 0:06:36.279 --> 0:06:40.520 market calm is a growing concern that the repo market, 0:06:40.600 --> 0:06:43.320 the sort of plumbing of the financial system, has not 0:06:43.480 --> 0:06:48.000 been fixed by the FEDS temporary repo facility, and that 0:06:48.279 --> 0:06:51.360 going into year end we will see a lot more tumult. 0:06:51.520 --> 0:06:54.239 Joining us here in our interactive broker studios David Kotalk 0:06:54.400 --> 0:06:57.200 He's chairman and chief investment Officer at Cumberland Advisors, and 0:06:57.240 --> 0:07:00.080 I was struck by this note that Sultan Posar of 0:07:00.080 --> 0:07:03.119 Credit Sweez put out where he was saying he thinks 0:07:03.160 --> 0:07:06.640 that people are underpricing the risk of a severe liquidity 0:07:06.680 --> 0:07:09.600 shortage that ends up driving the FED to have to 0:07:09.640 --> 0:07:13.160 buy coupon treasuries in another QUEWI four type move. Well, 0:07:14.120 --> 0:07:19.960 I think he's right. Um Zoltan does marvelous work. Number one. 0:07:20.240 --> 0:07:24.280 He may not be known to all listeners, but he 0:07:24.480 --> 0:07:31.280 is highly skilled technical. He has huge capacity to understand 0:07:31.360 --> 0:07:38.320 the flows worldwide in this particular front end high grade 0:07:38.400 --> 0:07:42.640 market number one. Number two is it a very complex issue, 0:07:43.120 --> 0:07:46.080 so maybe we can simplify the issue and think of 0:07:46.080 --> 0:07:49.800 it in the following are we're used to banking systems, 0:07:49.840 --> 0:07:54.440 bank deposits, bank reserves, banks making loans. That's how we 0:07:54.520 --> 0:07:58.360 think about the banks. There's a whole parallel system of 0:07:58.440 --> 0:08:03.640 liquidity management, and it's in repo or reverse repo, and 0:08:03.720 --> 0:08:11.200 it's an alternate form of cash management or financing or borrowing, 0:08:11.560 --> 0:08:15.160 and that's outside the bank channel, but it's linked to 0:08:15.320 --> 0:08:18.840 the bank channel, so it's intricate. Now we've got a 0:08:18.920 --> 0:08:22.240 set of rules that govern the banks, and they are 0:08:22.680 --> 0:08:26.600 creating a constraint for the banks to take all this 0:08:26.800 --> 0:08:31.040 excess liquidity and use it in the repo market. And 0:08:31.080 --> 0:08:34.120 we saw that in September because the repo market had 0:08:34.160 --> 0:08:37.160 a problem at ACUP, so an interest rate on a 0:08:37.320 --> 0:08:42.840 riskless overnight security went to from to in a quarter. 0:08:43.600 --> 0:08:46.240 Think about that. It's not supposed to happen. Why didn't 0:08:46.280 --> 0:08:49.200 it happen? Why didn't the banks intervene? And we now 0:08:49.280 --> 0:08:53.640 have some understanding of why, but we haven't fixed the 0:08:53.720 --> 0:08:56.440 why all right, So without getting into the nitty gritty, 0:08:56.480 --> 0:08:58.920 I highly recommend that you seek out this credit sweeze 0:08:59.040 --> 0:09:01.400 and pose our note. It's fantastic. There's a great story 0:09:01.440 --> 0:09:03.880 on the Bloomberg about it as well. I'm wondering what 0:09:04.000 --> 0:09:07.080 the consequence is as an investor in risk assets heading 0:09:07.120 --> 0:09:09.200 into your end. Do you think that people are not 0:09:09.320 --> 0:09:12.400 prepared for a sell off and risk assets that could 0:09:12.480 --> 0:09:16.840 ensue from this type of disruption. I don't know how 0:09:16.960 --> 0:09:20.080 prepared people are, at least what I do know is 0:09:20.600 --> 0:09:27.600 in the technical money management analytical community, there's a lot 0:09:27.600 --> 0:09:30.960 of conversation about it. In the general press, in the 0:09:31.080 --> 0:09:36.679 general investment community, it's ignored because we're being inundated with 0:09:36.760 --> 0:09:39.960 impeachment and trade war and all the headlines. So you 0:09:40.040 --> 0:09:43.720 have you have two discussions going on at once. The 0:09:43.920 --> 0:09:48.880 narrow one is the unknown. It has risk of a shock. 0:09:49.000 --> 0:09:51.200 What do you do if you have a fail you 0:09:51.280 --> 0:09:56.400 have a collateral that doesn't deliver, You overstep some limit, 0:09:56.840 --> 0:09:59.720 some threshold, and then you have a default, You have 0:09:59.760 --> 0:10:03.560 a k And therein lies a risk if the system 0:10:03.720 --> 0:10:07.520 is if the system fails, And the question and is 0:10:07.880 --> 0:10:13.080 how much will the central banks intervene in advance prospectively 0:10:13.480 --> 0:10:18.080 to avoid that. They'll intervene at once after the fact, 0:10:18.600 --> 0:10:21.400 but what do they do to avoid the shock? And 0:10:21.480 --> 0:10:23.920 how well, by the way, are we going to learn 0:10:23.960 --> 0:10:26.960 from this FED meeting? Are they prepared for it? What 0:10:27.000 --> 0:10:30.560 are they gonna say? So? What do we know about 0:10:30.960 --> 0:10:33.160 I guess our listeners are probably saying, I'm just trying 0:10:33.200 --> 0:10:37.120 to frame the risk here. Is this a December nineteen 0:10:37.280 --> 0:10:39.679 kind of risk to the financial markets? Or is this 0:10:39.679 --> 0:10:41.880 is kind of what we saw in September of this year, 0:10:41.920 --> 0:10:44.240 which was it's kind of a short term thing, and 0:10:44.240 --> 0:10:46.199 and the FED kind of calm the markets and I'm 0:10:46.200 --> 0:10:48.800 not gonna worry about it too much. I think market 0:10:48.840 --> 0:10:53.000 agents who are pricing securities are looking at this and say, 0:10:52.640 --> 0:10:56.000 at worst it will be a repeated September Paul one 0:10:56.080 --> 0:10:58.719 or two days. Everybody will get excited and then we'll 0:10:58.720 --> 0:11:03.280 go on to something else. And probably that's accurate. The 0:11:03.720 --> 0:11:09.319 FED was caught flat footed in September. They've been warned. Now, 0:11:09.440 --> 0:11:12.720 if we get a spike in repo again, way above 0:11:12.840 --> 0:11:15.400 what market rates should be, and that's only a few 0:11:15.440 --> 0:11:19.640 basis points movement, what would it say says the FED failed, 0:11:20.080 --> 0:11:22.480 they had warning, they had a shock, and they didn't 0:11:22.520 --> 0:11:26.080 fix the problem. That would be more serious in my opinion. 0:11:26.720 --> 0:11:29.640 All right, let's shift geared a little bit to the outlooks. 0:11:29.720 --> 0:11:34.720 Let's uh pass over the December potential turmoil or any 0:11:34.720 --> 0:11:38.439 other disruption, and when are you actually congratulations, got it 0:11:38.520 --> 0:11:41.640 totally right? Said that you went all in on markets. 0:11:41.679 --> 0:11:44.400 The market rallied quite a bit. Where are you now 0:11:44.440 --> 0:11:48.400 in terms of the cautious versus risk on spectrum heading 0:11:48.440 --> 0:11:53.680 into we raise some cash in the quantitative strategies, were 0:11:53.760 --> 0:11:58.000 back in cash. In the regular managed et F accounts, 0:11:58.000 --> 0:12:02.079 we have cash reserved, and in the fixed income accounts 0:12:02.120 --> 0:12:05.240 we have a barbell and we are happy with some 0:12:05.360 --> 0:12:07.800 of the short end because we think we're going to 0:12:07.880 --> 0:12:11.120 be able to deploy it at higher interest rates. You 0:12:11.240 --> 0:12:14.839 had a little no doubt or tweet on how tight 0:12:15.520 --> 0:12:21.199 the triple spread was okay, and it went everywhere, So 0:12:21.320 --> 0:12:24.760 you were vibral viral with a triple B. So you 0:12:24.800 --> 0:12:28.600 think about viral dn quote unless you've been sick. Yeah, 0:12:28.679 --> 0:12:30.480 but we don't want we don't want anybody sick. So 0:12:30.559 --> 0:12:32.760 you think about what your note said. What it said 0:12:32.960 --> 0:12:36.160 is we've got such a flood of liquidity worldwide, these 0:12:36.200 --> 0:12:41.520 spreads are not reflecting credit risk. Someday, sometime before the year, 0:12:43.080 --> 0:12:45.840 there's going to be credit risk repriced in the market, 0:12:46.080 --> 0:12:47.559 and we want to be in a place to take 0:12:47.600 --> 0:12:50.760 advantage of it. So do you have any kind of 0:12:50.800 --> 0:12:54.800 recession outlooking one kind of outlook? Here, we're starting to 0:12:54.800 --> 0:12:57.000 get some signs maybe that's some stabilization in some of 0:12:57.040 --> 0:12:59.000 the European economies, but I'm just not sure if it's 0:12:59.120 --> 0:13:03.480 a green shoot or not. Now, well, we're in no recession, 0:13:03.760 --> 0:13:07.040 slow growth camp Paul. We've been there for a while 0:13:07.120 --> 0:13:10.240 and there's no reason to change that. We think that 0:13:10.480 --> 0:13:14.360 there are enough shoots, whether you want to call him 0:13:14.400 --> 0:13:19.120 green or something else, to see rising labor income taking 0:13:19.160 --> 0:13:22.240 away from return on capital in the US saw a 0:13:22.240 --> 0:13:25.640 little and you did a deep dive in the productivity numbers, 0:13:25.960 --> 0:13:29.319 they reveal it. You look at the employment report that 0:13:29.480 --> 0:13:32.640 there are a number of signs that this labor market 0:13:32.800 --> 0:13:38.600 is finally tightening enough to begin to get upward costs 0:13:38.920 --> 0:13:43.000 of labor, and labor costs long time coming. But if 0:13:43.000 --> 0:13:48.320 it's coming, that means capital profits get the pressures. All right, 0:13:48.400 --> 0:13:51.360 So David, real quick here thirty seconds, and then we'll 0:13:51.400 --> 0:13:53.400 let you go. What's gonna be the best performing as 0:13:53.440 --> 0:14:01.280 at Class I Like the US healthcare sector, it's terrific 0:14:01.440 --> 0:14:05.480 risk aside, policy risk aside, insulated from the trade war, 0:14:05.640 --> 0:14:09.440 and the sleeper might be in the energy patch, which 0:14:09.520 --> 0:14:12.680 is so beaten down and killed that it's got no 0:14:12.840 --> 0:14:15.920 room to go down anymore. It's on the floor, he plays. 0:14:16.000 --> 0:14:18.640 David Kotak, thank you so much for joining us. David's 0:14:18.679 --> 0:14:21.480 chairman and chief investment officer of Coumbling Advisors, coming all 0:14:21.520 --> 0:14:23.720 the way up from Sara Sota, Florida, going against the 0:14:23.800 --> 0:14:26.520 migration that happens this time of a year. But he 0:14:26.600 --> 0:14:28.560 joins us here in a Bloomberg Interactive broker studio, and 0:14:28.640 --> 0:14:47.760 we appreciate that. Not a lot of action in markets today. However, 0:14:47.920 --> 0:14:50.840 if you do look at an index, the main index 0:14:50.960 --> 0:14:53.320 of Mexican stocks, you could see that they are up 0:14:53.480 --> 0:14:55.680 one point three percent. This comes on the heels of 0:14:55.680 --> 0:14:57.960 an announcement of a U S m C, a agreement 0:14:58.240 --> 0:15:02.160 that Mexico, Canada, the US are all planning to sign today. 0:15:02.240 --> 0:15:04.520 The U S. House of Representatives is expected to take 0:15:04.560 --> 0:15:07.280 it up next week and pass it. Joining us now 0:15:07.280 --> 0:15:10.640 to understand the significance of this deal is Christopher Wilson, 0:15:10.880 --> 0:15:13.960 Deputy director of the Mexico Institute for the Wilson Center 0:15:14.080 --> 0:15:17.160 based in Washington, d C. Christopher, thank you for being 0:15:17.200 --> 0:15:19.720 with us. Let's just get started in terms of who 0:15:19.760 --> 0:15:21.720 are the big winners from this deal and who are 0:15:21.760 --> 0:15:25.000 the big losers. Yes, thanks very much for having me. 0:15:25.280 --> 0:15:27.760 I mean, i'd say the business community in general is 0:15:27.800 --> 0:15:31.240 a winner. I mean, the American people and the people 0:15:31.280 --> 0:15:33.640 across North America are winners in a certain sense. And 0:15:33.640 --> 0:15:36.280 that big sense there is that having a deal now 0:15:36.400 --> 0:15:39.200 restores certainty to an area in which we've had so 0:15:39.280 --> 0:15:42.000 much uncertainty over the last couple of years. Trade policy 0:15:42.040 --> 0:15:44.720 has been you know, a big focus point for markets 0:15:44.720 --> 0:15:46.320 for the last couple of years, and it will remain 0:15:46.320 --> 0:15:48.320 to be given everything that's going on with China. But 0:15:48.440 --> 0:15:51.080 this little piece of it across North America is basically 0:15:51.080 --> 0:15:54.080 wrapped up now. It means that all of the companies 0:15:54.120 --> 0:15:57.000 who have built up a continental system of production across 0:15:57.040 --> 0:15:59.600 North America with parts and materials going back and forth 0:15:59.640 --> 0:16:03.080 across borders, so auto parts that you know, move across 0:16:03.120 --> 0:16:05.280 the border to then be put into a you know, 0:16:05.400 --> 0:16:08.400 fully assembled into a vehicle. Hundreds of billions of dollars 0:16:08.400 --> 0:16:10.880 of investments have been made to create that system, and 0:16:10.920 --> 0:16:13.840 the competitive it's the north of North America that comes 0:16:14.200 --> 0:16:17.560 along with that system are now safe again. So that's 0:16:17.600 --> 0:16:20.000 the most important thing. Now some there are some more 0:16:20.040 --> 0:16:22.680 specific winners and losers. So the one of the bigger 0:16:22.800 --> 0:16:26.320 changes was again on autos in terms of an increase 0:16:26.360 --> 0:16:28.760 in rules for regional content. So you have to have 0:16:29.120 --> 0:16:32.840 a greater portion of an automobile made within North America 0:16:32.840 --> 0:16:36.160 and specifically made within the United States or Canada in 0:16:36.240 --> 0:16:39.080 order to comply with usmc A rules. So that will 0:16:39.120 --> 0:16:41.680 create some a few new jobs in the US auto 0:16:41.720 --> 0:16:44.680 sector and potentially the Canadian auto sector as well, but 0:16:44.760 --> 0:16:47.280 it will make cars more expensive as a result. It 0:16:47.320 --> 0:16:49.400 will be a drag on the overall economy at the 0:16:49.480 --> 0:16:52.120 gain of sort of a much narrower sector. You know, 0:16:52.160 --> 0:16:55.280 we can look at agricultural sector as well. The United 0:16:55.280 --> 0:16:57.400 States will get a little bit more access to the 0:16:57.440 --> 0:17:00.480 Canada's dairy market, for example, So there's a in there. 0:17:00.720 --> 0:17:03.760 There's also a modernization that's happening with the agreement. So 0:17:03.920 --> 0:17:06.520 it's a lot of little changes to update NAFTA for 0:17:06.560 --> 0:17:10.080 the twenty feet century. Is their provisions on data storage, 0:17:10.200 --> 0:17:13.360 e commerce, things like that. I mean, products now are 0:17:13.400 --> 0:17:16.560 increasingly being delivered as much via email as they are 0:17:16.640 --> 0:17:19.679 via truck, and we needed rules to govern that across 0:17:19.720 --> 0:17:22.480 North America. Things that just didn't exist in the original 0:17:22.560 --> 0:17:25.880 NAFTA twenty five years ago. You know, it's interesting, Chris, 0:17:25.960 --> 0:17:29.800 since President Trump, you know, essentially scrapped NAFTA, calling it 0:17:29.880 --> 0:17:32.520 the worst deal of all time, We've had three years 0:17:32.520 --> 0:17:35.879 of uncertainty, three years of negotiations. This deal doesn't look 0:17:35.920 --> 0:17:40.600 that much different than NAFTA. It's NAFTA. I mean, this 0:17:40.720 --> 0:17:42.440 is you know, and that's why I say the most 0:17:42.480 --> 0:17:45.800 important thing that's happening here is just removing some of 0:17:45.840 --> 0:17:49.359 that uncertainty. You know, there are important differences between NAFTA 0:17:49.400 --> 0:17:50.960 and U s m c A, but we have to 0:17:51.000 --> 0:17:53.879 start from a baseline that this is basically just the 0:17:53.960 --> 0:17:57.639 restoration of the certainty surrounding NAFTA itself. We still have 0:17:57.800 --> 0:18:01.119 free trade across North America. We will have protections for 0:18:01.160 --> 0:18:04.120 investors that are investing across the borders in North America, 0:18:04.440 --> 0:18:06.720 and that, you know, is way bigger than any of 0:18:06.760 --> 0:18:09.560 the specific changes that are made now. It's it's absolutely 0:18:09.600 --> 0:18:13.119 important that Mexico had to undertake a labor reform, you know, 0:18:13.160 --> 0:18:15.879 for example, in order to comply with usmc A rules. 0:18:15.920 --> 0:18:18.199 That's going to be good for workers in Mexico. It 0:18:18.320 --> 0:18:22.040 may increase costs of productions lightly in Mexico. But you know, 0:18:22.080 --> 0:18:24.639 the bigger thing here is absolutely what's staying the same, 0:18:25.000 --> 0:18:27.440 much more than what's changing. All Right. I get the 0:18:27.480 --> 0:18:31.200 point that everybody wins in the business community community kumbaya, 0:18:31.240 --> 0:18:34.199 hold hands, sing songs. But we are is hearing a 0:18:34.200 --> 0:18:37.639 bit of pushback from specific slices of different industries, in 0:18:37.680 --> 0:18:41.359 particular the U S and Canadian Aluminum group saying that 0:18:41.440 --> 0:18:45.360 Mexico is looking after its own interests with some of 0:18:45.520 --> 0:18:47.960 the requirements within US m c A. Is there anything 0:18:48.000 --> 0:18:51.200 legitimate here? Are there any industries where there is going 0:18:51.240 --> 0:18:53.920 to be a lot of back and forth and dissonance 0:18:53.960 --> 0:18:56.280 in terms of the winners and losers. Yeah, Well, there 0:18:56.359 --> 0:18:59.720 was a you know, sort of last hour proposal to 0:18:59.800 --> 0:19:03.080 try to strengthen some of the rules around aluminum production 0:19:03.119 --> 0:19:06.720 that would have favored US aluminum producers, and Mexico was 0:19:06.760 --> 0:19:09.520 successful and sort of stopping that from moving forward. And 0:19:09.560 --> 0:19:12.120 so that's you know, what that specifically is about. There 0:19:12.200 --> 0:19:16.439 was another sort of ultimate our proposal regarding steel, and 0:19:16.520 --> 0:19:19.480 that one does stay in the agreement with the transition period. 0:19:20.320 --> 0:19:23.000 But you know, there was basically concerns that you'd have 0:19:23.200 --> 0:19:26.879 partially finished steel and aluminum coming into Mexico from other countries. 0:19:27.160 --> 0:19:28.960 They would do just a tiny bit of work on 0:19:29.000 --> 0:19:32.920 it and then call that Mexican aluminum and steel on steel. Uh, 0:19:33.119 --> 0:19:36.480 Mexico you know was less successful, the US was more successful, 0:19:36.560 --> 0:19:39.639 and vice versa on aluminum. So absolutely there, you know, 0:19:39.680 --> 0:19:42.840 there are winners and losers in this, but it comes 0:19:42.840 --> 0:19:45.040 down to those you know, sort of very specific sectors 0:19:45.080 --> 0:19:47.439 that you're bringing up there, Chris, what we have you 0:19:47.480 --> 0:19:50.440 want to get maybe your broader take on just how 0:19:50.480 --> 0:19:53.360 things are going in Mexico. You know, all we see, 0:19:53.440 --> 0:19:55.720 or a lot of what we see in the States 0:19:55.800 --> 0:19:58.000 is just you know, the stories about the extreme violence 0:19:58.040 --> 0:19:59.920 there and the government doesn't seem to be able to 0:20:00.000 --> 0:20:03.119 had a handle on it. How how does that impact 0:20:03.160 --> 0:20:06.760 the economy of Mexico. Just the uncertainty and the violence 0:20:06.800 --> 0:20:10.080 and the you know, all the government issues. What's the 0:20:10.080 --> 0:20:12.920 real bottom line that you're seeing. Yeah, So, I mean, 0:20:12.960 --> 0:20:15.720 Mexico is just completing the first year with its new president, 0:20:15.760 --> 0:20:19.200 Andres Lopez over or president from the left, after many 0:20:19.280 --> 0:20:22.080 years of sort of center or center right rule in Mexico, 0:20:22.320 --> 0:20:24.000 and so there's a lot of changes under way in 0:20:24.000 --> 0:20:26.280 the country and a lot of you know, additional uncertainty 0:20:26.280 --> 0:20:28.399 related to that. That's one of the reasons why U 0:20:28.440 --> 0:20:30.040 S m c A and having this wrapped up was 0:20:30.080 --> 0:20:32.560 so important for Mexico. Is you know, in the context 0:20:32.560 --> 0:20:35.240 of so much uncertainty, here's a little piece that's coming back. 0:20:36.000 --> 0:20:38.880 But yeah, Mexico. You know, twenty nineteen is going down 0:20:39.000 --> 0:20:41.960 on record as one of the most violent years historically 0:20:41.960 --> 0:20:44.720 in Mexico, and it's going down as a year with 0:20:44.960 --> 0:20:48.160 you know, almost zero growth in terms of GDP in Mexico. 0:20:48.280 --> 0:20:51.240 So this is a very challenging year from Mexico. I 0:20:51.280 --> 0:20:53.639 think we should expect the government to be able to 0:20:53.680 --> 0:20:55.960 mobilize a little bit more in terms of investment in 0:20:56.000 --> 0:20:58.520 the coming year. Transitions are always tough in Mexico in 0:20:58.600 --> 0:21:01.600 terms of keeping government investor moving. Uh So that's a 0:21:01.640 --> 0:21:04.919 positive thing to look forward to. But this, you know, 0:21:05.040 --> 0:21:08.320 the bigger question is just the governing style of the 0:21:08.320 --> 0:21:10.639 current president and I think the a lot of the 0:21:10.680 --> 0:21:14.040 private sector in Mexico is very concerned about the future 0:21:14.040 --> 0:21:17.040 of Mexico, in the Mexican economy. But you know, there's 0:21:17.040 --> 0:21:19.600 still a compelling case to be made that production in 0:21:19.640 --> 0:21:22.920 Mexico is you know, one of the most important ways 0:21:23.040 --> 0:21:26.080 for companies across North America to cut their costs and 0:21:26.119 --> 0:21:29.240 be more competitive. So that's that you know continental system 0:21:29.240 --> 0:21:31.960 of production that I was talking about, that's you know, 0:21:32.000 --> 0:21:34.359 that value proposition is still out there and it's still 0:21:34.359 --> 0:21:37.399 bringing investment into Mexico. So it's it's a mixed story. Absolutely, 0:21:37.400 --> 0:21:40.840 there are big challenges domestically in Mexico, but there's also 0:21:40.920 --> 0:21:44.200 a strong logic to continuing to invest there, and we'll see. 0:21:44.520 --> 0:21:46.960 I think the companies who are already in Mexico who 0:21:47.000 --> 0:21:50.760 know how to operate in that complex business environment staying there, 0:21:50.800 --> 0:21:54.240 reinvesting their profits, growing their business in Mexico, while we 0:21:54.240 --> 0:21:56.560 see others maybe stay on the sidelines and wait and see. 0:21:56.880 --> 0:21:59.280 Christopher Wilson, thank you so much for your commentary there. 0:21:59.320 --> 0:22:14.720 Christopher Wilson, Deputy Director of the Wilson Centers Mexico Institute. 0:22:17.800 --> 0:22:20.199 Time to check in with Bloomberg Opinion. We're joined by 0:22:20.240 --> 0:22:23.560 opinion calumnist Andy Brown. He's editorial director for the Bloomberg 0:22:23.920 --> 0:22:28.520 New Economy. Just held a big conference in China recently 0:22:28.640 --> 0:22:32.040