Speaker 1: Welcome to the Bloombergs Surveillance podcast name Tom Keene, along
Speaker 1: with Jonathan Ferrill and Lisa are Brownwitz Jaylie, we bring
Speaker 1: you insight from the best and economics, finance, investment and
Speaker 1: international relations. Find Bloomberg Surveillance and Apple Podcast SoundCloud, Bloomberg
Speaker 1: dot Com and of course on the Bloomberg terminal. Very
Speaker 1: pleased to say that we have an annual tradition here
Speaker 1: at Bloomberg Surveillance. We catch up with Im Bremer and
Speaker 1: the team at Eurasia Group to go through the top
Speaker 1: ten risks Eurasia Groups Top ten Risks and at number
Speaker 1: four is China at Home. We're lucky to have both
Speaker 1: Iam Brema and Elizabeth Economy with us of the Hoover Institute,
Speaker 1: and Lisa wanted to start with this quote in the report,
Speaker 1: foreign firms will face an increasingly difficult environment inside China,
Speaker 1: the two way political risk of operating in both the
Speaker 1: US and China, the task of keeping both Washington and
Speaker 1: Beijing happy, and perhaps Le's we can extend it further,
Speaker 1: the task of keeping a progressive consumer in America happy
Speaker 1: and an increasingly nationalistic one in China happy. To list
Speaker 1: how tough is that going to be. Yeah, I think
Speaker 1: it is a pretty significant and growing challenge. UM. I
Speaker 1: think many companies are trying to navigate a sort of
Speaker 1: a growing sense that, um, not only do the US companies,
Speaker 1: not only do they need to be concerned about national
Speaker 1: security issues, which have long been present sort of in
Speaker 1: U s foreign policy and for an economic policy right
Speaker 1: to ensure that companies aren't exporting technology that can be
Speaker 1: used by other countries that might pose a national security threat.
Speaker 1: But now increasingly we're dealing with human rights issues as well,
Speaker 1: human rights abuses. And this is particularly important, of course
Speaker 1: in the context of China, where we've seen, you know,
Speaker 1: any very repressive regime under Sident King beginning in twenty
Speaker 1: to the point now that we have you know, over
Speaker 1: a million of Chinese own citizens, the weaker Muslim in
Speaker 1: sin Jong, you know, in labor and and re education camps,
Speaker 1: detained there against their their will. And so, you know,
Speaker 1: how does American business respond to this? And I think
Speaker 1: increasingly Congress and the Biden administration are taking a very
Speaker 1: tough line on this. So I think you are finding
Speaker 1: American companies trying to figure out how to navigate in
Speaker 1: a very new environment. UM. And and in fact, as
Speaker 1: you suggest, the Chinese consumer. Then when companies do stand
Speaker 1: up and say, yes, we're not sourcing from Sindown, right,
Speaker 1: We're not sourcing from this region, We're we're not taking
Speaker 1: any products that are the results of forced labor from
Speaker 1: these weavor Muslims, then you have the Chinese consumers on
Speaker 1: the other and threatening to boycott. And we've seen companies
Speaker 1: like HM and Nike and others facing threats or actual
Speaker 1: boycotts of some sort as a result of these companies
Speaker 1: trying to do the right thing in terms of human rights.
Speaker 1: So it is a very tricky situation. And for a
Speaker 1: long long time, these companies have been able to sit
Speaker 1: on the fence, play the progress of card at home
Speaker 1: in America, then go abroad and do whatever the Chinese
Speaker 1: Communist Party needs them to do. The Disney Company, the
Speaker 1: Walt Disney Company a fantastic example of that, doing all
Speaker 1: it can to embrace the Chinese Communist Party to remain
Speaker 1: to have access to make sure their movies are shown.
Speaker 1: At the same time, and we have a government in
Speaker 1: America accusing the Chinese Communist Party of genocide, and what
Speaker 1: on earth do you advise a multinational operating of both
Speaker 1: America and China right now to do Yeah, how do
Speaker 1: you How do you be a woke CEO for domestic
Speaker 1: audience and participate in an expanding market that you want
Speaker 1: to be in When the American political leadership is saying
Speaker 1: that that country is committing genocide, Well, obviously you have
Speaker 1: to speak out of two sides of your mouth, and
Speaker 1: you get caught when you're doing that, and it's difficult,
Speaker 1: it's very uncomfortable. Look, most American CEOs, despite all of
Speaker 1: the problems that Liz and I have been talking about
Speaker 1: this morning, want to do more business in China. They
Speaker 1: believe that China is going to continue to expand. It's
Speaker 1: an enormous consumption market. They don't want to leave it
Speaker 1: on the table. And yet they know that anything that
Speaker 1: they say about that, or said about that to them
Speaker 1: is going to be problematic for you. Saw Ray Dalio
Speaker 1: on c NBC a while ago just get absolutely hammered
Speaker 1: in the United States for saying, Hey, like I am
Speaker 1: talking about human rights, where am I going to invest?
Speaker 1: I'm just trying to make money. I mean, CNBC Bloomberg.
Speaker 1: We're talking to capitalists here, people that are trying to
Speaker 1: make money, and yet the domestic audience is saying that's
Speaker 1: not enough. You've got to do less. With at the
Speaker 1: Beijing Olympics coming up, and the Biden administration trying to
Speaker 1: square the circle by saying we're gonna diplomatically boycott. But
Speaker 1: the companies, the American companies that are going over there
Speaker 1: and sponsoring, they can still sponsor. Yet we know that
Speaker 1: so many senators and members of the House are going
Speaker 1: to be scrutinizing and criticizing those companies for doing precisely that.
Speaker 1: One more I'll mention Elon Musk, you know, wealthiest man
Speaker 1: in the world, has been enormously you know, sort of
Speaker 1: the critical of the US government, the SEC for going
Speaker 1: after him, making life challenging for him. And yet in
Speaker 1: China he is incredibly supportive of the Chinese Communist Party,
Speaker 1: and it's becoming incredibly difficult for him to continue to
Speaker 1: do that. His SpaceX UH company in the United States,
Speaker 1: which gets a lot of money mostly from NASA and
Speaker 1: the Pentagon, now the Chinese government saying, hey, what's going on.
Speaker 1: You almost hit one of our you know, one of
Speaker 1: our satellites. Um that that all of that is a
Speaker 1: very serious problem for American corporates that are trying to
Speaker 1: avoid politics, politics won't avoid them. Yeah, and Elon Musk,
Speaker 1: I think is a is a very special case in
Speaker 1: so many ways. But I see it here in with
Speaker 1: the leaders of especially German export oriented companies. Right, they
Speaker 1: are not alone though it's not just the corporates. The
Speaker 1: government's here also seem to want to build and and
Speaker 1: hold on to strong ties to the Chinese economy. And
Speaker 1: way is that the Americans in Washington, d C. Wouldn't
Speaker 1: necessarily support. You know, the funny thing is you talk
Speaker 1: to the American leaders privately, and they recognize that the
Speaker 1: private sector wants to do more business, and they recognize
Speaker 1: that the interdependence of the United States in China is
Speaker 1: actually really important to our own national interests, our own
Speaker 1: national security. But they can't say that publicly. You know why,
Speaker 1: because Biden lost votes in swing states in because he
Speaker 1: was perceived as Beijing Biden as soft on China. The
Speaker 1: Republicans hit him on that, and they will not make
Speaker 1: that mistake again, so publicly they must come across as
Speaker 1: much tougher on the corporates, and tougher on the bankers,
Speaker 1: and tougher on anyone that's saying that, you know, China
Speaker 1: is a great place to be and that's why you
Speaker 1: see even the Biden administration talking about the Chinese committing
Speaker 1: genocide on the ground. That makes it much more uncomfortable
Speaker 1: and difficult for the American corporates to operate. There's no
Speaker 1: question that it's extremely uncomfortable. Lucky to have the Embrema
Speaker 1: with us this morning at the Raged Group, and thank you,
Speaker 1: says Elizabeth Economy of the Hoova Institute and the author
Speaker 1: of the Third Revolution List. Great to catch up. Thank
Speaker 1: you joining us now once again on the top risk
Speaker 1: for and also joining us Jane Harmon, President Emerita of
Speaker 1: the Wilson Center and former member of Congress ian the
Speaker 1: U S midterms make the list of these risks. When
Speaker 1: we talk about the political environment in the United States,
Speaker 1: especially on a week that brings the one year anniversary
Speaker 1: of January six, are we more divided now than we
Speaker 1: were a year ago? Yeah, I mean we've learned literally
Speaker 1: zero lessons from the election of two thousand twenty and
Speaker 1: and that's a that's a serious problem. This was the
Speaker 1: most dysfunctional and delegitimized election of our lifetimes in the
Speaker 1: United States, and we've done literally nothing to fix the
Speaker 1: underlying problems. Indeed, the Republican Party is more controlled by
Speaker 1: President Trump today, and more Republicans believe that the election
Speaker 1: was stolen today than did on January sixth. And the
Speaker 1: likelihood is, of course overwhelmingly that the Republicans are going
Speaker 1: to take the House, they may take the Senate um
Speaker 1: in midterm elections, and they'll take it with an underlying
Speaker 1: message that the election of was stolen. This is deeply
Speaker 1: problematic and a pivotal midterm election, probably the most important
Speaker 1: mid term of our lives. Well, and Jane, what's the
Speaker 1: picture that Ian is painting here is one of a
Speaker 1: very politically divided United States, one that doesn't necessarily project
Speaker 1: a picture of strength to the rest of the world.
Speaker 1: As the US in a position right now to be
Speaker 1: a leader on the global stage. Not so much. Um
Speaker 1: Ian has just produced a wonderful report on political risk
Speaker 1: going around the world. And I've been in Europe three
Speaker 1: times in the past few months, and people there are
Speaker 1: very worried. They don't see the Biden administration delivering on
Speaker 1: what had promised, but they also understand the under and
Speaker 1: underlying reason. Maybe some of it has to do with
Speaker 1: the Biden administration. But a big underlying reason is that
Speaker 1: Congress is totally dysfunctional. And something that's in an Even's
Speaker 1: report that got my attention is is UH the comment
Speaker 1: that the only thing possibly worse than President Trump being
Speaker 1: re elected is President Trump being not being re elected. UM,
Speaker 1: the point of which is underlying lack of confidence in
Speaker 1: our voting structure. And you know, I'm listening to all
Speaker 1: this talk about inflation big problem and about whether we
Speaker 1: could pass any form of build back better. I think
Speaker 1: it is crucial for Congress to pass UH some form
Speaker 1: of voting rights reform, or else we may be abdicating
Speaker 1: our our democratic voting process and letting elected legislators are
Speaker 1: appointed electors election officials UH decide what the vote is
Speaker 1: after people's valid votes are discountant. So, Jan Jane, what
Speaker 1: exactly do you mean by that? In which direction would
Speaker 1: this reform go? Are you saying that the Congress should
Speaker 1: pass UH laws that require you to prove your identity,
Speaker 1: prove your citizenship, and limit the amount of absentee voting
Speaker 1: that can happen so that people on the right have
Speaker 1: more faith in the system. Well, I want people on
Speaker 1: across the spectrum to have more faith in the system. Uh.
Speaker 1: It is true than in our constitution that the states
Speaker 1: set the terms of elections, but the federal government does
Speaker 1: have UH, and our constitution does creempt certain aspects of this.
Speaker 1: And it is appropriate, for example, for the federal government,
Speaker 1: which has done this, to declare voting machines critical infrastructure.
Speaker 1: It's also appropriate for the federal government to decide, uh,
Speaker 1: you know what our basic conditions of counting votes. And
Speaker 1: Joe Manchin, his name comes up every five minutes, has
Speaker 1: set out some terms that he would accept on voting rights,
Speaker 1: and they seem broadly acceptable. And so I think it
Speaker 1: is crucial for Congress to act soon before all of
Speaker 1: these laws take effect there in nineteen or twenty states,
Speaker 1: and we end up with a hot mess after November.
Speaker 1: Hotter Mass right, because it's already pretty messy. Ian. Let
Speaker 1: me get back to you and ask you about the
Speaker 1: international reputation of the US in terms of dependability. Was
Speaker 1: the withdrawal from Afghanistan really damaging to the US reputation? Um?
Speaker 1: The way that the withdrawal was executed was damaging, perhaps
Speaker 1: most so with America's Gulf allies, who are going to
Speaker 1: be affected by the Taliban running Afghanistan, the refugees, the radicalism,
Speaker 1: more than anybody else, the Emiratis, for example, the Saudist
Speaker 1: for examp apple um. But but I think much more broadly,
Speaker 1: the issue is that of the underlying American political system.
Speaker 1: That's what's damaging America's ability uh to be seen as
Speaker 1: credible going forward. Jane hit on this. We have just
Speaker 1: had successful elections in some of the world's biggest and
Speaker 1: richest democracies, in Germany, in Japan, in Canada in the
Speaker 1: last few months. No problem, no dysfunction, uh, no questions
Speaker 1: of legitimacy. The United States, on the other hand, increasingly
Speaker 1: has a fundamental structural issue. But whether or not the
Speaker 1: average American believes in its political system, what it stands for,
Speaker 1: whether the elections are legitimate, whether the two parties are
Speaker 1: equally uh legitimate in a representative democracy. These are fundamental
Speaker 1: and profound issues that are not only not about to
Speaker 1: be resolved in the mid terms, but are very likely
Speaker 1: to get aproximately worse. And I agree completely with Jane
Speaker 1: that voting rights is becoming much more important than build
Speaker 1: back better. But voting rights is not about mansion. Voting
Speaker 1: rights is about cinema. She is the vote that you
Speaker 1: have to actually get to make voting rights happen, and
Speaker 1: so far she looks un gettable. People I talked to
Speaker 1: in the Senate tell me that is probably not going
Speaker 1: to happen this year. And so again, your baseline when
Speaker 1: you think about the top risks for two for the
Speaker 1: United States is probably one of the more negative calls
Speaker 1: that you have. You wish when I first started this,
Speaker 1: the firm in the United States was never on this
Speaker 1: list because, frankly, the question of American democracy represented democracy,
Speaker 1: legitimacy of our institutions was something you could count on,
Speaker 1: something the markets could count on, something our allies could
Speaker 1: count on, something even our adversaries had to count on,
Speaker 1: even if they didn't like it. That is no longer true,
Speaker 1: and obviously that's a dominant issue for anyone considering what
Speaker 1: the state of the world is going to be going forward.
Speaker 1: How do you think, Jane, the rest of the world
Speaker 1: is going to view this? Then we're trying two stories together.
Speaker 1: Hit the number one risk Last year you write a
Speaker 1: group was number forty six. It was this presidency. Now
Speaker 1: it's the mid terms at number three, Jane, that's got
Speaker 1: to be music to the ears of the likes of Russia.
Speaker 1: The Chinese Communist Party who were thinking looking ahead to
Speaker 1: say places like Taiwan looking at Ukraine right now, Jane,
Speaker 1: what does it mean for their view that decisions that
Speaker 1: they make the likes of Russia the likes of China. Well,
Speaker 1: I don't think they're unhappy to see dysfunction in the
Speaker 1: United States, and in various ways they're exploiting. Surely Russia is.
Speaker 1: And Ian's report points out that we should expect more
Speaker 1: disinformation um through social media for um that will. I
Speaker 1: think that's dead right on China. China has a lot
Speaker 1: of its own problems, again pointed out in the report.
Speaker 1: But again, but I think since we have made China
Speaker 1: a focus of our foreign policy and the rhetoric has
Speaker 1: been pretty harsh, Shijin Ping is again probably quietly smiling
Speaker 1: at our dysfunction. What worries me and Afghanistan is emblematic
Speaker 1: thing is we may be targeting the right issues, but
Speaker 1: our execution is poor. Leaving Afghanistan was a mess, uh,
Speaker 1: and there was pre planning by the Widen administration, but
Speaker 1: there's all this finger pointing about we had a hard
Speaker 1: deadline with that wasn't based on UH situationally based, and
Speaker 1: we didn't let the military apt sooner and blah blah
Speaker 1: blah are intel, which was pretty bad. I've heard this
Speaker 1: from a very important member of the Senate, projecting a
Speaker 1: pretty bad mess was ignored, etcetera because the President decided
Speaker 1: we had to leave. I'm not against ending the military mission,
Speaker 1: but I think that as the world looked at this,
Speaker 1: and as Europe felt discounted, NATO did not feel fully consulted. UH.
Speaker 1: There was a huge tale on this that was very
Speaker 1: negative and it has hurt us ever since. And I
Speaker 1: don't think we should be abdicating our role as the
Speaker 1: international global leader. I just wrote a U COmON this.
Speaker 1: Since the Cold War, America has not had a foreign
Speaker 1: policy strategy for the world, and I think it's long overdue.
Speaker 1: Biden had the beginnings of this, and I salute him
Speaker 1: for it. It was human rights, it was working with allies,
Speaker 1: it was surging diplomacy, it was making foreign policy relevant
Speaker 1: to Americans average Americans. All of these are good things,
Speaker 1: but now we have to execute Jane. When you hear
Speaker 1: the President say America's back, do you believe him? I
Speaker 1: want to believe him. Europe doesn't believe him. Uh. He
Speaker 1: came to a G seven meeting a year ago and
Speaker 1: said America is back. And then the Afghanistan departure happened
Speaker 1: last summer, and then the messaging around the Australian nuclear
Speaker 1: sub deal happened, which even he confessed was very clumsy. Uh,
Speaker 1: we can do better. His team is good. I'm not
Speaker 1: ragging on the administration's team, but I'm ragging on a
Speaker 1: process that, somehow, uh doesn't convey the kind of competence
Speaker 1: UH and planning that he should be known for. I mean,
Speaker 1: he was the chairman of the Senate Foreign Relations Committee
Speaker 1: for a long time. He has long experience, UH, and
Speaker 1: he knows everybody, and a lot of them work for him.
Speaker 1: And so just let's hope that two is a better beginning,
Speaker 1: although it is fraught with this other controversy around build
Speaker 1: back better inflation, COVID never ending made a surge, possibly
Speaker 1: peak uh and UH, as far as I'm concerned, this
Speaker 1: this looming voting rights catastrophe, and we've got about ninety
Speaker 1: seconds left. I was going out of the top ten
Speaker 1: risks from last year, and I noticed one miss, I
Speaker 1: think one miss from you writer group was the belief
Speaker 1: that energy prices would remain low. One win was Turkey.
Speaker 1: Turkey in your top ten last year, it's in your
Speaker 1: top ten again this year. It's sixty seconds. And why
Speaker 1: the concern about Turkey again this year? Look, I mean
Speaker 1: inflation and spiraling, unemployment really high, and Urdawan and his
Speaker 1: Ak Party are at record lows right now. And he
Speaker 1: is not someone oriented towards representative democracy. He is willing
Speaker 1: to cause lots of repression at home and also be
Speaker 1: much more experimental in his foreign policy, with plenty of
Speaker 1: places he can cause trouble in the region. Think about
Speaker 1: Greek Greece and Cyprus, Think about Syria, think about Libya,
Speaker 1: think about Nagono, Karabak and Armenia, Azerbaijan. This is a
Speaker 1: country that is headed for trouble right now, a hell
Speaker 1: of a lot faster than any other major emerging markets
Speaker 1: out there. It's a country that a lot of us
Speaker 1: care about and should be doing a lot better, but
Speaker 1: the politics have gotten in the way. And wonderful congratulations
Speaker 1: to you and the team. I don't know, a fantastic
Speaker 1: piece of work to kick off a new year. Im
Speaker 1: Brema of Eurasia and to Jane Harmon of the Wilson Center, Jane,
Speaker 1: thank you to you as well, joining us now a
Speaker 1: big equity market bull, Ben Laidler Global Market Strategistic Eats
Speaker 1: or Ben, let's just start right here and not bury
Speaker 1: the lead. We've had three years of double digit gains.
Speaker 1: You think we can make a year for bend later? Why?
Speaker 1: I think we're still significantly underestimating the earning story. Consensus
Speaker 1: earnings growth globally for this year is is well under
Speaker 1: ten percent in a year when GDP growth is going
Speaker 1: to be nearly twice long term average levels. And companies
Speaker 1: have shown us throughout last year, but they are more
Speaker 1: than capable off setting all these cost pressures that they're seeing.
Speaker 1: And I think valuations can stay very high. The FED,
Speaker 1: I think, is going to move, you know, very slowly
Speaker 1: off a very low interest right no on, but bond
Speaker 1: hills are going to stay reasonably low. And this is
Speaker 1: a market that's changed over the last sort a couple
Speaker 1: of decades. It's just full of um you know, bigger,
Speaker 1: more profitable, more sustainably profitable companies. And I think you
Speaker 1: put those two things together, earnings numbers which should probably
Speaker 1: be twice as high as they are right now, and valuations,
Speaker 1: which I think I to come down a bit, but
Speaker 1: but not much. And I think those of your ingredients,
Speaker 1: so I think, I think the biggest risk remains not
Speaker 1: being in equities rather than being out of equities. Well,
Speaker 1: let's focus on one of those points that this thesis
Speaker 1: is predicated on, and that is persistently lower yields. How
Speaker 1: low do they have to stay? What is the threshold
Speaker 1: for equities to still be supported? And not just in
Speaker 1: terms of the nominal yield, but really yields as well. Yeah,
Speaker 1: I mean that's obviously been a huge um you know,
Speaker 1: tell went frequities. But I don't think it changes you
Speaker 1: know that soon, right, I mean we're coming off you know,
Speaker 1: your typical FED cycle is three or four basis points.
Speaker 1: This will probably may be something like half that, and
Speaker 1: it will be much slower and much longer. I think
Speaker 1: that gives you know, that gives economies, that gives markets,
Speaker 1: that gives stocks just a very long time, if you
Speaker 1: like to sort of grow into this and and and
Speaker 1: and the the impact I think that here and now
Speaker 1: impact is going to be on valuations and evaluations opticularly
Speaker 1: look high. I do think that I do think the
Speaker 1: world has changed. Not only a bond yield is going
Speaker 1: to stay low and move up slowly. And to specifically
Speaker 1: answer your point, I think the tipping point is quite
Speaker 1: a long way off. You know, yields are heavily, heavily negative,
Speaker 1: and even even in nominal terms, um, they're still extraordinarily low.
Speaker 1: And again, I think the market has changed. I think
Speaker 1: there's sort of intellectual sort of laziness, so one times
Speaker 1: earnings versus a long term marriage of sixteen for you know,
Speaker 1: the SMP five p you know, the long term average
Speaker 1: is not relevant anymore. The tech sector is twice as large.
Speaker 1: It's pretty much the most profitable sector in the market,
Speaker 1: and it's still got a lot of growth. That's a
Speaker 1: huge change to the composition of this market, which we
Speaker 1: haven't had didn't have twenty thirty years ago. Do you
Speaker 1: think tech will be able to retain its leadership of
Speaker 1: this market? Though, Banner? Is that going to shift shift elsewhere?
Speaker 1: I think the so called everything Raley continues. I mean,
Speaker 1: you look at your your equal weighted SMP five hundred.
Speaker 1: You know outperformed the weighted SMP five hundred last year,
Speaker 1: not about a lot, but it does tell you that
Speaker 1: everything did pretty well last year. I mean the thought
Speaker 1: that this is a sort of tech led market, that
Speaker 1: it's come plea depend on tech tax is important, but
Speaker 1: it's not the only driver here. I mean last year
Speaker 1: was about a lot more than tech, and I think
Speaker 1: that continues this year. I think tech are sort of
Speaker 1: the new defensives, and you definitely want to own them,
Speaker 1: but I don't think they're going to be the leadership
Speaker 1: this year. I think you want the cheaper segments. I
Speaker 1: think you want the higher growth segments. I think that's
Speaker 1: what's going to lead this year. Are you Are you
Speaker 1: worried then about profit margins getting hit hard by inflation?
Speaker 1: Not really, I mean to legitimate question. The market is
Speaker 1: clearly worried about it, which is why you've got these
Speaker 1: very low earnings growth expectations for this year. But I
Speaker 1: think we've if you, I think we've probably had the
Speaker 1: peak of inflation pressure on margins, and companies are still,
Speaker 1: at least in the US are reporting that profit margins
Speaker 1: for the second quarter in a row, which is the
Speaker 1: highest ever. I think companies in this environment where growth
Speaker 1: remained strong, which I think is going to continue into
Speaker 1: this year, companies are showing you they can they can
Speaker 1: offset it, they can mitigate it. And I think you
Speaker 1: know a that continues be there are big segments of
Speaker 1: the market when margins are still super depressed. I mean
Speaker 1: all these reopening segments, which I think incrementally through this
Speaker 1: year we'll get those margins back. I think that's the
Speaker 1: story we should also be talking more about and will
Speaker 1: be an offset to UM. You know any of these
Speaker 1: and you know if I'm wrong, and you know the
Speaker 1: more mainstream companies do see pressure on their margins. The
Speaker 1: year progressive. What a way to start two, Ben Laydler
Speaker 1: of Etara Ben I say it often every time you
Speaker 1: join us. You've been bullish. You've been right, Ben, Thank
Speaker 1: you sir. When we're looking at such massive numbers and Keyley,
Speaker 1: we've been covering this for a few days of more
Speaker 1: than a million, now more than two million cases a
Speaker 1: day globally, and that's got to be a drastic underestimate, right,
Speaker 1: because most people who test positive for COVID or have
Speaker 1: it and don't even test positive never tell any public
Speaker 1: health officials. UM, you're gonna send a lot more people
Speaker 1: to the hospital, and that's the big concerns. So do
Speaker 1: you does does Eric Adams make the right move for
Speaker 1: parents and for kids, or does he make the right
Speaker 1: move for healthcare workers. That's what I think the interesting
Speaker 1: debate is. Yeah, it's a very very good question. Matt,
Speaker 1: let's pose it now. Tjadoshua starf seen visting of the
Speaker 1: Johns Hopkins Bloomberg School of Public Health. When you think
Speaker 1: about schools in particular and children, where we've seen pediatric
Speaker 1: hospitalizations actually on the rise amid the spread of this variant,
Speaker 1: do you think keeping schools open is the right move?
Speaker 1: I do. I think so with the appropriate precautions. I
Speaker 1: do think that the doctor from Northwestern had it right
Speaker 1: that if done well, school is you know, relatively safe
Speaker 1: environment for kids UM masking tests. Especially during this surge
Speaker 1: of cases, I think it is very important for kids
Speaker 1: to be in school, and I think the chance of
Speaker 1: school becomes an explosive source of new infections is low
Speaker 1: with precautions, but explosive new infections is really what we've seen,
Speaker 1: not in schools specifically, but generally. Ten million cases in
Speaker 1: just a week. Are we reaching a peak of this wave?
Speaker 1: Considering how quickly it is spreading through the population. I
Speaker 1: think at a certain point it really has to slow down.
Speaker 1: And that's probably within a couple of weeks or a
Speaker 1: few weeks away UM, and that's I think going to
Speaker 1: be good news. The question is can we keep hospitalizations
Speaker 1: down enough during this period so we're not swamping hospitals,
Speaker 1: because even though there's a less risk of getting hospitalized
Speaker 1: with a macron um, it's still a risk. And with
Speaker 1: so many people infected, you see numbers increasing in the hospital.
Speaker 1: I heard from some doctors saying it's a lot of patients,
Speaker 1: but the good news is they're not as sick overall
Speaker 1: as they were back in the delta wave. Dr Sharkstein,
Speaker 1: how reliable are tests? You know? I keep talking to
Speaker 1: people who UM went to a party with someone who
Speaker 1: tested negative right before the party, but then on the
Speaker 1: day after or the day after that UM they tested
Speaker 1: positive of and then all of a sudden, every one
Speaker 1: of the party's got it. I mean, how much can
Speaker 1: we rely on these lateral flow tests. That's a really
Speaker 1: great question because in the United States we have a
Speaker 1: great faith in testing. We just assume that the test
Speaker 1: is going to give us the answer, and it's very
Speaker 1: hard to process the fact that there are cases that
Speaker 1: the tests will miss and testing only helps in aggregate.
Speaker 1: If everybody's testing, then we're gonna have fewer overall cases.
Speaker 1: But that doesn't mean you couldn't get into trouble in
Speaker 1: a situation just like that in a party. And I
Speaker 1: think that people have to check their risk tolerance and
Speaker 1: realize that they're lowering the risk where everybody's getting tested,
Speaker 1: but they're not eliminating it. And you just have to
Speaker 1: be judicious about you know what, what you want to do,
Speaker 1: what's valuable to you and um and keeping in mind
Speaker 1: the limits of the testing. What's your take, by the way,
Speaker 1: on flights, on the safety of being inside a giant
Speaker 1: aluminum to with a few hundred other people for a
Speaker 1: few hours, you know, two years on Because before this
Speaker 1: um COVID pandemic, I thought everybody gets sick on planes.
Speaker 1: That's just part of traveling. You get sick. That's why
Speaker 1: somebody invented airborne and made a billion dollars off of it. However,
Speaker 1: throughout this pandemic, talking to airline executives and engineers, I've
Speaker 1: come to believe that maybe it is uh cleaned out
Speaker 1: air safer place to be as long as everyone's masked.
Speaker 1: How do you view it? Yeah, I mean I think
Speaker 1: everything's relative. I mean compared to just sitting at home
Speaker 1: and doing nothing, it's going to be riskier. But there
Speaker 1: is a pretty frequent air exchange. You have the chance
Speaker 1: to wear a mask, and of course you have the
Speaker 1: chance to be vaccinated and boosted. So someone who's vaccinated
Speaker 1: and boosted and mass and an airplane that is not
Speaker 1: a very high risk for sitting there. I think it's
Speaker 1: pretty low. Um. And again it boils down to risk tolerance.
Speaker 1: People who want to avoid the virus at all costs,
Speaker 1: no matter what, they're going to be stuck at home.
Speaker 1: But you can now and I think it's get to
Speaker 1: two and we say we look, we're going to go
Speaker 1: back to living our lives. We're going to figure out
Speaker 1: a way through this. You have to take calculated risks,
Speaker 1: and air travel I think is reasonable under the circumstances. Now,
Speaker 1: in the middle of a huge wave of a macron um,
Speaker 1: I think there's some things that we're going to do
Speaker 1: differently in our lives. But once that's behind us, I
Speaker 1: think we're gonna see two play out a little differently.
Speaker 1: All right, Thank you so much to Joshua Sharfstein at
Speaker 1: the Johns Hopkins Bloomberg School of Public Health. Appreciate your time,
Speaker 1: and happy New Year to you. We had a heck
Speaker 1: of a one in the sp if I've oundered up.
Speaker 1: Month of December is the best best December in terms
Speaker 1: of performance since two thousand and What do we do now?
Speaker 1: Let's bring in Doug cast because he's got some thoughts
Speaker 1: on this stuff. Doug Cast, Sea Breeze Partners President, Doug,
Speaker 1: what's on your radar for two is related to these markets?
Speaker 1: What are you telling your clients? Well, I would start
Speaker 1: by saying that that last year began with this a
Speaker 1: marriage of monetary and physical policies, something that we've never
Speaker 1: seen or I've never seen in my investment career, and
Speaker 1: it's ending with a potentially failed bill better bill, and
Speaker 1: a central bank that's quickly getting out of the bond
Speaker 1: bonding business. So I would say that the setup for
Speaker 1: two is far different than UM. I expect economic growth
Speaker 1: will slow relative to consensus expectations, and that inflationary pressures
Speaker 1: will continue in the face of supply dislocations influenced in
Speaker 1: large measure because of country and business restrictions UM and
Speaker 1: that will serve to result in disappointing corporate profits dog
Speaker 1: Happy New Year. I'm what, I'm very happy here happy,
Speaker 1: I'm very curious why, and a lot of folks kind
Speaker 1: of two outlooks. I'm not seeing it of geopolitics and
Speaker 1: there yet every day we seem to be talking about Russia, China, Turkey.
Speaker 1: How do you or perhaps why do you not price
Speaker 1: that into a market right now? Well, I do a
Speaker 1: surprise list very similar to UM my friend Byron ween UM,
Speaker 1: and I do it every year. I've been doing it
Speaker 1: for twenty years. Besides running the new hedge funds Cebris Partners,
Speaker 1: I've been blogging for twenty four years on the street
Speaker 1: dot COM's Real Money pro site. And I write this
Speaker 1: list of surprises and I have a bunch of them
Speaker 1: this year which incorporate that concern. One of my concerns
Speaker 1: is that what little is left of global harmony is
Speaker 1: up ended in a year characterized by um expanding geopolitical
Speaker 1: tensions on three continents. I Ran and Israel obviously, China
Speaker 1: and Taiwan and Russian Ukraine. And it's a big negative.
Speaker 1: So how does that play out? I mean, you know,
Speaker 1: I think one of the things that the market seem
Speaker 1: to be discounting Doug is that it's all gonna work
Speaker 1: out here? Are you suggesting that these risks are perhaps
Speaker 1: a little bit more than this market's discounting. I think
Speaker 1: we have a lot of surprises in store and a
Speaker 1: lot of risks in store for this year. UM, be
Speaker 1: happy to go over a couple of surprises really quickly,
Speaker 1: to give us a couple of your favorites. Sure, my
Speaker 1: my number one favorite, and I can expand upon it.
Speaker 1: Is that it's going to be clear by the end
Speaker 1: of two that we are faded for another Trump Clinton
Speaker 1: presidential race in four But it's not the Trump you
Speaker 1: you think. Um, I'm with it that well, Um I
Speaker 1: the surprises that President Biden becomes sufficient sufficiently incapacitated such
Speaker 1: that President Harris becomes the first female president of the
Speaker 1: United States, and she immediately becomes in effect a lame
Speaker 1: duck president. Uh and unfortunately has no significant so successful
Speaker 1: legislative accomplishments over the next year. And um so both
Speaker 1: um J J and Ping and Vadimia putin immediately put
Speaker 1: Harris to the test with a series of foreign policy crises,
Speaker 1: and she proves not to be up to the task.
Speaker 1: And the November midterm elections results in the landslide for
Speaker 1: the Republicans who take the Senate and win a sizeable
Speaker 1: majority in the House. That's not this coount in the market.
Speaker 1: Done now. And so meanwhile, I think, at the same
Speaker 1: time Biden gets sick, Donald Trump also becomes ill and
Speaker 1: announces that he won't run for president. So this is
Speaker 1: the surprise. It creates his wide open field the nomination
Speaker 1: in both parties, and probably sometime in the second half
Speaker 1: of next year. This year, excuse me, Nicki Haley announces
Speaker 1: she'll run for president and assumes the de facto mantle
Speaker 1: of the party's leadership and takes a strong lead towards
Speaker 1: that Republican presidential nomination. And then at the same time,
Speaker 1: leading Democrats speak out and encourage surprisingly Hillary Clinton to
Speaker 1: run again. Though she remains um publicly uncommitted, she's clearly
Speaker 1: interested in, according to numerous sources, is seriously considering a run. Now.
Speaker 1: The most interesting twist of this whole thing is that
Speaker 1: privately the former president who's ill, uh lobbies, postures and
Speaker 1: grooms his daughter Vanka to run for president, and almost overnight,
Speaker 1: when her or his and her political ambitions are revealed,
Speaker 1: Ivanka takes a significant lead over Hailey, as her father's
Speaker 1: supporters quickly returning for it. So given which, by the way,
Speaker 1: they concluded Clinton in response and a hasty response to
Speaker 1: Trump's declaration, Clinton announces their plan. So again the stage
Speaker 1: is set for Trump Clinton, but different, different Trump. Yeah
Speaker 1: that sounds I mean, this is a Netflix, uh movie.
Speaker 1: I think you just novella sketched out for that can't
Speaker 1: be good for risk assets here, are you? I mean
Speaker 1: I gotta think that. I know you went negative on
Speaker 1: the market several months ago. Are you more so now?
Speaker 1: Are you doubling down now? Because that's the scenario that
Speaker 1: you just spelled out A it's a great Netflix novello,
Speaker 1: but it's also not good for stock markets. Yeah, practically speaking,
Speaker 1: besides the likely rate hikes, and I believe the FET
Speaker 1: is going to be far more aggressive than people expect. Remember, Paul,
Speaker 1: the FETE is ending a one point five trillion dollar
Speaker 1: quantitative easing program in the next three months. That's more
Speaker 1: than q E one and q E two combined, and
Speaker 1: it's almost above the size of the q E three.
Speaker 1: So the liquidity FORCET is being turned off. At the
Speaker 1: same time, banks outside the US are tightening and UM.
Speaker 1: So my scenario is basically that we have been stoking
Speaker 1: a very dangerous asset bubble fueled by that liquidity of policy.
Speaker 1: We have deepened income and wealth inequality, and we're embarking
Speaker 1: on a policy of money printing that has generated inflation
Speaker 1: from which it is hard to escape. So my scenario
Speaker 1: is the following. I think we're gonna have a general
Speaker 1: valuation reset lower And if you look over history, on average,
Speaker 1: a hundred basis point rise in the FED fund rates,
Speaker 1: which I think will get this year, is typically associated
Speaker 1: with at least a fifteen percent valuation adjustment lower. And
Speaker 1: if you consider where today's elevated valuations are, that reset
Speaker 1: has the potential of being more than the historic average.
Speaker 1: I believe as a result of the rate increase, we're
Speaker 1: gonna see a hard rotation from growth to value. If
Speaker 1: you combine the reset lower and this rotation and disappointing
Speaker 1: earnings growth UM, it could translate into negative negative overall
Speaker 1: returns for the smp UM. I think that, as I said,
Speaker 1: the Fed is going to be far more aggressive than
Speaker 1: as reflected in general expectations, and less liquidity could result
Speaker 1: in a mark reduction and flows into equity funds, which
Speaker 1: have been the store that stirs the drink. UM. We've
Speaker 1: had unprecedented fuel in the markets. As I said, the
Speaker 1: set up for two is far different than one, and
Speaker 1: I don't think people are realizing that. UM. The set
Speaker 1: up is far different than any other time in the
Speaker 1: last thirteen years, and we've had positive returns basically in
Speaker 1: all but one of those years. In fact, seventeen out
Speaker 1: of the last nineteen years we have shown positive SMP returns.
Speaker 1: So UM fiscal and monetary policy is no longer unbounded
Speaker 1: and we're likely well passed the points of peak economic
Speaker 1: activity and peak liquidity. Hey Doug, thanks so much for
Speaker 1: joining us. Always love getting your perspective on these markets unique,
Speaker 1: if nothing else. Doug cast Seabree's partners president giving us
Speaker 1: his thoughts on these markets, including his fifteen surprises for
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
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