WEBVTT - Poor Risk-Reward Ratio Now in High Yield, Maglan's Tawil Says

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<v Speaker 1>Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.

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<v Speaker 1>Along with my co host Lisa Bramowitz. Each day we

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<v Speaker 1>bring you the most important, noteworthy, and useful interviews for

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<v Speaker 1>you and your money, whether you're at the grocery store

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<v Speaker 1>or the trading floor. Find the Bloomberg p m L

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<v Speaker 1>Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. All right,

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<v Speaker 1>let's turn our attention now to the world of high

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<v Speaker 1>yield bonds, and we have David Towell. He is the

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<v Speaker 1>president and the co founder of Maglan Capital in our

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<v Speaker 1>studios here at eleven three oh to tell us more. David,

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<v Speaker 1>thank you very much for being here. I have to

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<v Speaker 1>confess that, you know, I feel like I've laughed myself

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<v Speaker 1>because in looking at the notes for your appearance, I

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<v Speaker 1>noticed the words Covenant Light Loans And that just rings

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<v Speaker 1>a bell, doesn't it? The Covenant Light Loans can Is

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<v Speaker 1>there a historical connection between Covenant Light Loans today and

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<v Speaker 1>Covenant Light light loans maybe you know two thousand and eight. Uh, certainly, Uh,

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<v Speaker 1>you know, we we seem to oscillate now in the

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<v Speaker 1>world of risky error assets between extremes. Uh, there seems

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<v Speaker 1>to be a very hard push when we go risk

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<v Speaker 1>on to the absolute lightest of restrictions on issuers UH.

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<v Speaker 1>And then when things collapse, the tightening happens almost overnight. UH.

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<v Speaker 1>The liquidity drives up in seconds UH and pricing comes

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<v Speaker 1>down very very hard. What that means, I think for

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<v Speaker 1>the investor is you need to be aware of that

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<v Speaker 1>volatility that can exist. UM. To the downside, you need

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<v Speaker 1>to be prepared for it and be able to weather it.

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<v Speaker 1>Some of the best buying opportunities may come at those moments. UM.

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<v Speaker 1>And then to the upside, do you need to appreciate

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<v Speaker 1>uh something very simple like the supplied demand equation, which

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<v Speaker 1>is UH. We live in a world that has UM

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<v Speaker 1>legacy like thinking surrounding how we balance our portfolios visa

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<v Speaker 1>v fixed income versus equities UM. And at the same time,

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<v Speaker 1>the fixed income world is radically different uh than historically

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<v Speaker 1>it has been. UH. There is uh lowest of low

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<v Speaker 1>interest rates. UH. We have extremely aggressive borrowers that are

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<v Speaker 1>fueled by private equity firms and you know, pushing for

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<v Speaker 1>as much leverage as they possibly can, and to the

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<v Speaker 1>extent that a certain investment doesn't work out well. They

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<v Speaker 1>have a portfolio of other investments that are similarly levered,

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<v Speaker 1>and they could probably go ahead and get a grand

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<v Speaker 1>slam or a home run out of one of those

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<v Speaker 1>in order to go ahead and compensate for a loss

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<v Speaker 1>in their portfolio. You know, David, I really want to

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<v Speaker 1>hate hild bonds right now because I'm looking at yields

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<v Speaker 1>that are within a half percentage point from they're all

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<v Speaker 1>time loads for US high yield bonds. They're not high yield.

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<v Speaker 1>They're about five percent, which is about half of what

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<v Speaker 1>they've been over the past three decades of an average.

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<v Speaker 1>I mean, it's a tremendous decline. And I'm looking at

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<v Speaker 1>spreads that are also similarly depressed uh in uh in

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<v Speaker 1>high yield bonds in particularly and in particular, and yet

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<v Speaker 1>I don't see any reason for this market to reverse

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<v Speaker 1>in the near term. I absolutely agree with you. I think,

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<v Speaker 1>I'm sorry, please finish your thought. Well, no, I just

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<v Speaker 1>it's sort of like you know, but at the same time,

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<v Speaker 1>it feels terrible. It's it's really annoying to look at

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<v Speaker 1>this and say, you know, how do you find value here? Right? So,

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<v Speaker 1>I think on relative basis, a lot of high yield

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<v Speaker 1>managers will say what you said, which is we're doing

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<v Speaker 1>good relative to the risk free rate, although we've never

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<v Speaker 1>seen the risk premium this narrow. But at the same time,

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<v Speaker 1>where am I going to go ahead and get real

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<v Speaker 1>high yield UM? And I don't see a default cycle

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<v Speaker 1>coming on anytime soon, even though we're in a rising

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<v Speaker 1>interest rate environment and so on. Weight I actually think

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<v Speaker 1>that the worst point and and this is the broader

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<v Speaker 1>point here about general portfolio management, not for specific high

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<v Speaker 1>yield managers who have a mandate to invest in a

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<v Speaker 1>high yield I'm talking about the overall investor, whether that

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<v Speaker 1>be institutional or individual. UM. There is very bad risk

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<v Speaker 1>reward ratio right now in high yield. And what I

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<v Speaker 1>what I mean by that is, yes, there isn't an

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<v Speaker 1>apparent risk outstanding, but at the same time, we do

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<v Speaker 1>have some lurking potential risks like geo political, whether they

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<v Speaker 1>be in this country specifically or whether they be generally

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<v Speaker 1>around the world with regimes that are unpredictable. UM. We're

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<v Speaker 1>also dealing with the market that has has changed substantially

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<v Speaker 1>over the past five to ten years. There's a lot

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<v Speaker 1>of ETF money in high yield that there wasn't once was.

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<v Speaker 1>We do not know how that works in a bear market,

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<v Speaker 1>in an extreme sell off. Uh, the liquidity um depth

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<v Speaker 1>is much shallower than it once was. We all know

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<v Speaker 1>that people have talked about it at nauseum throughout the

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<v Speaker 1>broker dealer world. Um. And so at the end of

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<v Speaker 1>the day, the downside risk is extreme and unpredictable, and

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<v Speaker 1>the upside at this point is to your point, we're

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<v Speaker 1>reaching nosebleed levels. Happy Wednesday, David Towell, Thank you so

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<v Speaker 1>much for joining us. It's definitely a harrowing market to cover,

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<v Speaker 1>since we see gains every day and yet where is

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<v Speaker 1>that value? David Towell is president and co founder of

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<v Speaker 1>Magdalen Capital, which is based in New York. And I'm

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<v Speaker 1>looking right now at relative yields and hier bonds three

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<v Speaker 1>and have percentage points above treasury Young Sid Vermo, market

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<v Speaker 1>supporter for Bloomberg in London, joins us now and he

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<v Speaker 1>wrote a story about how there are some remarkable similarities

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<v Speaker 1>now to the lead up to the financial crisis, especially

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<v Speaker 1>as it relates to these big rating agencies. Said, thank

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<v Speaker 1>you so much for joining us. Can you just give

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<v Speaker 1>us a sense of what those similarities are? Yes, Um,

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<v Speaker 1>I mean I think It's obviously a very well documented

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<v Speaker 1>fact that the post crisis financial landscape for a lot

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<v Speaker 1>of players such as banks, or insurance firms or brokers,

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<v Speaker 1>couldn't be any more different. But the big three credit

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<v Speaker 1>rating agencies maintain their market share, their business models remain intact,

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<v Speaker 1>and their profits are remaining extremely strong. UM. At the

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<v Speaker 1>same time, the regulatory regime that governs credit rating agencies

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<v Speaker 1>on all accounts remains remarkably soft relative to the fact

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<v Speaker 1>that they were blamed as the villains UM for creating

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<v Speaker 1>a crisis in the first place. UM. The issue of

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<v Speaker 1>pays model, which was really lamented UM and one of

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<v Speaker 1>the reasons cited by US regulators for contributing to the

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<v Speaker 1>crisis in the first place through creating conflicts of interest,

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<v Speaker 1>remains intact and and many many people concerned that they crept.

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<v Speaker 1>The big three agencies UM have been loosening their standards

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<v Speaker 1>just trying to win business, and that crisis era behavior

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<v Speaker 1>has been noted by UM the sec and we've also

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<v Speaker 1>seen UM some problems in the asset that security industry,

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<v Speaker 1>in which UM a couple of the agencies have been

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<v Speaker 1>faulted UM, but it's not clear how much has changed

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<v Speaker 1>was really the numb of my piece. Well, you're being

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<v Speaker 1>diplomatic about it, said, so we we appreciate that. I

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<v Speaker 1>won't be because you know this thing about paying for

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<v Speaker 1>a rating. I'm wondering if you could explain that to

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<v Speaker 1>people how that works. And uh, you know, when businesses,

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<v Speaker 1>not only when you're thinking of investing in a business,

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<v Speaker 1>but I mean thinking of buying a business, particularly if

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<v Speaker 1>it's a large business and it has lots of relations

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<v Speaker 1>financial relationships, they're gonna go out and they're gonna get

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<v Speaker 1>a rating, and they're gonna get a rating either from

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<v Speaker 1>you know, maybe even an insurance company, and then they

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<v Speaker 1>use that rating because that's part of the sale process.

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<v Speaker 1>Speak about how people pay for ratings. You've encapsulated the

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<v Speaker 1>issue very well. UM. Basically, since the nineteen seventies, a

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<v Speaker 1>model in which the bora UM buys a credit rating

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<v Speaker 1>and then the credit agency itself does an assessment that's

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<v Speaker 1>supposed to be independent about its credit wordiness UM uh

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<v Speaker 1>kicks in and UM A lot of that has obviously

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<v Speaker 1>come under a lot of criticism. UM. What's interesting is

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<v Speaker 1>there have been new credit rating agencies that have emerged

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<v Speaker 1>on the scene which have tried to go on an

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<v Speaker 1>investor pays model in which subscribers to the credit rating

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<v Speaker 1>UM pay for the rating and the issuer itself doesn't

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<v Speaker 1>pay for the rating to try and reduce perceived conflicts

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<v Speaker 1>of interest. Interestingly, that hasn't really got off the ground UM.

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<v Speaker 1>A lot of investors UM. There is a free rider

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<v Speaker 1>issue there, A lot of the rating agency information, rating

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<v Speaker 1>information and rating itself can be consumed by third party

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<v Speaker 1>who don't provide UM, you know, don't contribute financially to

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<v Speaker 1>the cost of that rate thing UM. And so we've

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<v Speaker 1>seen that model not take off. Same time, the credit

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<v Speaker 1>rating agencies argue themselves that UM. What we've seen is

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<v Speaker 1>the fact that that's a very difficult model because actually

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<v Speaker 1>by reducing information in the marketplace, you increase trading courts UM.

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<v Speaker 1>And there's a reason why that model UM exists, and

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<v Speaker 1>there's a reason why it persists. You know. I have

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<v Speaker 1>to say, just anecdotally, just to push back a little bit,

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<v Speaker 1>I have heard from investors that in fact, UH, when

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<v Speaker 1>they want a deal rated that is maybe smaller and

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<v Speaker 1>a structured deals a securitization, they'll go to DBRs or

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<v Speaker 1>CRULL simply because SMP and Moody's and Fitch will not

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<v Speaker 1>rate it because they do not want to be accused

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<v Speaker 1>of exactly what you are saying in your article. What's

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<v Speaker 1>your response to that. Yeah, I mean, certainly their market

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<v Speaker 1>share has been reduced and you can see that in

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<v Speaker 1>some of their numbers for the asset backed securitization market,

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<v Speaker 1>and SMP has been fingered by the SEC for and

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<v Speaker 1>was banned from a portion of that credit market for

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<v Speaker 1>a UM. But a lot of the a lot of

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<v Speaker 1>the issues of that market probably pertained to the fact

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<v Speaker 1>that a lot of the rated issuance is pretty minuscule

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<v Speaker 1>UM and we've not really seen it achieved to its

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<v Speaker 1>pre crisis peak. So yes, UM, a lot of the

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<v Speaker 1>rating agencies and the Big three might be concerned about

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<v Speaker 1>their reputational risks in that market, but it's not really

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<v Speaker 1>from a kind of business perspective that problematic for them,

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<v Speaker 1>because there's been this boom in corporate bond issuance and

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<v Speaker 1>boom and emerging market bonding. So literally they made it

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<v Speaker 1>up in volume completely right. They set revenues from the

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<v Speaker 1>declining revenues and securitization. Yeah, yeah, well done, good good

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<v Speaker 1>to have you on. Thank you very much. Sid Verma

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<v Speaker 1>is our markets reporter for a Bloomberg. He joins us

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<v Speaker 1>from London. Well, Apple reported earnings yesterday after the bell,

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<v Speaker 1>and they were great. The markets cheering stocks are up

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<v Speaker 1>the highest to the highest levels they have ever been,

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<v Speaker 1>dragging along a lot of other UH shares with them,

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<v Speaker 1>and Shara Overday is here to cast some shade on

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<v Speaker 1>it all. Shara Ovida is our technology calumnist for Bloomberg,

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<v Speaker 1>gad Fly and Shira I am just struck by the

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<v Speaker 1>fact that our entire stock market is leveraged to an iPhone.

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<v Speaker 1>Can you give us a sense of what your main

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<v Speaker 1>takeaways were from this earnings report? Well, it was better

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<v Speaker 1>than feared, I think, is the big top line headline right,

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<v Speaker 1>And you're right that. I mean a large portion of

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<v Speaker 1>Apple's share press right now is leveraged to a phone

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<v Speaker 1>that no one has seen yet, which is the next

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<v Speaker 1>versions of the iPhone. Expe did to debut in September

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<v Speaker 1>or so, and the stock has been running up for

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<v Speaker 1>more than a year basically on expectations that this new

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<v Speaker 1>phone is going to unleash what the the Wall Street

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<v Speaker 1>smarties have called a supercycle of iPhone sales. Sure, just

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<v Speaker 1>to move us to the numbers for just a moment,

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<v Speaker 1>because I find this staggering. This is a company that,

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<v Speaker 1>at least, as for the last twelve months, two hundred

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<v Speaker 1>and twenty three billion dollars in sales. So because my

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<v Speaker 1>brain is small, I get rid of the billions and

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<v Speaker 1>I just say, all right, imagine you had a business

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<v Speaker 1>where you did two hundred and twenty three dollars in

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<v Speaker 1>sales and you were able to put forty six of

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<v Speaker 1>it in your pocket. Forty six billion dollars in profit

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<v Speaker 1>out of that to twenty three. That is a staggering thing,

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<v Speaker 1>no matter whether it's you know, you're selling phones or

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<v Speaker 1>or you know, I don't know, pocket protectors. But it

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<v Speaker 1>is amazing that the scale of this business continues to grow.

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<v Speaker 1>Do you think they can continue this this momentum? I mean,

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<v Speaker 1>can they get the fifty in profits? Well? Certainly seems

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<v Speaker 1>in rage and you're right that. I mean, the scale

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<v Speaker 1>of Apple is nuts. I mean, this is its own category. Yes,

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<v Speaker 1>it's own category. It's the most profitable company in the

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<v Speaker 1>country by you know, a long shot um. But the

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<v Speaker 1>big question is what is the natural growth rate in

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<v Speaker 1>the future for Apple? And I don't know the answer

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<v Speaker 1>to that question, right, what what Apple had been before

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<v Speaker 1>last year or so was a company that was huge,

0:14:35.760 --> 0:14:40.880
<v Speaker 1>incredibly profitable and growing very quickly. And the growth part

0:14:41.120 --> 0:14:44.120
<v Speaker 1>of that three legged stool kind of has fallen apart.

0:14:44.600 --> 0:14:48.200
<v Speaker 1>And so what we don't know is, Okay, what is

0:14:48.240 --> 0:14:51.400
<v Speaker 1>the natural growth rate of a company at Apple scale

0:14:52.040 --> 0:14:55.200
<v Speaker 1>beyond the next year or so? And I don't think

0:14:55.240 --> 0:14:58.480
<v Speaker 1>anybody has a realistic answer to that question. Well, and Sira,

0:14:58.600 --> 0:15:01.560
<v Speaker 1>in your latest god Like column, you talked about how

0:15:01.640 --> 0:15:05.200
<v Speaker 1>sales in China have been following for six consecutive quarters

0:15:05.200 --> 0:15:09.160
<v Speaker 1>and continued in this lot latest pay earning this period.

0:15:09.600 --> 0:15:13.480
<v Speaker 1>Uh in other places also internationally, Apple has not gained

0:15:13.520 --> 0:15:17.680
<v Speaker 1>the same kind of traction and it's certainly accelerating momentum

0:15:17.800 --> 0:15:19.920
<v Speaker 1>as it has in the US. And I'm just wondering

0:15:20.320 --> 0:15:22.960
<v Speaker 1>how much is priced into the shares already, right, because

0:15:22.960 --> 0:15:24.840
<v Speaker 1>we're talking about a relative game. We're not talking about

0:15:24.880 --> 0:15:27.840
<v Speaker 1>Apple going out of business or becoming, you know, not

0:15:28.000 --> 0:15:31.400
<v Speaker 1>a behemoth and an amazing performer. We're talking about, you know,

0:15:31.720 --> 0:15:36.440
<v Speaker 1>is is the stock price pricing in astronomical growth that

0:15:36.480 --> 0:15:39.320
<v Speaker 1>seems improbable at this point? What's your answer to that question?

0:15:40.840 --> 0:15:43.080
<v Speaker 1>Probably is the answer to that question. I mean, the

0:15:43.640 --> 0:15:47.560
<v Speaker 1>stock has run up. UM. Apple has always been a

0:15:47.600 --> 0:15:51.720
<v Speaker 1>little bit of a tricky company to value because it's

0:15:51.720 --> 0:15:54.880
<v Speaker 1>a hardware company and typically those are valued lower than

0:15:54.920 --> 0:16:00.600
<v Speaker 1>other kinds of high margin software companies. UM. But even

0:16:00.680 --> 0:16:05.520
<v Speaker 1>relative to Apple's own history, it's stock valuation is higher

0:16:05.560 --> 0:16:08.440
<v Speaker 1>than it has ever been, or certainly has ever been

0:16:08.520 --> 0:16:11.680
<v Speaker 1>in the recent history of Apple. And there is a

0:16:11.720 --> 0:16:16.640
<v Speaker 1>lot of expectation of growth and profitability baked into the

0:16:16.640 --> 0:16:18.400
<v Speaker 1>share price at this point. And obviously, you know the

0:16:18.400 --> 0:16:21.760
<v Speaker 1>slucks now at a record today, so that's even pushing

0:16:21.840 --> 0:16:27.640
<v Speaker 1>up the valuation even more. India and the next maybe

0:16:27.720 --> 0:16:30.120
<v Speaker 1>frontier for Apple, because I know that Tim Cook, the

0:16:30.160 --> 0:16:33.640
<v Speaker 1>chief executive, he's already said he's focused on India, and

0:16:33.680 --> 0:16:37.600
<v Speaker 1>indeed production of the iPhone SE is going to begin

0:16:38.080 --> 0:16:41.640
<v Speaker 1>this quarter. That could be the next growth story. Yeah,

0:16:41.680 --> 0:16:44.480
<v Speaker 1>India is a very interesting market, not only for Apple,

0:16:44.560 --> 0:16:48.360
<v Speaker 1>but for lots of other tech companies, both domestic tech

0:16:48.400 --> 0:16:51.720
<v Speaker 1>companies and India and foreign companies like Apple and Amazon,

0:16:51.760 --> 0:16:54.920
<v Speaker 1>which is also investing heavily in India. UM. Tim Cook

0:16:55.000 --> 0:16:58.160
<v Speaker 1>has said for a while now that he sees India

0:16:58.400 --> 0:17:02.080
<v Speaker 1>on kind of a similar potent entual trajectory as China

0:17:02.160 --> 0:17:05.560
<v Speaker 1>for them, which has been an enormous growth driver, although

0:17:05.560 --> 0:17:09.600
<v Speaker 1>India is lagging far behind. Really, in the last year,

0:17:09.960 --> 0:17:15.120
<v Speaker 1>you've seen this huge surge of people with UM smartphone

0:17:15.200 --> 0:17:18.320
<v Speaker 1>connections with There's been some moves by one of the

0:17:18.400 --> 0:17:22.680
<v Speaker 1>domestic cell phone companies in India to basically make almost

0:17:23.000 --> 0:17:27.520
<v Speaker 1>free fast Internet connection from people's phones, and that's going

0:17:27.560 --> 0:17:30.200
<v Speaker 1>to be a big help to anybody that's selling smartphones

0:17:30.240 --> 0:17:32.320
<v Speaker 1>in India. But there's a lot of hurdles. I mean

0:17:32.359 --> 0:17:36.400
<v Speaker 1>there there's a lot of favoritism towards UM domestic companies

0:17:36.400 --> 0:17:40.960
<v Speaker 1>in India. Apple phones are very expensive relative to what

0:17:41.080 --> 0:17:44.200
<v Speaker 1>people typically buy in India, so it's not an immediate

0:17:44.240 --> 0:17:47.040
<v Speaker 1>growth story. Thanks very much for being here. Sure O.

0:17:47.119 --> 0:17:52.159
<v Speaker 1>The day is Bloomberg Gadfly columnists covering technology for Bloomberg News.

0:18:04.040 --> 0:18:06.960
<v Speaker 1>Let's turn our attention now to China. The Premier of

0:18:07.040 --> 0:18:11.479
<v Speaker 1>China said yesterday that all states US states, including Michigan,

0:18:11.480 --> 0:18:15.640
<v Speaker 1>are welcome to strength and exchanges with provinces and municipalities

0:18:15.720 --> 0:18:19.320
<v Speaker 1>in China in order to deepen cooperation in fields such

0:18:19.400 --> 0:18:23.600
<v Speaker 1>as trade, investment, manufacturing, and innovations. Who was he speaking

0:18:23.640 --> 0:18:26.560
<v Speaker 1>to the Governor of Michigan, Rick Snyder, who happens to

0:18:26.600 --> 0:18:29.080
<v Speaker 1>be in China. Here to tell us about the U. S.

0:18:29.160 --> 0:18:32.320
<v Speaker 1>China trade relation is Tom Orlick. Here's our chief Asia

0:18:32.359 --> 0:18:37.040
<v Speaker 1>economist for Bloomberg Intelligence. Uh, Tom, maybe just come in

0:18:37.080 --> 0:18:40.600
<v Speaker 1>on what is the current state of US China trade

0:18:40.680 --> 0:18:43.760
<v Speaker 1>relations and what do you believe the President and the

0:18:43.800 --> 0:18:47.600
<v Speaker 1>administration are going to propose. Um, I think the current

0:18:47.640 --> 0:18:51.960
<v Speaker 1>picture is actually extremely positive for China, PIM. If you remember,

0:18:52.119 --> 0:18:55.600
<v Speaker 1>Donald Trump came into office promising to get extremely tough

0:18:55.800 --> 0:18:59.760
<v Speaker 1>on China relations. He was talking about at tariff on

0:19:00.040 --> 0:19:05.440
<v Speaker 1>Chinese imports, talking about naming China a currency manipulator. So far,

0:19:05.760 --> 0:19:10.560
<v Speaker 1>we've had some aggressive tweets, we've had some um suggestive

0:19:10.600 --> 0:19:12.760
<v Speaker 1>reports from the U. S. T R and others, but

0:19:12.840 --> 0:19:16.080
<v Speaker 1>in terms of substance, we've basically had nothing. And that

0:19:16.160 --> 0:19:19.720
<v Speaker 1>means that China's exports to the US are doing really

0:19:19.760 --> 0:19:23.960
<v Speaker 1>well up around so far this year. Well, Tom, there

0:19:24.040 --> 0:19:26.040
<v Speaker 1>was a report today out of the New York Times

0:19:26.040 --> 0:19:28.240
<v Speaker 1>saying the White House is preparing to open a broad

0:19:28.320 --> 0:19:32.199
<v Speaker 1>investigation into China's trade practices. This is in part to

0:19:33.320 --> 0:19:36.120
<v Speaker 1>possibly counter the country's effort to become a global leader

0:19:36.119 --> 0:19:39.119
<v Speaker 1>in microchips, electric cars, and other crucial technologies of the future.

0:19:39.720 --> 0:19:43.840
<v Speaker 1>Does that concern you in any way? China is a

0:19:43.840 --> 0:19:48.680
<v Speaker 1>country which has an industrial strategy, so they're consciously and

0:19:48.840 --> 0:19:52.760
<v Speaker 1>deliberately attempting to catch up with the technology frontier. They

0:19:52.800 --> 0:19:56.840
<v Speaker 1>see what the US, Europe, Japan has in terms of

0:19:56.920 --> 0:19:59.719
<v Speaker 1>high technology and they want to get there, and they

0:19:59.800 --> 0:20:06.280
<v Speaker 1>use policy together. UM. Now, so far, other countries have

0:20:06.400 --> 0:20:10.440
<v Speaker 1>not really formulated a response to that. UM. It's been

0:20:10.520 --> 0:20:13.000
<v Speaker 1>left to corporates to decide do we want to put

0:20:13.040 --> 0:20:15.560
<v Speaker 1>on new high tech R and D facility in China

0:20:15.920 --> 0:20:19.919
<v Speaker 1>and risk that technology transfer or not. What this seems

0:20:19.960 --> 0:20:23.280
<v Speaker 1>to suggest is perhaps the Trump administration is going to

0:20:23.400 --> 0:20:26.520
<v Speaker 1>put a bit of US government strategy around a response.

0:20:26.680 --> 0:20:29.320
<v Speaker 1>Oh that's fascinating I I when I see this, I

0:20:29.320 --> 0:20:33.159
<v Speaker 1>start thinking to myself, Wow, China US relationship trade and

0:20:33.160 --> 0:20:35.560
<v Speaker 1>then paired with North Korea and the fact that US

0:20:35.640 --> 0:20:39.080
<v Speaker 1>is trying to uh strengthen its hand to force China

0:20:39.119 --> 0:20:42.680
<v Speaker 1>into action with North Korea. But what you're saying makes

0:20:42.680 --> 0:20:46.040
<v Speaker 1>it sound like this is completely unrelated. I think the

0:20:46.160 --> 0:20:48.480
<v Speaker 1>US administration are going to be taking a view on

0:20:48.640 --> 0:20:51.720
<v Speaker 1>China relations in the round. If you remember, going back

0:20:51.720 --> 0:20:56.159
<v Speaker 1>to the she Trump meeting at Mara Lago, Trump said, Okay,

0:20:56.240 --> 0:20:58.400
<v Speaker 1>we can't go in too hard on trade. We can't

0:20:58.400 --> 0:21:00.600
<v Speaker 1>go in too hard on the exchange rate because we

0:21:00.720 --> 0:21:04.840
<v Speaker 1>need support on North Korea. UM. At the same time,

0:21:04.880 --> 0:21:07.680
<v Speaker 1>clearly it's possible to snap these things apart and take

0:21:07.760 --> 0:21:13.280
<v Speaker 1>separate views on security, trade, intellectual property. Tom fox Can

0:21:14.119 --> 0:21:17.240
<v Speaker 1>didn't the the president was touting this move by fox

0:21:17.320 --> 0:21:22.439
<v Speaker 1>Can to place a new factory in the United States, right,

0:21:22.760 --> 0:21:26.120
<v Speaker 1>maybe spend anywhere from ten to thirty billion dollars here.

0:21:26.840 --> 0:21:29.200
<v Speaker 1>If you're going to praise them for doing that, how

0:21:29.240 --> 0:21:31.720
<v Speaker 1>can you in the same what what's the reaction from

0:21:31.720 --> 0:21:34.920
<v Speaker 1>the Chinese leaders if you if you praise that and

0:21:35.000 --> 0:21:38.399
<v Speaker 1>then launch this trade investigation, what do you think Chinese

0:21:38.520 --> 0:21:42.400
<v Speaker 1>leaders and business leaders are thinking. So my first reaction

0:21:42.480 --> 0:21:46.119
<v Speaker 1>to that fox Can news was ten billion dollars. That

0:21:46.280 --> 0:21:50.240
<v Speaker 1>must be the most expensive factory ever built. UM. My

0:21:50.359 --> 0:21:55.440
<v Speaker 1>second reaction was, do US politicians know what it's like

0:21:55.680 --> 0:22:00.480
<v Speaker 1>working in a Chinese factory? Is this the kind of

0:22:00.560 --> 0:22:03.680
<v Speaker 1>job which they really want to offer to their voters.

0:22:04.560 --> 0:22:07.200
<v Speaker 1>Take a look at some of the news flow on

0:22:07.359 --> 0:22:12.159
<v Speaker 1>what happens at some of Chinese electronics assembly plants. I

0:22:12.280 --> 0:22:14.719
<v Speaker 1>understand in certain places, right, they put nets so that

0:22:14.760 --> 0:22:19.040
<v Speaker 1>people who jump aren't don't necessarily die. They have nets,

0:22:19.040 --> 0:22:21.200
<v Speaker 1>and those nets and not being used to play soccer,

0:22:21.400 --> 0:22:24.560
<v Speaker 1>that's right, Pim, Well, I just want to get a sense,

0:22:24.600 --> 0:22:28.280
<v Speaker 1>so if you do, zoom back. And I am wondering

0:22:28.359 --> 0:22:30.439
<v Speaker 1>as we hear more about North Korea, and there was

0:22:30.440 --> 0:22:33.880
<v Speaker 1>a report on Bloomberg today talking about how perhaps North

0:22:33.960 --> 0:22:39.720
<v Speaker 1>Korean nuclear technologies have gotten too far for sanctions to work.

0:22:39.840 --> 0:22:43.000
<v Speaker 1>I'm just wondering what's the state of the relationship between

0:22:43.080 --> 0:22:46.200
<v Speaker 1>China and the US with respect to moving forward and

0:22:46.280 --> 0:22:51.480
<v Speaker 1>some kind of diplomatic solution to that quagmire. I think

0:22:51.560 --> 0:22:54.000
<v Speaker 1>for Beijing, there's going to be a certain amount of

0:22:54.040 --> 0:22:58.920
<v Speaker 1>confusion in the new aggressive approach which the Trump administration

0:22:59.000 --> 0:23:03.840
<v Speaker 1>is taking. Um Mara Largo. Trump passed she to help

0:23:03.840 --> 0:23:07.280
<v Speaker 1>out with North Korea. UM and China has now actually

0:23:07.280 --> 0:23:09.760
<v Speaker 1>gone further than it's ever gone in the past in

0:23:09.880 --> 0:23:14.160
<v Speaker 1>terms of putting the choke on North Korea's exports. China

0:23:14.240 --> 0:23:18.439
<v Speaker 1>has basically embargoed North Korea's sales of coal, which cuts

0:23:18.440 --> 0:23:22.560
<v Speaker 1>off a huge source of f X income from Pyongyang. Now,

0:23:22.600 --> 0:23:24.800
<v Speaker 1>you would expect that that would be welcomed by the

0:23:24.840 --> 0:23:28.200
<v Speaker 1>Trump administration as a kind of constructive show of good

0:23:28.200 --> 0:23:32.720
<v Speaker 1>faith by the Chinese administration. In fact, the reverse has happened.

0:23:33.040 --> 0:23:36.080
<v Speaker 1>Trump has been on Twitter saying China has done nothing,

0:23:36.280 --> 0:23:41.160
<v Speaker 1>China needs to do more. He's very disappointed. You've been

0:23:41.720 --> 0:23:43.679
<v Speaker 1>studying China, but I think you've been in China for

0:23:43.720 --> 0:23:48.040
<v Speaker 1>how long a decade? All rights a decade. Are there

0:23:48.160 --> 0:23:50.720
<v Speaker 1>some things that you can describe, even anecdotally, to give

0:23:50.760 --> 0:23:54.040
<v Speaker 1>people a quick version of what they would see if

0:23:54.040 --> 0:23:58.280
<v Speaker 1>they went to China they've never been. I think the

0:23:58.320 --> 0:24:02.000
<v Speaker 1>striking thing which people miss a by China pim um

0:24:02.160 --> 0:24:05.440
<v Speaker 1>is firstly, well, I think the thing which people miss

0:24:05.440 --> 0:24:08.399
<v Speaker 1>about China when they read the coverage in some of

0:24:08.400 --> 0:24:11.199
<v Speaker 1>the Western press is just the optimism you have on

0:24:11.280 --> 0:24:13.919
<v Speaker 1>the grain there. I think if you read you know,

0:24:14.040 --> 0:24:17.600
<v Speaker 1>Western commentary, you think the end is nigh, the credit

0:24:17.640 --> 0:24:21.679
<v Speaker 1>bubble um, the stress in the financial system. That's just

0:24:21.800 --> 0:24:24.720
<v Speaker 1>not the feeling on the Chinese street. Tom more Like,

0:24:24.760 --> 0:24:26.320
<v Speaker 1>thank you so much for joining us, Tom or Like

0:24:26.359 --> 0:24:32.719
<v Speaker 1>as Chief Asia economist for Bloomberg Intelligence. Thanks for listening

0:24:32.760 --> 0:24:35.639
<v Speaker 1>to the Bloomberg p M l podcast. You can subscribe

0:24:35.640 --> 0:24:39.240
<v Speaker 1>and listen to interviews at Apple Podcasts, SoundCloud, or whatever

0:24:39.280 --> 0:24:42.800
<v Speaker 1>podcast platform you prefer. I'm Pim Fox. I'm on Twitter

0:24:43.080 --> 0:24:46.600
<v Speaker 1>at pim Fox. I'm on Twitter at Lisa Abramo. It's

0:24:46.640 --> 0:24:49.680
<v Speaker 1>one before the podcast. You can always catch us worldwide

0:24:49.680 --> 0:24:50.639
<v Speaker 1>on Bloomberg Radio