Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa A.
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Speaker 2: To talk about the specific sectors and some of the
Speaker 2: rolling recessions. One of the recessions has been in the
Speaker 2: logistics area and the shipping area. And I do before
Speaker 2: we get to Steve Rashudo of Mizuho here, I do
Speaker 2: want to just touch base with Lee Klascow Senior, a
Speaker 2: logistics analyst at Bloomberg Intelligence.
Speaker 1: And Lee, the reason why you're really.
Speaker 2: The person who I want to speak to is to
Speaker 2: understand how much we could be dealing with potential supply
Speaker 2: chain disruptions again because of what we're seeing in the
Speaker 2: Red Sea.
Speaker 3: Yeah, I don't think these are going to be a
Speaker 3: major dislocation. I think it's going to be more or
Speaker 3: less a hiccup, if you will. And that effect is
Speaker 3: that freight rates are arising. They're actually up but about
Speaker 3: nine percent sequentially. A lot of that increase is being
Speaker 3: driven by freight headed from Singapore, I'm sorry, from China
Speaker 3: to Europe. That's been up pretty significantly, up around fifteen
Speaker 3: sixteen percent over the last week, and it's up around
Speaker 3: fifty percent since bottoming in October. But it also does
Speaker 3: need to remind people that in twenty twenty one, to
Speaker 3: ship a container used to cost fourteen thousand dollars.
Speaker 4: That was a peak.
Speaker 3: Today it's around fourteen hundred dollars. So rates are down significantly,
Speaker 3: but we are seeing a bounce, and you know what's
Speaker 3: going on in the Red Sea. I'm guessing that it's
Speaker 3: not going to be long term in nature, and there's
Speaker 3: going to be a resolution in the coming months.
Speaker 5: And lee with that in mind, just quickly here if
Speaker 5: you anticipate a resolution coming in fairly short order. Does
Speaker 5: this ever touch the consumer if at all?
Speaker 3: Absolutely, because if shippers are paying higher rates, they're going
Speaker 3: to try to push that cost onto the consumer. But
Speaker 3: remember there's a lot of T shirts that go into
Speaker 3: a container, so we're talking about half a penny more
Speaker 3: in terms of shipping costs to ship certain items. Obviously
Speaker 3: larger items the impacts greater, but you know a lot
Speaker 3: of stuff that goes on the ocean are usually lower
Speaker 3: value stuff, where high value stuff is usually shipped via
Speaker 3: air freight.
Speaker 2: Lea Glasgow of Bloomberg Intelligence, thank you so much for
Speaker 2: being with us. Short of visit, I do want to
Speaker 2: get to the economic data that we just got, since
Speaker 2: it is fascinating to be stever Shuddo here with us
Speaker 2: chief economist at Mizuho Securities, and I.
Speaker 1: Want to start there.
Speaker 2: Initial jobbles claims came in below expectations. It's actually a
Speaker 2: positive downside surprise, and yet you're seeing a real rally
Speaker 2: in the two year which makes me think that the
Speaker 2: Philadelphia outlook for manufacturing is of concern.
Speaker 1: Is that right?
Speaker 6: Well?
Speaker 7: I think you have this environment where you have people
Speaker 7: like you mentioned Harker talking about, you know, the grassroots
Speaker 7: kind of sentiment that they're getting in terms of inform
Speaker 7: from companies that tell them that there's a problem in
Speaker 7: the underlying economic fabric, but you're not seeing it in
Speaker 7: the broader macro perspective. I think this gets to what
Speaker 7: was Katy was talking about in terms of rolling sector
Speaker 7: recessions but I think it also gets to the fact
Speaker 7: that expectations are really an issue because when I sit
Speaker 7: down and I talk to CFOs and I talk to
Speaker 7: CEOs of different companies in different industries, I get the
Speaker 7: same message over and over again, which is the economy
Speaker 7: is not going to do well, We're going to go
Speaker 7: into a recession, but my business is doing really well.
Speaker 7: And I kind of like, you know, time out, guys,
Speaker 7: everybody tells me exactly the same thing. So if you're
Speaker 7: all telling me your business is doing well, but you
Speaker 7: all think the world isn't going to do well, then
Speaker 7: maybe you've got to disconnect in terms of the underlying realities.
Speaker 7: And this is why you see the continuing claims numbers
Speaker 7: doing what they're doing, they're moving lower. So you also
Speaker 7: see this in terms of the employment numbers. Everyone says, oh,
Speaker 7: we're laying off workers, but then you go back and
Speaker 7: look at their actual job counts and you see that
Speaker 7: they've repositioned their workers into different parts of their business.
Speaker 1: So put this together, I help us understand what that
Speaker 1: actually going on.
Speaker 2: Is Basically, people are feeling bad because they feel like
Speaker 2: they should feel bad, and the actually things are very good,
Speaker 2: and that the risk is actually to an acceleration in
Speaker 2: the economy that people aren't expecting.
Speaker 7: Well, I think the risk is the recession that the
Speaker 7: market is expecting doesn't happen. You look at things like
Speaker 7: the blue chip average, right, the blue chip average has
Speaker 7: first half growth at zero point five percent. Now zero
Speaker 7: point five percent is the closest you're going to get
Speaker 7: the blue chip numbers to ever saying negative GDP before
Speaker 7: you actually print negative GDP. So recession is priced into
Speaker 7: the structure. If you don't get recession, you're going to
Speaker 7: have to have a readjustment. This is exactly what happened
Speaker 7: after the regional bank situation. Remember everyone forecasted a recession,
Speaker 7: it didn't happen. Then we had that major summer sell off.
Speaker 7: I'm not saying we're going to get as much of
Speaker 7: a summer sell off as we got this time through,
Speaker 7: but there certainly needs to be a correction in some
Speaker 7: of these markets to reflect the fact that this economy
Speaker 7: is not rolling over and playing dead, that expectations are
Speaker 7: different than the reality, and eventually expectations have to adjust
Speaker 7: to reality because reality is what it is, it's the reality.
Speaker 5: Well, just to meditate a little bit on the evolution
Speaker 5: of the recession calls. Remember twenty twenty three, it was
Speaker 5: definitely going to happen, and then everyone started pushing out
Speaker 5: the recession calls and then basically abandoning them all together.
Speaker 5: There's actually a story on the terminal right now, City Group,
Speaker 5: Deutsche Bank, Wolls Fargo, some of the last remaining on
Speaker 5: the street who are still calling for a recession. But
Speaker 5: to that idea that maybe rolling recessions are what we're
Speaker 5: seeing at the sector level, is that the way we
Speaker 5: should be thinking about this economy or are we smooth
Speaker 5: sailing from here?
Speaker 7: I think the economy is fundamentally healthy. I think we've
Speaker 7: discovered that, you know, the FED is uncomfortable with a
Speaker 7: five percent ten year note. I think the FED is
Speaker 7: somewhat equally uncomfortable with a ten year note moving below
Speaker 7: a four percent the way it is. But you have
Speaker 7: to keep in mind the fair value trading range on
Speaker 7: the ten year note, if you assume a two percent
Speaker 7: target is basically three and three quarters to four and
Speaker 7: a quarter. We're in the bottom half of that range.
Speaker 7: And no one's going to be selling this market going
Speaker 7: into the end of the year. There's zero sellers out
Speaker 7: there and the bulls are still in favor. So what
Speaker 7: you're seeing happening on the tayl like today with the
Speaker 7: claims numbers coming lower, continuing claims coming lower. The gdpeople
Speaker 7: number probably went down. I don't have the details, wy
Speaker 7: I'm assuming because of inventory. Yeah, okay, so those are
Speaker 7: things to tell you better growth going forward. And then
Speaker 7: we latch onto the one thing here that we can say,
Speaker 7: oh gee, it's time to be bullish again. We'll push
Speaker 7: and I think by the end of the day we'll
Speaker 7: realize it wasn't worth pushing.
Speaker 5: So should we be just applauding the Fed right now?
Speaker 5: Because you think about what we've seen so far. We've
Speaker 5: seen inflation come down from once in a generation highs,
Speaker 5: the unemployment rate is still under four percent, and I
Speaker 5: mean everyone seems to be left and right abandoning their
Speaker 5: recession calls. Have we is it safe to say that
Speaker 5: the plane has just about landed here, that they actually
Speaker 5: have pulled it off?
Speaker 7: Well, I mean, the plane is never going to go
Speaker 7: have a recession. We're never going to have a hard landing.
Speaker 7: The only way you could have gotten the hard landing
Speaker 7: is if the equity market corrected to earning's numbers, and
Speaker 7: then you had companies being forced to really lay off
Speaker 7: workers to drive up margins that never happened. And because
Speaker 7: the FED kept on telling you we're going to cut rates.
Speaker 7: So because the FED kept on telling you we're we're
Speaker 7: going to cut rates, you never had that adjustment take place.
Speaker 7: So the adjustment in terms of the macroeconomic stories clearly
Speaker 7: why the FED did do that through forward guidance in
Speaker 7: terms of whether or not they're going to achieve the
Speaker 7: inflation numbers that's still open. We're looking at inflation numbers
Speaker 7: that are closer to three percent than two percent now
Speaker 7: unto average inflation targeting. And given the concept of this
Speaker 7: FED in terms of the inflation concept not wanting to
Speaker 7: get back to the zero bound at any particular point
Speaker 7: in time in the future, they're willing to accept three percent.
Speaker 7: The problem is that three percent the ten year note
Speaker 7: is much too expensive. And if the ten year note
Speaker 7: is much too expensive, then the equity market's much too expensive.
Speaker 7: So the reality is the FED may get us to
Speaker 7: a hotter landing, but the markets have to adjust to that,
Speaker 7: and they haven't.
Speaker 2: That's the reason why I was just going to ask you,
Speaker 2: why are you bearish if you see the economy doing better.
Speaker 1: Than expected and no recession.
Speaker 2: Is this because you do think that there is this
Speaker 2: inflationary underlying pressure that people are discounting and that there
Speaker 2: is going to be a meaningful sell off in bonds
Speaker 2: as people understand that.
Speaker 7: Well, you have to keep in mind there is a
Speaker 7: global deflationary force which is real incredible. By the same token,
Speaker 7: there is a domestic cyclical inflationary force that's real incredible,
Speaker 7: and it's been a battle between the two of them.
Speaker 7: Markets never took on board the nine percent spike in inflation.
Speaker 7: We never took that on board. So the fact that
Speaker 7: we've come down to these levels, which are in the
Speaker 7: fair value range of two to three two percent, we
Speaker 7: have to ask ourselves a question is two or three?
Speaker 7: This is the question we haven't answered yet, and that's
Speaker 7: the critical question, and that determines whether or not where
Speaker 7: you want to be in the bond market. And to me,
Speaker 7: it also suggests that if this Federal Reserve were to
Speaker 7: do something like take an insurance rate cut, because you
Speaker 7: hear that conversation all the time. You saw that in
Speaker 7: twenty eighteen to that, you saw that during the green
Speaker 7: Span soft landing in the mid nineteen nineties, they took
Speaker 7: these insurance rate cuts. The question was that these particular times,
Speaker 7: in those particular times, was inflation hadn't spiked and we
Speaker 7: didn't have the cyclical tightness that we have today. We do,
Speaker 7: and in twenty eighteen twenty nineteen we had a disruption
Speaker 7: in financial markets. We have no disruption in financial markets.
Speaker 7: I think if the FED were to take insurance rate
Speaker 7: cuts right now, the dollar would collapse. If the dollar
Speaker 7: would collapse, you then get into a situation with the
Speaker 7: global deflationary story no longer helps out the inflationary numbers
Speaker 7: because we've been importing global deflation. But if the dollar collapses,
Speaker 7: we no longer import global deflation, and at that point
Speaker 7: in time, goods prices no longer go down. Goods prices
Speaker 7: no longer go down. Then service prices are fully reflected
Speaker 7: in inflation, and that becomes the rub for the FED.
Speaker 7: That's why they're in this difficult balancing act of pushing
Speaker 7: back when things get too aggressive, and when things go
Speaker 7: too far the other way, they have to push the
Speaker 7: other way. They're trying to fine tune this thing, and
Speaker 7: so far they've been able to pull it off because
Speaker 7: the market gives them credibility. You have to ask yourself
Speaker 7: a question, how many times can you.
Speaker 4: Get that lucky?
Speaker 1: Steve Shuda, thank you so much.
Speaker 2: You'll have to come back on in the new year
Speaker 2: and tell us whether it's working or not.
Speaker 1: Steve Harshuda there of Mizuho.
Speaker 2: Stuart Kaiser ahead of US Equity Strategy, Trading Strategy at
Speaker 2: City Group, joining us now, Stuart, I want to start there.
Speaker 2: Do you sort of worry that you're not getting bullish
Speaker 2: enough because the rest of the streets coming to you.
Speaker 4: It's a good question. I mean, I'm definitely feeling more
Speaker 4: bullish post FED. I think that we weren't going into
Speaker 4: the FED, and as you know, we've been kind of bullish,
Speaker 4: you know, the last few months expected a rally into
Speaker 4: your end. The FED feels like they've extended that window
Speaker 4: a little bit, just in the sense that they're being
Speaker 4: more respectful of the dual mandate and probably a little
Speaker 4: bit you know, quicker to come to the rescue, so
Speaker 4: to speak, if we do see weakness and the growth data,
Speaker 4: so you know, I think we're probably I don't know
Speaker 4: if we're more bullish, but I think the bullishness is
Speaker 4: probably has a wider window to perform in going to
Speaker 4: twenty twenty four.
Speaker 2: Well, the reason why I ask that is because if
Speaker 2: we're at forty eight hundred, essentially you're not talking about
Speaker 2: that big of a game through year end. And this
Speaker 2: comes as you're expecting the economic data to come in
Speaker 2: strong and to still show this is inflationary trend.
Speaker 1: So what would it take for you to boost that
Speaker 1: your end target.
Speaker 4: Well, I'd have to call Scott and ask him to
Speaker 4: do that for us. But I think, look, from my perspective,
Speaker 4: we still do have a modest recession in the middle
Speaker 4: of the year from our US economist. So I think
Speaker 4: really the question here is does that recession call continue
Speaker 4: to get pushed out as it did through much of
Speaker 4: twenty twenty three. And if that happens, and if the
Speaker 4: FED is wanting to do quote unquote insurance cuts, then
Speaker 4: you know, then the markets are going to be much
Speaker 4: higher by year end. And I really think that that's
Speaker 4: one of the big topics next year is a recession,
Speaker 4: do we get it or not? And be kind of
Speaker 4: what is the calculus for the FED? If you'd asked
Speaker 4: me a couple of weeks ago, I would have said
Speaker 4: the FED might be too slow to react because they
Speaker 4: want to loosen up the economy. After the December FBC,
Speaker 4: it seems like they're not going to be too slow
Speaker 4: to react, and that might just add a little bit
Speaker 4: of juice to your point as we get it too
Speaker 4: next year.
Speaker 5: Well, on the Fed's reaction function, are you basically saying
Speaker 5: that the FED put is back or is it coming back?
Speaker 4: I mean that that would be an initial takeaway from
Speaker 4: the December FMC. I think my view, if you had
Speaker 4: asked me in November would have been, you know, they're
Speaker 4: not going to hike unless inflation hooks higher, and they're
Speaker 4: probably not going to cut and unless we see meaningful
Speaker 4: weakness in the labor side of the economy. The December
Speaker 4: FMC suggested, you know, no, maybe there is this third
Speaker 4: option where they could actually be doing quote unquote insurance cuts.
Speaker 4: And if they do that, I think that's extremely bullish
Speaker 4: for equities. I mean, if they're cutting in an environment
Speaker 4: let's say, well we're printing one hundred and fifty k jobs,
Speaker 4: then you know, equities, you're going higher.
Speaker 5: Well, something that we've been tussling with is how much
Speaker 5: rate cuts are actually going to matter. You think about
Speaker 5: five hundred basis points of hikes, maybe causing a little
Speaker 5: bit of indigestion in the stock market at one point,
Speaker 5: not at all this year. We did have some turbulence
Speaker 5: over the summer. And then you think about the economy
Speaker 5: overall rate cuts. Does the why for why we're getting
Speaker 5: rate cuts actually matter when it comes to this equity rally?
Speaker 4: I think it does one hundred percent. You know, if
Speaker 4: they're cutting because they're seeing real weakness in the labor
Speaker 4: side of the economy, you know that that's much different
Speaker 4: than if growth is sort of sideways, inflation's easing, and
Speaker 4: they decide, hey, we're too restrictive. So I think I
Speaker 4: think the why matters matter significantly, at least in my
Speaker 4: view at this point.
Speaker 2: Though, there is a question about earnings. And I know
Speaker 2: that you say bad news is bad.
Speaker 1: News, induce is good is have we really gotten such
Speaker 1: good news on the earnings front.
Speaker 2: I'm going to be speaking with Emily Roland later this morning,
Speaker 2: and she basically pointed out that year on year S
Speaker 2: and P five hundred, earnings barely grew zero xo point
Speaker 2: six percent, and a lot of the gains that we've
Speaker 2: seen are pricing in next year gains that are expected
Speaker 2: to be robust.
Speaker 1: Doesn't that concern you?
Speaker 4: You know, it does a bit, I would say. I
Speaker 4: think year on year we're tracking down about two percent
Speaker 4: for SMP. You know, but if you had asked, if
Speaker 4: you had asked this last December, what is the risk
Speaker 4: to SMP earnings? People were throwing around two hundred numbers
Speaker 4: or sub two hundred numbers, so you know, the year
Speaker 4: on your growth isn't great, But the way the data
Speaker 4: printed relative to expectations has been you know, very very
Speaker 4: very positive. So I think I think that that's how
Speaker 4: I view earnings this year. As we came into the
Speaker 4: year with people throwing around one hundred eighty five to
Speaker 4: two hundred dollars bear market type you know situations on EPs,
Speaker 4: we're now going to print something that looks more like
Speaker 4: two twenty scott On at City is a two forty
Speaker 4: five for next year, which is, you know, got to
Speaker 4: give you a pretty close to double digit EPs growth
Speaker 4: in twenty twenty four, So not too worried. I think
Speaker 4: if I hadn't described twenty twenty three better than feared,
Speaker 4: and then twenty twenty four, it looks like, hopefully we're
Speaker 4: going to get some actual not only EPs growth, but
Speaker 4: a broadening out of EPs growth to a larger number
Speaker 4: of sectors, which we do think is also important.
Speaker 1: Exactly where I was going to go.
Speaker 2: We had Margie ptel on earlier and saying maybe that
Speaker 2: story is a little overplayed. Other people still sticking with
Speaker 2: what's worked, including big tech. You're kind of taking a
Speaker 2: little bit of a different tone.
Speaker 4: Look, we thought big tech and growth was going to
Speaker 4: work it to your end, and then as you got
Speaker 4: into twenty twenty four, you needed to kind of do
Speaker 4: a little bit of a reevaluation of things. And next year,
Speaker 4: if you do get broader Ernie's growth after a year
Speaker 4: in which you had very narrow large cap leadership, I
Speaker 4: think there's a fair argument to say that, you know,
Speaker 4: SMP equal weight, for instance, relative to S and P
Speaker 4: cap weight, would make a lot of sense. What we've
Speaker 4: seen this month is Russell two thousand is massively outperformed.
Speaker 4: So I think what folks are saying is, you know,
Speaker 4: growth growth may be better than we expected. The FED
Speaker 4: actually may cut you know, without a recession. And I've
Speaker 4: got a lot of stocks at the smaller size of
Speaker 4: the cap spectrum that have meaningfully lagged, so I think
Speaker 4: that the theme has legs. I do think Russell two
Speaker 4: thousand were probably a little less comfortable with just from
Speaker 4: a risk of war perspective, but definitely SMP equal weight
Speaker 4: relative to capwaight is something that we think, we think
Speaker 4: makes a lot of sense in earlier next year.
Speaker 5: So we're talking about some big, longer term themes here,
Speaker 5: of course, what the risks look like in twenty twenty
Speaker 5: four and the opportunities. Let's talk about two thirty pm yesterday.
Speaker 5: Of course, that sudden plunge that we saw on the
Speaker 5: S and P five hundred, A lot of people pointing
Speaker 5: to zero day options and the heavy put volume that
Speaker 5: we saw there.
Speaker 1: What do you make of that argument?
Speaker 4: You know, our view is that the zero date options
Speaker 4: is probably less likely to have caused that yesterday. Just
Speaker 4: talking to the clients that we talked to on a
Speaker 4: regular basis, everybody was searching. You know, some people said, oh,
Speaker 4: it must be their twenty year bond auction, or maybe
Speaker 4: it's just low volumes, you know, kind of late in
Speaker 4: the month. You know, people throw zero date options out there.
Speaker 4: I think is as a reason if they don't have
Speaker 4: another reason. It's an easy kind of fallback reason. So
Speaker 4: it's always possible that in a low volume day, a
Speaker 4: small amount of flows can kind of get you going.
Speaker 4: And it does feel like the markets were now, once
Speaker 4: a direction is determined, we're just going to kind of
Speaker 4: go that way because there's not a lot of volume
Speaker 4: to push it back. So, you know, we're not generally
Speaker 4: the camp of blaming zero date for these type of things.
Speaker 4: It could it be one of a few things that
Speaker 4: got listed.
Speaker 6: You know.
Speaker 4: Some people said, oh, a delayed reaction to FedEx numbers.
Speaker 4: Some people said the twenty year bond auction, you know,
Speaker 4: other people said zero date options. It's this is just
Speaker 4: one of those I think late in the year, low volume,
Speaker 4: you know, kind of we rallied a lot, take some
Speaker 4: risk off the table.
Speaker 5: I like the theory that it was a delayed reaction
Speaker 5: to FedEx, because that would be quite a delayed, well
Speaker 5: reaction if.
Speaker 4: You don't have an answer, I mean people were I
Speaker 4: think people were groping yesterday. Yeah, and you just kind
Speaker 4: of you're looking for anything what has been bad news
Speaker 4: theoretically that we've received in the last couple of days
Speaker 4: that could have done it. I think the most notable
Speaker 4: thing which you mentioned earlier, is equities move but other
Speaker 4: assets didn't, and I think that's why people were a
Speaker 4: little bit confused by it. Clearly didn't come from the
Speaker 4: bond side of the ledger. Some folks said there were
Speaker 4: just some you know, equity sell programs going through the system,
Speaker 4: and that might just be risk reduction into your end.
Speaker 4: Last year we kind of had this a little bit too, though.
Speaker 4: We kind of rallied the first two or three weeks
Speaker 4: of December and then the last two weeks of December
Speaker 4: last year were a little wonky. So maybe we're having
Speaker 4: that again.
Speaker 1: So were you following Scott's advice just buying the tip?
Speaker 2: Were you out there yesterday just scooping stuff up and
Speaker 2: getting really excited?
Speaker 6: I was.
Speaker 4: I was trying to figure out what was happening. I
Speaker 4: think the buy the dip stuff makes sense. I think
Speaker 4: if you believe all the narrative we've had here right.
Speaker 2: So, well, this is my issue. If you always buy
Speaker 2: the dips, there will not be dips. So is that
Speaker 2: what we're expecting? All the volatility that people are talking
Speaker 2: about next year, there's a high risk of it not
Speaker 2: happening because everyone's going to buy into any kind of
Speaker 2: volatility that we see.
Speaker 4: You know, what, it is possible there's still a lot
Speaker 4: of cash on the sidelines. You know, if you're a
Speaker 4: retail investor, you're sitting in money market and you get
Speaker 4: told rates are going lower. You just missed a twenty
Speaker 4: percent rally in the SMP and a fifty percent rally
Speaker 4: in NASDAC. And if you believe we're not going to
Speaker 4: to recession, I think there is the potential for money
Speaker 4: to start to bleed into the market. To your point,
Speaker 4: and kind of, you know, a retail put alongside the
Speaker 4: Fed put maybe you know, kind of really improves your
Speaker 4: risk reward. But to me, it all boils down to
Speaker 4: labor market data. Labor market data holds in you just
Speaker 4: want to continue to run long equity risk. If you
Speaker 4: see weakness in that part of the economy, you need
Speaker 4: to be excuse me, you'd be really really cautious about
Speaker 4: how you manage to thinks.
Speaker 2: Suirar Kaiser, thank you so much for being with us,
Speaker 2: joining us now, I'm so pleased to say. Is Susan Thornton,
Speaker 2: Senior Fellow at the Palsai China Center at Yal Susan,
Speaker 2: I just want to get your sense of how much
Speaker 2: of a sort of increased a threat. The NBC report
Speaker 2: on what Jijinping told President Biden really was.
Speaker 8: Yeah, thanks very much. I think this is really a
Speaker 8: tempest in a teapot. The things that Xi Jinping said
Speaker 8: on Taiwan and the meeting with Biden are absolutely not new.
Speaker 8: The Chinese have repeated at almost every occasion that Taiwan
Speaker 8: will be reunified at some point. So I don't think
Speaker 8: anything that the Chinese would have said on this issue
Speaker 8: would be considered new by people who watch this issue.
Speaker 8: Maybe by people who don't watch this issue, they would
Speaker 8: have been surprised. But I do think the Chinese are
Speaker 8: kind of reflecting some concern that US policy is shifting
Speaker 8: toward a support for a kind of permanent separation with Taiwan,
Speaker 8: and that would be maybe something that would be causing
Speaker 8: them a little bit of alarm and may have added
Speaker 8: some umph to this kind of statement about Taiwan will
Speaker 8: be reunified.
Speaker 2: They added a lot of umph this morning when you
Speaker 2: talk about the potential prohibition of exports of certain rare
Speaker 2: earth metals that are really crucial to a lot of
Speaker 2: electric vehicles, And this comes as there are reports that
Speaker 2: the administration in the United States is thinking about possibly
Speaker 2: increasing the tariffs on imports of certain goods having to
Speaker 2: do electric vehicles from China. Is this a really material
Speaker 2: increase in the tit for tat the trade war that
Speaker 2: we saw really heat up a couple of years ago
Speaker 2: with China and the US.
Speaker 8: Well, you know, the Chinese have already announced in a
Speaker 8: couple of other occasions some selected restrictions on exports of
Speaker 8: rare earths, you know, trying to show that they have
Speaker 8: cards that they can play too in this tit for
Speaker 8: tat trade war. I think what we're seeing from the
Speaker 8: Biden administration is a desire to kind of adjust some
Speaker 8: of the tariffs that the Trump administration had imposed on China,
Speaker 8: in which the Biden administration left on. So, you know,
Speaker 8: evs are a particular concern because of the desire to
Speaker 8: try to ramp up manufacturing here in the US. Of course,
Speaker 8: they're also a big concern in Europe, and so I
Speaker 8: think that's what we're looking at. Certainly, this is a
Speaker 8: hugely successful sector for China, so they don't want to
Speaker 8: see this tariff and position happen. I think probably they're
Speaker 8: resigned to it at this point. And this is probably
Speaker 8: you know, just a lot more signaling than something that's unexpected.
Speaker 5: So resigned to tariffs. But what about when it comes
Speaker 5: to sanctions. I mean to go back to what Senator
Speaker 5: Lindsay Graham said saying that he is intent on drafting
Speaker 5: pre invasion sanctions from Hell to impose on China if
Speaker 5: they take action to seize Taiwan. How would those sanctions
Speaker 5: be received and would that actually deter China in any fashion?
Speaker 8: Yeah, I think it's really important that we sort of
Speaker 8: try to separate the Taiwan issues from the trade war
Speaker 8: issues because they are very different, and people have, you know,
Speaker 8: a tendency to try to lump all these things together,
Speaker 8: especially up on Capitol Hill. You know, the issues around
Speaker 8: trying to draft you know, pre invasion sanctions have been
Speaker 8: talked about up on Capitol Hill for a while. You know,
Speaker 8: it didn't work with Russia, and those sanctions were probably
Speaker 8: much more dramatic than anything that could be imposed on
Speaker 8: China in terms of trying to get the rest of
Speaker 8: the countries in the world to go along with it.
Speaker 8: Of course, sanctions regime only works to the extent that
Speaker 8: you can get other countries to also join in so
Speaker 8: I think this is an effort by you know, people
Speaker 8: to try to show the Chinese that we really don't
Speaker 8: want them to do this. But again, you know, the
Speaker 8: summit was very successful, the some in San Francisco between
Speaker 8: President Biden, President she and trying to tamp down this issue,
Speaker 8: and it seems now like there's a desire in some
Speaker 8: quarters to try to ramp it up again, and I
Speaker 8: think that's unfortunate. I mean, we really do need to
Speaker 8: see some stability on this issue going into what's going
Speaker 8: to be a pretty tumultuous year in US China relations.
Speaker 1: I think, well, Susan to that point.
Speaker 5: Of course, the Apex Summit, it was perceived, is going well,
Speaker 5: and I think that's why part of the reason why
Speaker 5: there was surprise to see this report from NBC yesterday
Speaker 5: when it comes to China's intentions with Taiwan. But I mean,
Speaker 5: you made the great point that this isn't necessarily new
Speaker 5: rhetoric from China when it comes to Taiwan.
Speaker 8: Absolutely, I think the summit actually on Taiwan, my understanding
Speaker 8: is the two leaders didn't really spend a lot of
Speaker 8: time on that issue, and that there was a tacit
Speaker 8: agreement to try to work to manage this difficult issue.
Speaker 8: You know, we have the Taiwan election coming up on
Speaker 8: January thirteenth, that's going to pose tensions and some difficulties
Speaker 8: in the relationship. There'll be an inauguration in May, and
Speaker 8: there's always a lot of bad back and forth between
Speaker 8: the US and China and how these issues will be handled.
Speaker 8: And I think what we're trying to get from the
Speaker 8: summit was that these issues will be handled carefully, and
Speaker 8: that was the message that was trying to be conveyed.
Speaker 8: And now we've sort of got back to this increased
Speaker 8: sort of hype around a possible military action, which I
Speaker 8: agree with Michael Hurston, I don't think is imminent.
Speaker 2: Given the fact that we are dealing with a very
Speaker 2: political year heading into the election at the end of
Speaker 2: the year.
Speaker 1: How can there be.
Speaker 2: Any kind of diplomatic discussions between China and the US
Speaker 2: with any conviction if there is not clear who is
Speaker 2: going to be in the White House come twenty twenty five.
Speaker 8: Well, this is an issue for diplomats working on relationships
Speaker 8: with pretty much every country in the world right now.
Speaker 8: I mean, all countries are kind of looking at our
Speaker 8: political situation and wondering what's going to happen and wondering
Speaker 8: what kind of commitments they can make with US in
Speaker 8: the coming year. So it is difficult, and you know,
Speaker 8: probably especially difficult with China. The only thing I would
Speaker 8: say about the US China relationship is that it's it's
Speaker 8: less likely probably to turn on a dime with the
Speaker 8: you know, accession of a Republican president, be it Trump
Speaker 8: or anybody else, because I think there is this kind
Speaker 8: of bipartisan approach to China which is quite you know,
Speaker 8: hawkish at the moment and probably won't change no matter
Speaker 8: who comes into the White House. And I think the
Speaker 8: Chinese do know that, so they are so they are
Speaker 8: looking at, you know, the coming year and then the
Speaker 8: years after it sort of how to manage what's going
Speaker 8: to be a pretty difficult time.
Speaker 5: I think, Well, Susan, you bring up a question that
Speaker 5: I think about all the time when it comes to
Speaker 5: US China relations.
Speaker 1: A lot of these issues go back years.
Speaker 5: And years, they outlast any one administration, and like you mentioned,
Speaker 5: being hawkish on China is very bipartisan at the moment.
Speaker 5: And with that in mind, how much does it truly matter,
Speaker 5: how consequential is it who is actually in the Oval Office.
Speaker 8: Yeah, well, you mentioned that being hawkish on China is bipartisan. Now,
Speaker 8: I mean, I think it actually goes a long way back,
Speaker 8: and almost every issue we have today with China has
Speaker 8: been around for decades, you know, especially on Taiwan, if
Speaker 8: you go back and look at I've been looking at
Speaker 8: historical records lately from the Harder administration, and you know,
Speaker 8: every single issue was talked about at the time of
Speaker 8: normalization between the US and China in nineteen seventy nine.
Speaker 8: So we're forty five years on from that, and I
Speaker 8: think it you know, it's just going to be two
Speaker 8: big countries, huge economies, important players in the world, and
Speaker 8: it's just going to be so difficult to figure out
Speaker 8: how to manage all of these issues. I think the
Speaker 8: most important thing is that whoever's in the White House
Speaker 8: should be expressing confidence about the future of the United
Speaker 8: States and our ability to be resilient and maintain our
Speaker 8: competitive edge. I think that's the most important thing.
Speaker 2: Susan Thornton of the Paul Side China Center at the
Speaker 2: Yale University, thank you so much for being with us.
Speaker 1: The media industry is consolidating.
Speaker 2: We late yesterday learned that Warner Brothers and Paramount held
Speaker 2: talks about a possible merger deal, putting potentially the studios
Speaker 2: together and putting HBO and CBS under one roof, according
Speaker 2: to people familiar with the matter. Robert Fishman, senior research
Speaker 2: analyst at Mofatt Nathanson, writing this morning, we hesitate to
Speaker 2: see the upside in any transaction for the Paramount company
Speaker 2: as a whole, especially at its current premium valuation. Given
Speaker 2: the pressure on the linear TV business. It's a great
Speaker 2: place to start. And Robert, I'm so pleased to say,
Speaker 2: is joining us.
Speaker 1: Now to discuss.
Speaker 2: Robert, that is my key question, what is the advantage
Speaker 2: to tying up and CBS?
Speaker 9: But good morning, thank you for having me.
Speaker 6: I think the answer to the question right now is
Speaker 6: the desperate times in media landscape and the companies are
Speaker 6: facing significant challenges from a linear TV perspective given the
Speaker 6: increasing rates of cord cutting. Linear advertising we think is
Speaker 6: in secular declines right now. So all these companies are
Speaker 6: looking to really just cut back and back to your
Speaker 6: conversation earlier, try to figure out how to get to
Speaker 6: this other side of the streaming pivot that they're all making.
Speaker 9: But it's a really challenging time right now.
Speaker 2: So do you think that this is a viable deal
Speaker 2: or do you think that this is just basically CEOs
Speaker 2: throwing in the talent, saying we'll talk to whoever we
Speaker 2: can try to understand what could potentially work.
Speaker 6: I think every company is really trying to figure it
Speaker 6: out right now, and I do think that combinations are
Speaker 6: likely to happen. Do I think that anything is going
Speaker 6: to happen in the very near term. We have our
Speaker 6: skepticism just because of the regulatory landscape that that was
Speaker 6: just reference.
Speaker 5: And something that I've been wondering about thinking about this
Speaker 5: potential combination is how Warner Brothers would actually pay for this,
Speaker 5: because as I understand it, they have a pretty hefty
Speaker 5: debt load. You think back to that massive merger between
Speaker 5: Discovery and Murder Media from twenty twenty one. How would
Speaker 5: they actually fund this acquisition if it happens.
Speaker 6: Yeah, we're still waiting to learn more details in terms
Speaker 6: of the actual terms and how it would be structured.
Speaker 6: I mean clearly that they would likely look for some
Speaker 6: sort of stock component, if not a significant state in
Speaker 6: the combined companies. So we still need to figure out
Speaker 6: the exact combination. But to your point, all of these
Speaker 6: companies are in a challenged position right now because of
Speaker 6: the debt loads that they have, and that has limited
Speaker 6: the flexibility that these companies have as they're coming through
Speaker 6: the streaming pivot that they're looking to make and try
Speaker 6: to get to the other side with the pressures of
Speaker 6: the linear ecosystem going against them.
Speaker 5: And if I were in the C suite at Netflix
Speaker 5: or say at Apple's streaming are should I be worried
Speaker 5: right now, not particularly just about this potential tie up,
Speaker 5: but potential consolidation to come.
Speaker 6: Well from the digital company perspective in terms of streaming specifically,
Speaker 6: I mean, clearly, I would flip the question around. I'd
Speaker 6: say the media companies should continue to be worried to
Speaker 6: see how much bigger and stronger the digital companies are
Speaker 6: getting in streaming, especially with public reports that Amazon continues
Speaker 6: to be looking to go more in sports. And I
Speaker 6: think the whole sports angle here is a really interesting
Speaker 6: angle because what Warner Brothers Discovery does not have today
Speaker 6: is a broadcast network, and what we know that they're
Speaker 6: looking to do a big deal coming up in twenty
Speaker 6: twenty four is going to be the NBA renewal, So
Speaker 6: sports I think is a critical piece to all of
Speaker 6: this potential consolidation question and how that plays out and
Speaker 6: who owns what assets will have a significant impact on
Speaker 6: the future of the sports landscape as well.
Speaker 1: That's exactly where I was going to go, especially with CBS.
Speaker 2: I wonder how much that's part of this, this idea
Speaker 2: of trying to get in, especially before Amazon as they
Speaker 2: bid on this. If Amazon or one of the other
Speaker 2: streaming networks were to get a hold of some of
Speaker 2: the rights to the sports teams or football in particular,
Speaker 2: would that be the desnel for the cable channels.
Speaker 9: Well, to some degree, it's already happening.
Speaker 6: Amazon does have their Thursday Night package and they've succeeded
Speaker 6: so far this season. We've seen real momentum there in
Speaker 6: terms of viewership. So yes, I mean this is the
Speaker 6: trend for sports. Sports is going over the top. Clearly,
Speaker 6: ESPN remains the pivotal piece to the sports ecosystem, and
Speaker 6: there's been lots of discussion in terms of the timing
Speaker 6: of when they're going to take their flagship network over
Speaker 6: the top as well. But all of these sports rights
Speaker 6: are a critical piece again to the future of the
Speaker 6: media landscape and to the whole sports ecosystem, and the
Speaker 6: digital players play a critical piece as part of that
Speaker 6: as well.
Speaker 2: I have to say, as you're talking, Robert does not
Speaker 2: sound very optimistic for a lot of these streaming channels
Speaker 2: that are not Amazon or that are not Netflix. And
Speaker 2: I'm wondering if the best game plan, according to you,
Speaker 2: is just to basically put all of the sort of repertoire,
Speaker 2: all the different shows together, give it as a streaming
Speaker 2: offer that is only one stream, it's a bundled stream,
Speaker 2: and just offering it like that, rather than trying to
Speaker 2: compete in any kind of material way with the content
Speaker 2: as well as just the pocketbook of some of these
Speaker 2: other players.
Speaker 6: I mean, we do think that reaggregation on the streaming
Speaker 6: side is inevitable.
Speaker 9: It will likely take some time to play out.
Speaker 6: But this potential consolidation or whatever permutation you want to
Speaker 6: throw out there is all one step closer to that
Speaker 6: end goal.
Speaker 5: And let's talk a little bit more about Paramount specifically,
Speaker 5: because it was interesting to see this news yesterday about
Speaker 5: Warner Brothers. When you think about what else we've heard
Speaker 5: and learned about Paramount this week. Of course, holding talks
Speaker 5: once again about a sale of the Black Entertainment Television
Speaker 5: Network for example. We'll see if any buyers emerge. There
Speaker 5: can Paramount stand alone as a standalone company if it's
Speaker 5: not Warner Brothers, for example, do they need to be
Speaker 5: acquired by someone else at this.
Speaker 6: Point, yeah, I mean, I think the challenges at hand
Speaker 6: are real and growing. We hosted a conference a couple
Speaker 6: weeks ago now in terms of the future of the
Speaker 6: impact of Charter deal, that the Disney Charter deal on
Speaker 6: the rest of the ecosystem, and we believe and it's
Speaker 6: been reported that Charter deal with Paramount is coming up,
Speaker 6: but all future renewals per Paramounts given what we say,
Speaker 6: essentially back to sports, that the fact that they're leaking
Speaker 6: all of their premium sports rights, including the NFL over
Speaker 6: the top, is going to be a significant challenge going
Speaker 6: forward for Paramount, and we think that the renewal is
Speaker 6: what will come under pressure because of.
Speaker 9: That, and that will be another leg.
Speaker 6: As far as what some of the risks are facing
Speaker 6: this company. Coming back to the advertising story, it's a
Speaker 6: real difficult time right now, and it's pretty clear to
Speaker 6: us that television is in secular decline in terms of advertising,
Speaker 6: and that's going to put another significant challenge ahead given
Speaker 6: how high margin these dollars are and the exposure that
Speaker 6: the TV network's TV media business is for Paramount is
Speaker 6: generating essentially all of their profit today.
Speaker 5: And of course the talks between Warner Brothers and Paramount,
Speaker 5: they're preliminary, according to people familiar, may not lead to
Speaker 5: an agreement, but let's say that it did, that these
Speaker 5: two companies did combine. On the surface level, there's a
Speaker 5: lot of overall between these two companies. What could that
Speaker 5: potentially mean for restructuring and layoffs for example?
Speaker 6: I mean, they would clearly be significant cost synergies involved
Speaker 6: in the combination of these companies. But in the report
Speaker 6: we published this morning, we alluded to the fact from
Speaker 6: an overlap perspective that the cable network business would be
Speaker 6: something with high concentration. So that's clearly something from a
Speaker 6: regulatory standpoint that we would imagine is reviewed at the
Speaker 6: very least again in this potential speculative type of combination,
Speaker 6: and then you have to question what ends up with
Speaker 6: the two different studios, whether or not Warner Brothers Discovery
Speaker 6: would be forced or even opportunistically look to get rid
Speaker 6: of the Paramount Studio as well.
Speaker 2: Robert Fishman, if Buffet Nathanson, thank you so much for
Speaker 2: being with us. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify,
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