1 00:00:06,320 --> 00:00:13,040 Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 2 00:00:13,480 --> 00:00:17,560 Speaker 1: Jay Leye. We bring you insight from the best in economics, finance, investment, 3 00:00:18,000 --> 00:00:23,520 Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 4 00:00:23,600 --> 00:00:34,479 Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg. Yeah. So, 5 00:00:34,640 --> 00:00:37,519 Speaker 1: days after the anti establishment five Star Movement and the 6 00:00:37,560 --> 00:00:40,480 Speaker 1: anti immigrant League walked away from a bid to form 7 00:00:40,520 --> 00:00:44,280 Speaker 1: a coalition Italian government, according to a senior state official, 8 00:00:44,600 --> 00:00:47,000 Speaker 1: the president of Italy wants to find out whether they're 9 00:00:47,040 --> 00:00:49,680 Speaker 1: ready to revive it. Joining us now, I'm ready pleased 10 00:00:49,680 --> 00:00:53,320 Speaker 1: to say is Luigis and Galas Chicago, both school finance professor, 11 00:00:53,680 --> 00:00:56,120 Speaker 1: and he joined us on the phone, Professors and Galas. 12 00:00:56,120 --> 00:00:59,600 Speaker 1: It was started by a president who gave legitimacy to 13 00:00:59,640 --> 00:01:01,720 Speaker 1: an I here that wasn't clearly on the agenda at 14 00:01:01,720 --> 00:01:06,640 Speaker 1: the time. It's a curious event that's taking place in Italy. Luigi, yes, 15 00:01:06,760 --> 00:01:09,480 Speaker 1: it is. I think that I agree with you. That 16 00:01:10,240 --> 00:01:13,440 Speaker 1: was the president that spook the market more than the populace. 17 00:01:13,560 --> 00:01:17,320 Speaker 1: That the fact that he raised the issue of you 18 00:01:17,440 --> 00:01:21,360 Speaker 1: will exit and made us think out of not appointed. 19 00:01:21,480 --> 00:01:26,520 Speaker 1: Somebody has announcements to really created a lot of uncertainty. 20 00:01:27,200 --> 00:01:28,959 Speaker 1: I don't know what is going to have to really, 21 00:01:29,000 --> 00:01:31,480 Speaker 1: the situation is very much in flux now. So, Professor, 22 00:01:31,520 --> 00:01:34,080 Speaker 1: the key question I think for markets that everyone should 23 00:01:34,120 --> 00:01:36,319 Speaker 1: be looking out for is whether we get a new 24 00:01:36,319 --> 00:01:39,600 Speaker 1: election one and two, what kind of platform did these 25 00:01:39,640 --> 00:01:42,000 Speaker 1: two parties run on in that election? Is it clear 26 00:01:42,040 --> 00:01:44,120 Speaker 1: to you, Luigi, that if we had another election in 27 00:01:44,160 --> 00:01:47,160 Speaker 1: Italy that those two parties would run on a platform 28 00:01:47,280 --> 00:01:51,760 Speaker 1: to leave the Eurozone. No, I don't think that they 29 00:01:51,760 --> 00:01:54,240 Speaker 1: will run on that platform. I think would be suicidal 30 00:01:54,320 --> 00:01:59,280 Speaker 1: honestly to a campaign on that front, because people were 31 00:01:59,320 --> 00:02:02,120 Speaker 1: started running to get their money out of the bank 32 00:02:02,480 --> 00:02:07,120 Speaker 1: as the ballots accounted. So I don't think they will 33 00:02:07,160 --> 00:02:10,239 Speaker 1: do it. I think that the the Democratic Party will 34 00:02:10,280 --> 00:02:13,800 Speaker 1: try to train them to run a campaign the direction, 35 00:02:13,880 --> 00:02:16,480 Speaker 1: because it is in his interest to do that. But 36 00:02:17,120 --> 00:02:19,640 Speaker 1: I don't think this will happen. So for anyone worrying, 37 00:02:19,680 --> 00:02:22,600 Speaker 1: Professor about an existential crisis in Europe, once again, what's 38 00:02:22,639 --> 00:02:26,560 Speaker 1: your message to them at this point? So? I think 39 00:02:26,600 --> 00:02:29,679 Speaker 1: that we're always in theistential crisis. I think that the 40 00:02:29,960 --> 00:02:36,160 Speaker 1: problems of Italy indicate that the you is not a 41 00:02:37,280 --> 00:02:41,640 Speaker 1: well designed system. And I think that everybody knows it, 42 00:02:42,440 --> 00:02:44,040 Speaker 1: but nobody has the card to say. It is a 43 00:02:44,040 --> 00:02:47,720 Speaker 1: bit like the Emperor's no close and we need to 44 00:02:47,760 --> 00:02:50,920 Speaker 1: fix it. The question is is their willingness to fix it? 45 00:02:51,360 --> 00:02:54,200 Speaker 1: And if they is not willing to fix it? Uh 46 00:02:54,919 --> 00:02:58,920 Speaker 1: was stun who used to say, is something is not sustainable, 47 00:02:59,120 --> 00:03:02,360 Speaker 1: eventually will not su state And I'm stating the obvious. 48 00:03:02,440 --> 00:03:05,639 Speaker 1: But eventually we're obviously state. Whether it is because of 49 00:03:05,680 --> 00:03:08,160 Speaker 1: the fight that movement, or because of this or because 50 00:03:08,200 --> 00:03:12,520 Speaker 1: of that, that's that's sort of accident. The substance is 51 00:03:12,880 --> 00:03:15,880 Speaker 1: we need to fix it, right, Luigi, wonderful to have 52 00:03:15,919 --> 00:03:18,280 Speaker 1: you on in this time of turmoil in Italy. And 53 00:03:18,320 --> 00:03:20,400 Speaker 1: it ar cons back to what was the book of 54 00:03:20,400 --> 00:03:22,720 Speaker 1: the summer for me. I recall a number of years ago, 55 00:03:23,200 --> 00:03:28,720 Speaker 1: your wonderful book on American capitalism. Describe European capitalism right now? 56 00:03:29,280 --> 00:03:34,520 Speaker 1: Help our European listeners with what capitalism is in Europe. 57 00:03:34,560 --> 00:03:40,880 Speaker 1: I really can't figure out a good definition. Actually is 58 00:03:41,000 --> 00:03:44,600 Speaker 1: very different across countries, and I would say that it 59 00:03:44,760 --> 00:03:47,560 Speaker 1: is one in this moment. One advantage of the U 60 00:03:47,960 --> 00:03:51,920 Speaker 1: over the United States is that they seem to enforce 61 00:03:52,040 --> 00:03:56,320 Speaker 1: the rule of competition better than the United States. The 62 00:03:56,360 --> 00:04:02,600 Speaker 1: anti trust is more aggressive and is less easy to 63 00:04:02,640 --> 00:04:07,400 Speaker 1: buy out the legislator. At the European level, I think 64 00:04:07,440 --> 00:04:12,480 Speaker 1: it's just a transitional phase and eventually things will converge 65 00:04:12,600 --> 00:04:14,600 Speaker 1: in the war state. But at the moment, I think 66 00:04:14,600 --> 00:04:19,840 Speaker 1: this is in advantage with the United States. I mean 67 00:04:19,880 --> 00:04:22,840 Speaker 1: with within it is. I guess where GDP is in 68 00:04:22,920 --> 00:04:25,520 Speaker 1: the whole disappointment here has been where GDP has been 69 00:04:25,560 --> 00:04:28,320 Speaker 1: in the United States for X number of years, and 70 00:04:28,360 --> 00:04:31,360 Speaker 1: for Europe and and all that as well. A little 71 00:04:31,360 --> 00:04:35,840 Speaker 1: bit of inflation today reported in Europe. Are you optimistic 72 00:04:35,920 --> 00:04:42,960 Speaker 1: that we will see a power like inflation lift in America? 73 00:04:43,720 --> 00:04:46,680 Speaker 1: I think that my reading of the data is that 74 00:04:47,120 --> 00:04:49,960 Speaker 1: the lack of inflation is due to the lack of 75 00:04:50,440 --> 00:04:56,200 Speaker 1: increasing wages. And ironically, maybe we've gone too much the 76 00:04:56,240 --> 00:05:01,039 Speaker 1: other ways. There was a huge pressure to reduced wage, 77 00:05:01,080 --> 00:05:03,080 Speaker 1: reduced the power of label. We do s this will 78 00:05:03,120 --> 00:05:06,640 Speaker 1: use that eventually, maybe we over shot and and we 79 00:05:06,680 --> 00:05:10,200 Speaker 1: need to give a little bit more of arguing power 80 00:05:10,279 --> 00:05:14,040 Speaker 1: to h to label so that wages will go up. 81 00:05:14,120 --> 00:05:16,160 Speaker 1: And when wage you will go up in station, we 82 00:05:16,200 --> 00:05:18,479 Speaker 1: go up as well. The professor, Before we lose you. 83 00:05:18,520 --> 00:05:19,920 Speaker 1: I think what's already stood out to a lot of 84 00:05:19,960 --> 00:05:24,640 Speaker 1: market participants this week is how quickly liquidity evaporated in 85 00:05:24,720 --> 00:05:28,120 Speaker 1: some of the world's largest markets, which we would expect 86 00:05:28,120 --> 00:05:30,120 Speaker 1: to have liquidity at times of stress, and it just 87 00:05:30,240 --> 00:05:33,040 Speaker 1: was not there. The Italian bond market is one of 88 00:05:33,080 --> 00:05:35,760 Speaker 1: the largest bond markets on the planet, and what clearly 89 00:05:35,800 --> 00:05:39,040 Speaker 1: happened this week was a move sparked by politics, but 90 00:05:39,160 --> 00:05:44,000 Speaker 1: amplified by the complete evaporation of liquidity. How concerning is 91 00:05:44,040 --> 00:05:45,880 Speaker 1: that for you, professor, and what's the lesson that we 92 00:05:45,920 --> 00:05:50,400 Speaker 1: can learn from this week? It is definitely concerning. It 93 00:05:50,480 --> 00:05:54,160 Speaker 1: reminds me of the temper tantrum that took place a 94 00:05:54,200 --> 00:05:56,440 Speaker 1: few years back, when the night just started to announce 95 00:05:56,520 --> 00:06:01,120 Speaker 1: that you will start increasing rage. I think that what happened, 96 00:06:01,120 --> 00:06:03,240 Speaker 1: in my view, is that a lot of people were 97 00:06:03,320 --> 00:06:08,000 Speaker 1: long on Italian bombs, not because they believed in Italy, 98 00:06:08,240 --> 00:06:13,120 Speaker 1: just because was the highest security around and as a result, 99 00:06:13,200 --> 00:06:16,120 Speaker 1: we're ready to rush to the door for the first 100 00:06:16,520 --> 00:06:18,720 Speaker 1: at the first sign of problems. So I think that 101 00:06:19,120 --> 00:06:21,640 Speaker 1: we have seen the effects of this reaching for il 102 00:06:22,520 --> 00:06:25,360 Speaker 1: which is as we know, tend to be the stabilizing 103 00:06:25,960 --> 00:06:28,960 Speaker 1: and I think to some extent this book has been 104 00:06:29,040 --> 00:06:32,760 Speaker 1: useful because as all people, that is not a one 105 00:06:32,760 --> 00:06:35,000 Speaker 1: way back and they can actually lose money, and so 106 00:06:35,279 --> 00:06:37,120 Speaker 1: I'm sure that they're going to be more careful in 107 00:06:37,160 --> 00:06:40,800 Speaker 1: the future. Luigi, one final question, if we could have 108 00:06:40,920 --> 00:06:43,360 Speaker 1: you made plans to attend the World Cup this summer? 109 00:06:44,520 --> 00:06:49,400 Speaker 1: One World Cup this year? Don't you know that, professor? Professor, 110 00:06:49,400 --> 00:06:51,279 Speaker 1: there is a more important question for you. Would you 111 00:06:51,279 --> 00:06:54,120 Speaker 1: accept the positioners finance minister in Italy? It was that 112 00:06:54,160 --> 00:06:58,400 Speaker 1: would be a more important question. Nobody has offered it 113 00:06:58,480 --> 00:07:00,719 Speaker 1: to be, so you can give me a shoa that 114 00:07:00,800 --> 00:07:03,839 Speaker 1: I would be watching their the world happen well. But 115 00:07:03,920 --> 00:07:08,840 Speaker 1: within this Luigi to Mr Farrow's important question, Carlo Cardarelli 116 00:07:08,960 --> 00:07:12,480 Speaker 1: has been a wonderful and sustained guest on Bloomberg Surveillance 117 00:07:12,480 --> 00:07:15,800 Speaker 1: over the years with his fiscal work and original work 118 00:07:15,800 --> 00:07:20,240 Speaker 1: at the International Monetary Fund. To see Mr Cardarelli and 119 00:07:20,400 --> 00:07:25,080 Speaker 1: Zingalis in tandem in Italy, would I would suggest lift 120 00:07:25,160 --> 00:07:30,200 Speaker 1: the spirit of markets? Is that politically feasible in your 121 00:07:30,320 --> 00:07:36,320 Speaker 1: Italy to have academics associated with this phrase technocrats really 122 00:07:36,400 --> 00:07:41,640 Speaker 1: run the show? Is that feasible? So first of all, 123 00:07:41,840 --> 00:07:45,760 Speaker 1: I don't think that being on Bloomberg is necessarily the 124 00:07:45,880 --> 00:07:54,600 Speaker 1: stat to go to become minister. That's Joli, a prerequisite, Luigi, you, 125 00:07:54,960 --> 00:08:00,240 Speaker 1: I'm sure, but the reality is actively I respect uh 126 00:08:00,600 --> 00:08:05,680 Speaker 1: calibery badge. We have different views on many things, so 127 00:08:05,800 --> 00:08:08,560 Speaker 1: I don't think that all technicals think to stay the same. 128 00:08:09,120 --> 00:08:13,000 Speaker 1: And I think that it is important in my view 129 00:08:13,400 --> 00:08:18,280 Speaker 1: to feel the pain that is around in Italy. And 130 00:08:18,680 --> 00:08:24,040 Speaker 1: I think people underestimate how devastated the country is. Twenty 131 00:08:24,160 --> 00:08:29,960 Speaker 1: years of no growth in a cap almost fifty of 132 00:08:30,120 --> 00:08:33,719 Speaker 1: youth and employment. I think that this is that this 133 00:08:33,920 --> 00:08:37,520 Speaker 1: is a country that has lost hope and forget the 134 00:08:37,559 --> 00:08:40,000 Speaker 1: World Cup. I think that people are not even dataset 135 00:08:40,080 --> 00:08:44,080 Speaker 1: about that because there are much bigger problems around. And 136 00:08:44,120 --> 00:08:48,400 Speaker 1: I think that whether you're a technocrat or not, I 137 00:08:48,440 --> 00:08:53,560 Speaker 1: think that what people want is somebody ruling them that 138 00:08:53,679 --> 00:08:56,840 Speaker 1: feel that pain. Professor sing Goes, thank you so much 139 00:08:56,880 --> 00:09:01,160 Speaker 1: for those important comments, particularly on your Italy. We greatly 140 00:09:01,240 --> 00:09:04,199 Speaker 1: appreciate his attendance. He is Uh, of course with the 141 00:09:04,200 --> 00:09:07,760 Speaker 1: Booth School, University of Chicago as well. Luigi as in, 142 00:09:22,280 --> 00:09:25,080 Speaker 1: this is without question our interview of the day and 143 00:09:25,280 --> 00:09:29,320 Speaker 1: is without question timely as we may see further tariffs 144 00:09:29,320 --> 00:09:33,640 Speaker 1: today from the White House. Donald stras, I'm essentially invented 145 00:09:33,760 --> 00:09:37,960 Speaker 1: China market economics, darkening the door of Mary lynch warton 146 00:09:38,000 --> 00:09:41,199 Speaker 1: economics and others over the years, including the Milk and Institute. 147 00:09:42,240 --> 00:09:44,760 Speaker 1: He is with Mr Hyman over at Evercore I s 148 00:09:44,800 --> 00:09:49,679 Speaker 1: I and continues a true focus on China. Who was 149 00:09:49,720 --> 00:09:53,080 Speaker 1: the first premier or president of China that you dealt 150 00:09:53,120 --> 00:09:56,880 Speaker 1: with professionally? You don't go back to mount right. No, 151 00:09:57,360 --> 00:10:03,360 Speaker 1: John Zaman, who was uh in the nineties. Uh, he was. 152 00:10:03,760 --> 00:10:15,440 Speaker 1: He was a smart guy, UM focused um any consensus builder. 153 00:10:15,800 --> 00:10:20,559 Speaker 1: Now we are back to Chairman Mao days. Uh political 154 00:10:20,600 --> 00:10:25,360 Speaker 1: strong man rule under Jin Ping. Uh. It's not uh, 155 00:10:25,400 --> 00:10:28,520 Speaker 1: not my idea of a good time. Can you explain 156 00:10:28,800 --> 00:10:34,600 Speaker 1: to me how Mr g reacts to the bipolar advice 157 00:10:34,760 --> 00:10:39,000 Speaker 1: that Mr Trump is getting, maybe personified by one view 158 00:10:39,000 --> 00:10:43,839 Speaker 1: of free trader Lawrence Cudlow and another by Navarro singularly 159 00:10:43,880 --> 00:10:50,120 Speaker 1: saying China is not evil but unfair in their trade. Uh. 160 00:10:50,320 --> 00:10:55,600 Speaker 1: He listens uh politely. He and his team Uh Wangchi 161 00:10:55,679 --> 00:10:59,199 Speaker 1: Shan who's a vice president, and Liu Hu who was 162 00:10:59,240 --> 00:11:01,720 Speaker 1: a guy at DAVA and is in charge of the 163 00:11:01,800 --> 00:11:05,960 Speaker 1: U S. John economic and financial relationship. Um, they listen politely, 164 00:11:06,800 --> 00:11:09,760 Speaker 1: but they don't react to tweets. They don't react to 165 00:11:09,960 --> 00:11:15,760 Speaker 1: speeches too, reports. They react to actions. So wait until 166 00:11:15,960 --> 00:11:20,280 Speaker 1: you see Washington do something. Then you react, but not before, don't. 167 00:11:20,280 --> 00:11:22,240 Speaker 1: I read this term in the last twenty four hours, 168 00:11:22,240 --> 00:11:23,480 Speaker 1: and I think it was in the Li Times. It 169 00:11:23,600 --> 00:11:27,080 Speaker 1: was microwave diplomacy. I think it's a fantastic term. Microwave 170 00:11:27,120 --> 00:11:32,199 Speaker 1: diplomacy short quick. You know, we used to diplomacy happening 171 00:11:32,200 --> 00:11:35,440 Speaker 1: over time, over years of a decade, with with goals 172 00:11:35,480 --> 00:11:38,800 Speaker 1: of a long time horizons. This is very fast high heat. 173 00:11:39,720 --> 00:11:43,720 Speaker 1: Does microwave diplomacy worked on I doubt it. I mean 174 00:11:43,800 --> 00:11:47,000 Speaker 1: I I heat up my uh my cold coffee and 175 00:11:47,080 --> 00:11:49,800 Speaker 1: a microwave now, and I guess twenty years ago, if 176 00:11:49,800 --> 00:11:51,880 Speaker 1: I did it in a regular avenue would have taken 177 00:11:51,920 --> 00:11:56,959 Speaker 1: a lot longer. I suppose it still works. Okay, but uh, 178 00:11:57,120 --> 00:12:00,520 Speaker 1: I think, uh China, it looks at washing and I think, 179 00:12:00,520 --> 00:12:05,000 Speaker 1: and they see, um, they don't see policy, they see results. 180 00:12:05,360 --> 00:12:09,120 Speaker 1: They see flip flop. They don't know what way to move, 181 00:12:09,160 --> 00:12:12,920 Speaker 1: and so accordingly they were wait until Washington does something 182 00:12:12,960 --> 00:12:15,080 Speaker 1: and then they react. Is it good? To keep China 183 00:12:15,120 --> 00:12:16,559 Speaker 1: on the back foot, and he's China on the back 184 00:12:16,559 --> 00:12:18,800 Speaker 1: foot right now. I don't think China is on the 185 00:12:18,840 --> 00:12:24,680 Speaker 1: back foot right now. Uh. Some people have said that Washington. 186 00:12:25,559 --> 00:12:29,600 Speaker 1: I've said that China. See is Washington is unreliable and 187 00:12:29,880 --> 00:12:35,960 Speaker 1: uh unpredictable, and I think it means unreliable and untrustworthy. Uh. 188 00:12:36,040 --> 00:12:40,319 Speaker 1: This last week, Um, we said we the US said 189 00:12:40,440 --> 00:12:44,240 Speaker 1: we're go. We will impose the fifty billion dollars worth 190 00:12:44,280 --> 00:12:47,400 Speaker 1: of tariffs. Will not. Maybe that's drawing a line in 191 00:12:47,400 --> 00:12:51,400 Speaker 1: the sand and maybe being unpredictable as a point guard 192 00:12:52,000 --> 00:12:55,520 Speaker 1: is okay to go either way, but not in international relationships. 193 00:12:55,120 --> 00:12:57,800 Speaker 1: Done the difference here? And John, I just I just 194 00:12:57,840 --> 00:13:00,120 Speaker 1: did this in real time, Folks. When I say go 195 00:13:00,200 --> 00:13:02,400 Speaker 1: to China, it's a bunch of Bologney. I get on 196 00:13:02,440 --> 00:13:04,840 Speaker 1: a plane, I get in a car and go to 197 00:13:04,920 --> 00:13:08,480 Speaker 1: some fancy hotel. I'm within a football field of the hotel, 198 00:13:09,080 --> 00:13:11,559 Speaker 1: a soccer field, John, and then I get back in 199 00:13:11,600 --> 00:13:14,200 Speaker 1: the fancy car and come home. This time I actually 200 00:13:14,200 --> 00:13:16,120 Speaker 1: went into China, but I didn't go to cheng Do. 201 00:13:16,920 --> 00:13:21,240 Speaker 1: How is all this playing across all of industrial China, 202 00:13:21,400 --> 00:13:23,760 Speaker 1: not in Beijing, not in Shanghai not in a long 203 00:13:23,840 --> 00:13:28,360 Speaker 1: called how's it playing every place else? Well, companies throughout 204 00:13:28,480 --> 00:13:32,200 Speaker 1: China who are involved in international trade and and all 205 00:13:32,280 --> 00:13:37,679 Speaker 1: are in one way or another UM are perplexed. They 206 00:13:37,679 --> 00:13:40,280 Speaker 1: don't know what to do. Uh, there's this great deal 207 00:13:40,280 --> 00:13:43,000 Speaker 1: of uncertainty because their biggest trading partner in the world 208 00:13:43,840 --> 00:13:50,120 Speaker 1: is on an an uncertain path. Uh. So what do 209 00:13:50,160 --> 00:13:53,400 Speaker 1: you do when you're uncertain? You run in place. You 210 00:13:53,440 --> 00:13:58,440 Speaker 1: don't make long term commitments because you don't know whether 211 00:13:58,840 --> 00:14:01,120 Speaker 1: the step that you take is going to ultimately be 212 00:14:01,160 --> 00:14:05,160 Speaker 1: a step forward or back within This is the American feeling. 213 00:14:05,160 --> 00:14:07,560 Speaker 1: A lot of our listeners are saying, right, John, you've 214 00:14:07,559 --> 00:14:11,040 Speaker 1: been I give John for a huge credit for articulating 215 00:14:11,040 --> 00:14:15,160 Speaker 1: the frustration over there taking of our technology. Liz Economy 216 00:14:15,200 --> 00:14:19,320 Speaker 1: really features us in her book The Third Revolution of 217 00:14:19,360 --> 00:14:23,480 Speaker 1: how they're appropriating our technology? How do you respond to that? 218 00:14:23,560 --> 00:14:26,680 Speaker 1: Are they? Are they bad guys that we can't play 219 00:14:26,760 --> 00:14:30,360 Speaker 1: there unless we give them patent and copyright. I think 220 00:14:30,600 --> 00:14:36,320 Speaker 1: China has been a serial um uh intellectual property, a thief, 221 00:14:36,840 --> 00:14:38,880 Speaker 1: probably the biggest in the world, the best in the 222 00:14:38,880 --> 00:14:42,760 Speaker 1: world for a long time. I don't think that's likely 223 00:14:42,880 --> 00:14:47,480 Speaker 1: to change. Excuse me, we're it can be a hat 224 00:14:47,520 --> 00:14:50,800 Speaker 1: trick off. Okay, there you go. Uh, that's not gonna 225 00:14:50,880 --> 00:14:54,280 Speaker 1: change in any material way. I think the forced technology 226 00:14:54,320 --> 00:14:58,880 Speaker 1: transfer as a completely non Uh, that's a non item. 227 00:14:58,880 --> 00:15:02,720 Speaker 1: No company is worse to operate in China, but if 228 00:15:02,760 --> 00:15:06,080 Speaker 1: they do, they have to follow China's rules. No companies, 229 00:15:06,280 --> 00:15:08,760 Speaker 1: Chinese companies are not forced to operate in the US. 230 00:15:09,000 --> 00:15:11,120 Speaker 1: If they do, they're going to follow the US rules. 231 00:15:11,200 --> 00:15:14,360 Speaker 1: I think that's a non item. Uh. And three oh 232 00:15:14,360 --> 00:15:18,240 Speaker 1: one tariffs are not going to help this. They are 233 00:15:18,880 --> 00:15:21,760 Speaker 1: a step back. They are a lose lose, not a 234 00:15:21,760 --> 00:15:25,200 Speaker 1: win lose or a lose win or a win win. 235 00:15:25,240 --> 00:15:29,600 Speaker 1: They are a lose lose lose loses the red both sides. 236 00:15:29,840 --> 00:15:32,440 Speaker 1: They're not forced to operate there though done. But the 237 00:15:32,440 --> 00:15:36,080 Speaker 1: problem arises when the barriers to entry for Chinese companies 238 00:15:36,080 --> 00:15:38,080 Speaker 1: in the United States are much lower than the barriers 239 00:15:38,120 --> 00:15:40,760 Speaker 1: to entry for the United States into China. And I 240 00:15:40,800 --> 00:15:42,720 Speaker 1: think it makes sense that we have an administration in 241 00:15:42,720 --> 00:15:45,040 Speaker 1: the United States that tries to level the playing field. 242 00:15:45,280 --> 00:15:48,160 Speaker 1: That makes sense. Surely, sure isn't that what they're trying 243 00:15:48,200 --> 00:15:50,560 Speaker 1: to do. I think that is what they are that 244 00:15:50,760 --> 00:15:54,320 Speaker 1: they're trying to do. We'll see how successful they are 245 00:15:54,400 --> 00:15:59,280 Speaker 1: at it. China is has a very different UH strategy 246 00:15:59,320 --> 00:16:03,560 Speaker 1: that state cap realism. Unlike ours, it has its pluses 247 00:16:03,560 --> 00:16:06,760 Speaker 1: and within this UH done stress, I mean, if you're 248 00:16:06,800 --> 00:16:11,320 Speaker 1: just joining us with a S. Donald Within this is 249 00:16:11,840 --> 00:16:14,600 Speaker 1: the labor arbitrage that Steve Roach has talked about it 250 00:16:14,680 --> 00:16:18,359 Speaker 1: years at Morgan Stanley and Yale, which is that marginal 251 00:16:18,520 --> 00:16:23,800 Speaker 1: labor dollar in China migrating to Vietnam, migrating to other 252 00:16:24,040 --> 00:16:28,040 Speaker 1: Asian geographies maybe Malaysia is one example. Give us an 253 00:16:28,160 --> 00:16:33,760 Speaker 1: update on how China competes in a more advanced labor wage. Well, 254 00:16:34,120 --> 00:16:38,800 Speaker 1: the uh this is exactly what is happening is but 255 00:16:38,960 --> 00:16:43,560 Speaker 1: this is not not new. Is the the medium scale 256 00:16:43,640 --> 00:16:48,720 Speaker 1: manufacturing jobs, the low scale manufacturing jobs are migrating, have 257 00:16:48,960 --> 00:16:52,560 Speaker 1: migrated to the lower wage economies that will continue on 258 00:16:52,640 --> 00:16:56,280 Speaker 1: from Vietnam to Africa and so forth. At the high end, 259 00:16:56,880 --> 00:17:00,720 Speaker 1: our my own view is our USK through twelve education 260 00:17:00,800 --> 00:17:04,480 Speaker 1: system is completely broken. China's is the best in the world. 261 00:17:04,760 --> 00:17:07,679 Speaker 1: And what China has more than anything else is human 262 00:17:07,760 --> 00:17:13,040 Speaker 1: capital that is of great value and importance. Alway goes 263 00:17:13,080 --> 00:17:15,119 Speaker 1: a minute a half lift, Have done stress, I might 264 00:17:15,160 --> 00:17:20,720 Speaker 1: want to talk about pollution. Can a totalitarian structure find 265 00:17:20,760 --> 00:17:26,119 Speaker 1: the incentives to diminish air and water pollution? Or is 266 00:17:26,160 --> 00:17:29,760 Speaker 1: that really want? An open capitalistic system is good at 267 00:17:30,720 --> 00:17:35,520 Speaker 1: um Either side can do that. China, I think does 268 00:17:35,560 --> 00:17:40,480 Speaker 1: not use the pricing UH tool well as they could 269 00:17:41,040 --> 00:17:46,679 Speaker 1: on environment the force tool. Can they force? Sure? They 270 00:17:46,720 --> 00:17:49,720 Speaker 1: can um uh And they are doing that. And I 271 00:17:49,760 --> 00:17:52,400 Speaker 1: will tell you that I think the most important economic 272 00:17:52,520 --> 00:17:56,159 Speaker 1: dynamic in China for the next twenty years is environmental 273 00:17:56,200 --> 00:17:59,840 Speaker 1: preservation and remediation. They know they have to clean it up. 274 00:17:59,840 --> 00:18:02,359 Speaker 1: They have to do that for their own self preservation. 275 00:18:02,440 --> 00:18:05,159 Speaker 1: Is the leadership at the margin? Is it finally getting 276 00:18:05,160 --> 00:18:10,400 Speaker 1: better air quality? In UH? Fifty cities in China? Biggest 277 00:18:10,440 --> 00:18:14,520 Speaker 1: ones are down air quality. The air quality index is 278 00:18:14,560 --> 00:18:19,400 Speaker 1: down from five years ago. It's still bad, but it's 279 00:18:19,520 --> 00:18:23,000 Speaker 1: much better than it was. We continue to improve. Don stress, 280 00:18:23,040 --> 00:18:25,200 Speaker 1: I'm thinking so much with the evercres I s I 281 00:18:25,320 --> 00:18:40,360 Speaker 1: on China, Gino Martin Adams, with them, We're gonna really 282 00:18:40,400 --> 00:18:44,600 Speaker 1: dig down here now into much more technical discussion of 283 00:18:44,640 --> 00:18:46,560 Speaker 1: the equity markets. We do this for the cf A 284 00:18:46,680 --> 00:18:51,040 Speaker 1: crew staggering late June UH and you know, see if 285 00:18:51,040 --> 00:18:54,080 Speaker 1: a one, two, three, four, five, six. Where in the 286 00:18:54,119 --> 00:18:57,960 Speaker 1: accounting statement is the dynamics that interest you the most 287 00:18:58,480 --> 00:19:01,240 Speaker 1: in American corporations. I think it's a really good question, 288 00:19:01,280 --> 00:19:03,520 Speaker 1: because what we've seen over the last several years is 289 00:19:03,560 --> 00:19:08,240 Speaker 1: actually a migration of investor attention up the income statement 290 00:19:08,840 --> 00:19:12,480 Speaker 1: toward the balance sheet. Right, so investors are actually paying 291 00:19:12,600 --> 00:19:17,280 Speaker 1: for sales beats and uh discouraging sales misses more so 292 00:19:17,320 --> 00:19:20,159 Speaker 1: than they're paying for earning speats and discouraging earnings misses 293 00:19:20,240 --> 00:19:24,000 Speaker 1: in stock price reactions. We also see over the longer term, 294 00:19:24,160 --> 00:19:28,960 Speaker 1: companies that are reporting consistent and robust sales growth. So 295 00:19:29,080 --> 00:19:32,439 Speaker 1: companies with five year average sales growth that exceeds the 296 00:19:32,480 --> 00:19:36,440 Speaker 1: market are outperforming companies with five year slower sales growth, 297 00:19:36,440 --> 00:19:38,760 Speaker 1: and we're not seeing that extreme distinction on the part 298 00:19:38,800 --> 00:19:41,280 Speaker 1: of earnings. You see it with cash flow as well, 299 00:19:41,320 --> 00:19:44,240 Speaker 1: So cash flow like sales towards the top the upper 300 00:19:44,400 --> 00:19:48,880 Speaker 1: end of the income statement, definitely providing performance. And then 301 00:19:48,960 --> 00:19:50,520 Speaker 1: I also think the other thing to talk about is 302 00:19:50,560 --> 00:19:52,360 Speaker 1: the balance sheet. When we've seen over the last year, 303 00:19:52,400 --> 00:19:56,240 Speaker 1: in particular, is investors paying up for companies with lower 304 00:19:56,280 --> 00:20:01,199 Speaker 1: debt or lower leverage ratios and certain punishing companies that 305 00:20:01,280 --> 00:20:03,720 Speaker 1: have utilized debt to a large degree, to the extent 306 00:20:03,800 --> 00:20:07,480 Speaker 1: that their debt to EBITDA is above average, and especially 307 00:20:07,600 --> 00:20:10,600 Speaker 1: the companies with debt to EBITDA ratios well above average 308 00:20:10,640 --> 00:20:14,040 Speaker 1: have actually underperformed substantially. From where you sit, the synthesis 309 00:20:14,080 --> 00:20:19,080 Speaker 1: of all Bloomberg intelligence, what is the dynamic if yields 310 00:20:19,400 --> 00:20:24,760 Speaker 1: lift to that debt burden. It's not linear, it's it 311 00:20:24,920 --> 00:20:27,720 Speaker 1: is anywhere near where it is an inertial force. It 312 00:20:27,800 --> 00:20:32,000 Speaker 1: really causes angst, not yet, because a lot of the 313 00:20:32,080 --> 00:20:35,040 Speaker 1: debt is actually secured at long term low interest rates 314 00:20:35,080 --> 00:20:38,520 Speaker 1: that do not reset. So that the positive aspect of 315 00:20:38,560 --> 00:20:42,639 Speaker 1: this exactly so, even though rates are going higher, the 316 00:20:42,720 --> 00:20:45,919 Speaker 1: companies are not experiencing a tremendous amount of pressure on 317 00:20:45,960 --> 00:20:49,199 Speaker 1: their current debt. They can certainly sustain payments on that 318 00:20:49,280 --> 00:20:53,159 Speaker 1: debt with earnings accelerating. The problem becomes later in the 319 00:20:53,200 --> 00:20:56,520 Speaker 1: cycle if rates reset higher on a more permanent basis, 320 00:20:56,520 --> 00:20:58,959 Speaker 1: say five years from now, when companies go back to 321 00:20:58,960 --> 00:21:01,800 Speaker 1: tap the debt market, they're going to have to pay 322 00:21:01,800 --> 00:21:04,280 Speaker 1: a lot more for new debt. They're gonna have to 323 00:21:04,320 --> 00:21:06,600 Speaker 1: pay a lot more for that maturing debt to refinance 324 00:21:06,680 --> 00:21:08,640 Speaker 1: the debt. The other thing that I think is really 325 00:21:08,680 --> 00:21:11,960 Speaker 1: interesting is in the tax package that was passed in December. 326 00:21:12,400 --> 00:21:16,640 Speaker 1: There's inherently a component of it that disincentivizes debt use. 327 00:21:17,200 --> 00:21:19,600 Speaker 1: Because companies have been able to write off their interest 328 00:21:19,640 --> 00:21:23,360 Speaker 1: expense UM when it comes to their tax bills for 329 00:21:23,400 --> 00:21:26,800 Speaker 1: several years now, there's been a tremendous incentive to utilize debt, 330 00:21:26,800 --> 00:21:30,439 Speaker 1: which explains partially at least why debt has grown as 331 00:21:30,560 --> 00:21:33,240 Speaker 1: much as it has. As part of the tax component 332 00:21:33,359 --> 00:21:35,320 Speaker 1: or a tax package, this year, they will only be 333 00:21:35,320 --> 00:21:40,320 Speaker 1: able to write off, of UM that interest expense to 334 00:21:40,359 --> 00:21:44,679 Speaker 1: the extent that that interest expenses percentage of underlying earnings, 335 00:21:44,720 --> 00:21:47,560 Speaker 1: and going forward that will be the percentage that they 336 00:21:47,560 --> 00:21:51,680 Speaker 1: can write off will become less and less over time. Yeah, 337 00:21:51,720 --> 00:21:54,719 Speaker 1: so we're starting to disincentivize debt, which you know depends 338 00:21:54,720 --> 00:21:57,920 Speaker 1: on if this tax reform becomes permanent. Right It's it's 339 00:21:57,960 --> 00:22:00,919 Speaker 1: there's a lot that can happen in the next several years. 340 00:22:00,920 --> 00:22:02,840 Speaker 1: But I think as rates rise, if we are going 341 00:22:02,880 --> 00:22:05,680 Speaker 1: to continue to disincentivize debt, that could very much change 342 00:22:05,720 --> 00:22:08,120 Speaker 1: the funding structure of companies as well. Something to look 343 00:22:08,119 --> 00:22:09,800 Speaker 1: out for in the longer term, where is the tax 344 00:22:09,840 --> 00:22:15,120 Speaker 1: dividend going the tax dividends, so that the extra cash, Yeah, 345 00:22:15,280 --> 00:22:18,360 Speaker 1: it's for the most part so far going towards capital 346 00:22:18,400 --> 00:22:22,000 Speaker 1: spending plans. Right, I wouldn't go so far as to 347 00:22:22,040 --> 00:22:24,560 Speaker 1: say that we've actually deployed a lot of that extra 348 00:22:24,640 --> 00:22:29,040 Speaker 1: cash or the savings from tax. Initially, companies suggested that 349 00:22:29,080 --> 00:22:31,080 Speaker 1: they were going to pay it out in the form 350 00:22:31,119 --> 00:22:35,720 Speaker 1: of wage increases, bonuses, one time bonuses to employees. And 351 00:22:35,760 --> 00:22:37,720 Speaker 1: through the course of the first quarter earning season, which 352 00:22:37,760 --> 00:22:40,840 Speaker 1: we just completed, what we found is companies starting to 353 00:22:40,880 --> 00:22:45,560 Speaker 1: announce capital spending plans. In Mass we saw the capital 354 00:22:45,600 --> 00:22:48,719 Speaker 1: spending the next twelve months. Capital spending growth is now 355 00:22:48,760 --> 00:22:51,520 Speaker 1: expected to accelerate eighteen percent, for example, and we've been 356 00:22:51,560 --> 00:22:53,640 Speaker 1: running at a pace below ten percent for the last 357 00:22:53,720 --> 00:22:57,520 Speaker 1: year or so. So there is an evolution of um 358 00:22:57,680 --> 00:23:00,920 Speaker 1: potential capex growth playing out through the earning stream. The 359 00:23:00,960 --> 00:23:04,520 Speaker 1: company announcements. There's a little bit of buyback growth, so 360 00:23:04,560 --> 00:23:06,760 Speaker 1: they are starting to deploy it back to shareholders, though 361 00:23:06,760 --> 00:23:09,520 Speaker 1: I'd say that it's pretty slow in coming and it's 362 00:23:09,640 --> 00:23:12,840 Speaker 1: very narrow, not that many companies are announcing it. Though 363 00:23:12,880 --> 00:23:16,680 Speaker 1: we are seeing buy back growth accelerate, and some companies, 364 00:23:16,680 --> 00:23:19,760 Speaker 1: such as energy companies for example, have really been ahead 365 00:23:19,800 --> 00:23:21,760 Speaker 1: of this. They've started to deploy capital in the form 366 00:23:21,840 --> 00:23:26,240 Speaker 1: of buybacks and dividends where they hadn't in past years. 367 00:23:26,359 --> 00:23:28,480 Speaker 1: So this sounds positive on the debt side because there 368 00:23:28,560 --> 00:23:30,600 Speaker 1: might be less issuance on the equity side because it 369 00:23:30,600 --> 00:23:32,800 Speaker 1: should lengthen the cycle. Um if we do get this 370 00:23:32,880 --> 00:23:35,679 Speaker 1: camp X story and supply side response when you have 371 00:23:35,800 --> 00:23:39,439 Speaker 1: a fragile story internationally in a m now increasingly so 372 00:23:39,920 --> 00:23:42,680 Speaker 1: in Europe too, do we see a buy America theme 373 00:23:42,800 --> 00:23:45,159 Speaker 1: come back into this market in a way that we 374 00:23:45,240 --> 00:23:48,560 Speaker 1: had things in say the back end early seven seen. 375 00:23:48,840 --> 00:23:51,159 Speaker 1: Oh it's interesting because we have actually seen that the 376 00:23:51,200 --> 00:23:54,399 Speaker 1: small cap stocks have outperformed tremendously. When we talk about 377 00:23:54,720 --> 00:23:56,680 Speaker 1: large cap stocks have sort of been stuck in this 378 00:23:56,880 --> 00:23:58,919 Speaker 1: malaise for the last two weeks, just stuck at their 379 00:23:58,960 --> 00:24:02,879 Speaker 1: Hunter day moving every ridge relatively volatile on recent news. 380 00:24:03,080 --> 00:24:07,520 Speaker 1: But small caps are making new highs. Microcap stocks are 381 00:24:07,520 --> 00:24:11,560 Speaker 1: making new highs. So the companies that are more domestically focused, 382 00:24:11,600 --> 00:24:14,600 Speaker 1: the companies that benefit when the dollar rallies that are 383 00:24:14,640 --> 00:24:18,720 Speaker 1: more sheltered from international risks are absolutely doing better. It's 384 00:24:18,800 --> 00:24:21,879 Speaker 1: that also going to mean a switch from from growth 385 00:24:21,920 --> 00:24:24,639 Speaker 1: to value as well, given that those growth names are 386 00:24:24,680 --> 00:24:28,679 Speaker 1: international by by definition on the spire, So normally it 387 00:24:28,760 --> 00:24:33,600 Speaker 1: would and it really intriguingly has not yet. So you 388 00:24:33,640 --> 00:24:36,400 Speaker 1: would think that the recovery and small caps, the recovery 389 00:24:36,480 --> 00:24:40,080 Speaker 1: and dollar focused companies, the recovery and the domestic names 390 00:24:40,440 --> 00:24:44,080 Speaker 1: would start to produce a shift in value stocks in 391 00:24:44,119 --> 00:24:46,520 Speaker 1: the SMP five hundred, and we have not seen that 392 00:24:46,560 --> 00:24:48,560 Speaker 1: in mass yet. As a matter of fact, that financials 393 00:24:48,560 --> 00:24:51,280 Speaker 1: in the SMP five have been one center of extraordinary 394 00:24:51,320 --> 00:24:55,560 Speaker 1: weakness in this environment. It's a it's a big conuntry 395 00:24:56,760 --> 00:24:59,199 Speaker 1: circle back to the income statement. Is that I mean 396 00:24:59,240 --> 00:25:02,840 Speaker 1: Charles Peabody is been brilliant on this portalent. Pebody was bullish, 397 00:25:02,840 --> 00:25:05,760 Speaker 1: bullersh look like a genius. He flips to more negative. 398 00:25:05,840 --> 00:25:07,760 Speaker 1: Now he looks like a genius. And is it because 399 00:25:07,800 --> 00:25:10,080 Speaker 1: of a real question or revenue shortfall? I think it 400 00:25:10,200 --> 00:25:12,320 Speaker 1: is for the top line companies, that's at least part 401 00:25:12,320 --> 00:25:14,639 Speaker 1: of it. But the financials and the small caps are 402 00:25:14,680 --> 00:25:17,919 Speaker 1: doing very well. So what I think is happening is 403 00:25:17,960 --> 00:25:20,680 Speaker 1: the small cap financials are doing well because they're perceived 404 00:25:20,680 --> 00:25:25,840 Speaker 1: to benefit from deregulation and wave. They're also still lending 405 00:25:26,000 --> 00:25:28,680 Speaker 1: and lending to lower credit quality borrowers where the large 406 00:25:28,720 --> 00:25:32,080 Speaker 1: camps have been extraordinarily conservative and they're exposed to more, 407 00:25:32,080 --> 00:25:34,640 Speaker 1: they're supposed to the international story, and they're not producing 408 00:25:34,680 --> 00:25:37,240 Speaker 1: that extraordinary top line. One minute left with all of 409 00:25:37,280 --> 00:25:40,280 Speaker 1: your experience at Wells fargoing now at Bloomberg is simply 410 00:25:40,840 --> 00:25:44,040 Speaker 1: what is the pixie dust of Amazon? Where they're valued 411 00:25:44,160 --> 00:25:49,040 Speaker 1: not on profits? Where did that come from? Well, I 412 00:25:49,080 --> 00:25:51,840 Speaker 1: think it comes from a desire for long term secular growth. 413 00:25:52,680 --> 00:25:57,040 Speaker 1: So there industry cap there, there is a belief that 414 00:25:57,200 --> 00:26:00,919 Speaker 1: a certain subset of companies are going to produce long 415 00:26:01,040 --> 00:26:04,760 Speaker 1: term secular growth prospects that don't exist elsewhere in the index, 416 00:26:04,840 --> 00:26:08,720 Speaker 1: elsewhere in the economy, and those companies are largely concentrated 417 00:26:08,840 --> 00:26:11,679 Speaker 1: in the Internet space is a big theme. Amazon is 418 00:26:11,680 --> 00:26:14,600 Speaker 1: one of them, Facebook is another. Twitter as another. Right, 419 00:26:14,640 --> 00:26:18,000 Speaker 1: So you've got this whole subset of companies that has 420 00:26:18,040 --> 00:26:23,160 Speaker 1: this investor following because of their long term outlook, which 421 00:26:23,200 --> 00:26:25,159 Speaker 1: doesn't exist in a lot of places. We've got to 422 00:26:25,160 --> 00:26:27,240 Speaker 1: have you back before the CFA exams. We're gonna do 423 00:26:27,320 --> 00:26:30,239 Speaker 1: five ratio DuPont and analysis of Gina Martin Adams here 424 00:26:30,280 --> 00:26:33,800 Speaker 1: in about ten days, you can I have to explain 425 00:26:33,840 --> 00:26:37,040 Speaker 1: what BTPs and you get to say that. I think 426 00:26:37,119 --> 00:26:40,159 Speaker 1: that's a good point. I think I think I've been 427 00:26:40,320 --> 00:26:45,439 Speaker 1: checked there. We call that shade. Yeah, that was like 428 00:26:45,359 --> 00:26:48,680 Speaker 1: the Big Chefs five ratio shade right there, Gina Martin 429 00:26:48,760 --> 00:26:51,840 Speaker 1: Adams ahead of all of equities. Boomberg Intelligence thrilled. Ever, 430 00:27:05,280 --> 00:27:08,160 Speaker 1: Deutsche Bank cannot find a bit. It's as simple as that. 431 00:27:08,720 --> 00:27:11,400 Speaker 1: Four days ago we're down a good ten percent, almost 432 00:27:11,400 --> 00:27:14,720 Speaker 1: eleven percent on a euro basis, we are a ten 433 00:27:14,800 --> 00:27:19,320 Speaker 1: and change down to about with the news the ft 434 00:27:19,520 --> 00:27:22,480 Speaker 1: article that we have. Deutsche Bank is a problem bank. 435 00:27:22,560 --> 00:27:26,320 Speaker 1: We've moved and we're now trying to find a bit 436 00:27:26,359 --> 00:27:32,959 Speaker 1: at nine on Deutsche Bank. Catherine Man with us right now. 437 00:27:32,960 --> 00:27:35,040 Speaker 1: We're going to continue with this discussion even as we 438 00:27:35,080 --> 00:27:38,720 Speaker 1: want to talk banking. Of course, doctor Man cannot speak 439 00:27:38,760 --> 00:27:42,679 Speaker 1: to us about UH financials and banks in particular. But 440 00:27:42,720 --> 00:27:44,879 Speaker 1: there's too much else to talk to Kathy Man about 441 00:27:45,600 --> 00:27:48,879 Speaker 1: at this moment um. I have to rip up the script, 442 00:27:49,040 --> 00:27:52,679 Speaker 1: doctor Man and go back to your iconic book. Is 443 00:27:52,720 --> 00:27:57,440 Speaker 1: the Trade deficit Sustainable? Mr? Trump, believes it is sustainable 444 00:27:58,119 --> 00:28:01,520 Speaker 1: in this moment where we may seem new in complex 445 00:28:01,600 --> 00:28:06,479 Speaker 1: tariffs across different nations. From the White House, if Donald 446 00:28:06,480 --> 00:28:11,600 Speaker 1: Trump was to read your classic, small book, easily digestible 447 00:28:11,640 --> 00:28:14,800 Speaker 1: and three plane trips, what would he learn? What does 448 00:28:14,840 --> 00:28:17,679 Speaker 1: he need to learn from your classic? Is a trade 449 00:28:17,720 --> 00:28:22,840 Speaker 1: deficit sustainable? So I think it needs to learn that. Um, 450 00:28:22,880 --> 00:28:25,680 Speaker 1: there are two sides of the trade deficit. One is, 451 00:28:25,720 --> 00:28:28,960 Speaker 1: of course the goods and services, but the other side 452 00:28:29,000 --> 00:28:31,520 Speaker 1: is capital flows. UM. And the two sides of the 453 00:28:31,520 --> 00:28:35,760 Speaker 1: same coin. And if you try to squeeze one side 454 00:28:35,800 --> 00:28:40,320 Speaker 1: through protectionist measures, you have to be concerned about what 455 00:28:40,520 --> 00:28:45,160 Speaker 1: signal that sends to financial markets about the welcoming nature 456 00:28:45,440 --> 00:28:49,960 Speaker 1: of business in the United States. Uh. So, I think 457 00:28:49,960 --> 00:28:54,200 Speaker 1: that that's the important ingredient, because you can't be protectionist 458 00:28:54,840 --> 00:28:58,400 Speaker 1: on the side of trade and at the same time 459 00:28:58,960 --> 00:29:02,760 Speaker 1: welcome international capital flows. So the surprise then could be 460 00:29:02,840 --> 00:29:08,120 Speaker 1: dollar dynamics. Is that where we observe his strategy. Let 461 00:29:08,160 --> 00:29:11,400 Speaker 1: you see it with a strong dollar that surprises all. Well, 462 00:29:11,440 --> 00:29:14,560 Speaker 1: I think that the strong dollar or the dollar dynamics 463 00:29:14,560 --> 00:29:17,160 Speaker 1: are are driven by a whole lot of things. UM. 464 00:29:17,160 --> 00:29:20,480 Speaker 1: Relatively stronger US economy, right now because of the degree 465 00:29:20,480 --> 00:29:24,920 Speaker 1: of fiscal stimulus, no question about that, particularly visa the Europe, 466 00:29:24,960 --> 00:29:29,040 Speaker 1: which is going through a number of issues. Uh. And 467 00:29:29,160 --> 00:29:33,520 Speaker 1: when we think about the consequences for protectionism, UH, you know, 468 00:29:33,840 --> 00:29:36,920 Speaker 1: there's a there's a lot of rhetoric out there that 469 00:29:37,200 --> 00:29:40,640 Speaker 1: UM is perhaps actually going to be backed up by 470 00:29:40,880 --> 00:29:43,880 Speaker 1: by changes in policy on the steel side, with the 471 00:29:43,880 --> 00:29:45,960 Speaker 1: new rhetoric on two three two with cars. You know, 472 00:29:46,000 --> 00:29:48,640 Speaker 1: you've got the issues with Iran UM and so all 473 00:29:48,680 --> 00:29:53,040 Speaker 1: of that is uh tempering the growth in Europe more 474 00:29:53,080 --> 00:29:54,960 Speaker 1: than it is helping the growth in the United States. 475 00:29:54,960 --> 00:29:57,160 Speaker 1: Doctor man, time for one more question before we go 476 00:29:57,200 --> 00:30:00,000 Speaker 1: to this important financial story away from your good word 477 00:30:00,000 --> 00:30:02,760 Speaker 1: a good city group and and and that is the 478 00:30:02,880 --> 00:30:07,800 Speaker 1: idea that maybe we've seen coordinated growth, combined growth ebbing. 479 00:30:08,240 --> 00:30:11,800 Speaker 1: Do you observe that across your global mandate. Well, we've 480 00:30:11,840 --> 00:30:14,320 Speaker 1: got it. We've got we've got the synchronized growth rate 481 00:30:14,320 --> 00:30:17,840 Speaker 1: of the last two years continuing for this year. Uh, 482 00:30:17,880 --> 00:30:20,960 Speaker 1: it could continue for next year. But there there are 483 00:30:21,360 --> 00:30:24,840 Speaker 1: cracks in that synchronicity. UM. And that you know is 484 00:30:25,240 --> 00:30:29,400 Speaker 1: coming from the trade rhetoric, and that possibly the trade war, 485 00:30:29,720 --> 00:30:33,400 Speaker 1: but it is also coming from um financial market turbulence 486 00:30:33,440 --> 00:30:36,840 Speaker 1: that is part of the normalization of monetary policy, and 487 00:30:36,880 --> 00:30:39,040 Speaker 1: that has you know, we have to have the normalization 488 00:30:39,040 --> 00:30:42,040 Speaker 1: of monetary policy. UH. It's been a very long time 489 00:30:42,080 --> 00:30:45,480 Speaker 1: with very money and so that financial market turbulence and 490 00:30:45,520 --> 00:30:48,320 Speaker 1: how it translates into the real economy is something that 491 00:30:48,400 --> 00:30:51,240 Speaker 1: is going to be differential acrost countries. Dr Man, thank 492 00:30:51,240 --> 00:30:53,280 Speaker 1: you so much, Katherine Man, and we're too rude with 493 00:30:53,320 --> 00:30:56,160 Speaker 1: her today ahead of all of global economics for City Group, 494 00:30:56,560 --> 00:30:59,000 Speaker 1: as we have to move on to breaking UH news. 495 00:30:59,040 --> 00:31:02,880 Speaker 1: In course Kathy Man and there mentions the idea of turbulence, 496 00:31:03,560 --> 00:31:05,960 Speaker 1: it is a good time to turn to Gerard Cassidy 497 00:31:06,000 --> 00:31:13,120 Speaker 1: with decades of banking analysis, experience, experience with OURBC capital markets. UH. 498 00:31:13,680 --> 00:31:17,280 Speaker 1: Jared Cassid, Jered Cassidy, wonderful to have you with us today. 499 00:31:17,720 --> 00:31:21,240 Speaker 1: What does it signal to Deutsche Bank that they have 500 00:31:21,320 --> 00:31:24,720 Speaker 1: become a problem bank? According to the U s f 501 00:31:24,840 --> 00:31:30,880 Speaker 1: D I C is, this company has struggled with the 502 00:31:30,920 --> 00:31:34,360 Speaker 1: sacraft process. As you know, that's the annual stress test 503 00:31:34,760 --> 00:31:36,920 Speaker 1: that the banks have to go through and they've not 504 00:31:37,000 --> 00:31:39,280 Speaker 1: been able to pass it for the last couple of years. 505 00:31:39,560 --> 00:31:42,520 Speaker 1: So it's no big surprise this news leaked out. Normally, 506 00:31:42,560 --> 00:31:45,880 Speaker 1: these ratings by the bank regulators. They are part of 507 00:31:45,880 --> 00:31:49,160 Speaker 1: the rating system called CAMEL, which is an acronym and 508 00:31:49,200 --> 00:31:51,920 Speaker 1: it's one trough five. If you're a four or five, 509 00:31:52,000 --> 00:31:54,680 Speaker 1: you're a troubled bank, which is apparently what came out 510 00:31:54,720 --> 00:31:57,160 Speaker 1: this morning, as you pointed out, with Deutsche Bank. So 511 00:31:57,280 --> 00:31:59,920 Speaker 1: it means that this heavy lifting still to be done 512 00:32:00,240 --> 00:32:03,320 Speaker 1: so that they get their internal house in order here 513 00:32:03,400 --> 00:32:07,280 Speaker 1: in the United States, Jered, what does this mean to 514 00:32:07,360 --> 00:32:10,240 Speaker 1: a bank to see the decline and shares? We have 515 00:32:10,280 --> 00:32:14,320 Speaker 1: a ten percent decline off of the pre italy moment, 516 00:32:14,400 --> 00:32:17,000 Speaker 1: there's a fact where the stock price is a stock price. 517 00:32:17,520 --> 00:32:21,400 Speaker 1: Do institutions, including the boards of directors of a given bank, 518 00:32:22,200 --> 00:32:25,200 Speaker 1: do they care when they see a stock drop like this, 519 00:32:25,280 --> 00:32:29,880 Speaker 1: and particularly drop into the single digit area, Tom, I 520 00:32:29,920 --> 00:32:32,000 Speaker 1: think they do. I mean they have to take notice 521 00:32:32,160 --> 00:32:36,040 Speaker 1: of any big stock price the clients, and so we've 522 00:32:36,080 --> 00:32:38,880 Speaker 1: seen deutger has struggled as you and I have noticed 523 00:32:39,520 --> 00:32:42,520 Speaker 1: all the last many years, and this is just another 524 00:32:42,920 --> 00:32:45,960 Speaker 1: challenge that they have to confront. And so the steep 525 00:32:46,000 --> 00:32:48,960 Speaker 1: price decline, of course is troublesome. It's something that they 526 00:32:49,000 --> 00:32:52,040 Speaker 1: have to address um possibly come out with the public 527 00:32:52,080 --> 00:32:55,520 Speaker 1: statements to address it. So what's so important here? And 528 00:32:55,560 --> 00:32:57,760 Speaker 1: I guess it goes back to the memories of another 529 00:32:57,800 --> 00:33:01,200 Speaker 1: time and place not to be inflammatory, which is all 530 00:33:01,240 --> 00:33:04,479 Speaker 1: slams in Gerard Cassidy to the short term paper market, 531 00:33:05,040 --> 00:33:08,160 Speaker 1: pim Fox likes to talk about counter party risk and 532 00:33:08,240 --> 00:33:12,040 Speaker 1: other ideas. Maybe it's commercial paper, short term paper. Come on, Jerry, 533 00:33:12,080 --> 00:33:15,160 Speaker 1: it's all about trust. Where's the trust now on the 534 00:33:15,160 --> 00:33:18,719 Speaker 1: desk of Deutsche Bank. No, No, you're right. There's certainly 535 00:33:18,760 --> 00:33:22,840 Speaker 1: a confidence factor that you have to address. Certainly, this company, 536 00:33:23,240 --> 00:33:26,840 Speaker 1: you know, consolidated, is well capitalized. This is nothing like 537 00:33:26,920 --> 00:33:29,479 Speaker 1: what we saw. Yeah, but that's a distinction, Gerard Cassy, 538 00:33:29,560 --> 00:33:33,560 Speaker 1: This is important. This is a distinction between liquidity and solvency. 539 00:33:34,080 --> 00:33:37,720 Speaker 1: Discuss that, please, what's the difference for our audience between 540 00:33:37,720 --> 00:33:42,520 Speaker 1: a given major banks liquidity and their solvency? No time, 541 00:33:42,560 --> 00:33:45,400 Speaker 1: You're absolutely right. In fact, you know, the liquidity problem 542 00:33:45,480 --> 00:33:48,920 Speaker 1: was why they eventually put UM meaning Brothers into the 543 00:33:49,040 --> 00:33:52,240 Speaker 1: position and they ended up failing. But because of what 544 00:33:52,280 --> 00:33:54,800 Speaker 1: we saw No. Seven oh eight, Deutscher and all the 545 00:33:54,920 --> 00:33:58,680 Speaker 1: global banks have addressed the amount of liquidity they need 546 00:33:58,720 --> 00:34:02,160 Speaker 1: to carry because of the new BOSSAL requirements. So all 547 00:34:02,280 --> 00:34:04,840 Speaker 1: of our banks, even banks that are considered to be troubled, 548 00:34:04,920 --> 00:34:08,400 Speaker 1: and with this troubling too, with what came out, it's 549 00:34:08,440 --> 00:34:12,520 Speaker 1: in my view it looks like it's more the internal um, 550 00:34:12,640 --> 00:34:16,440 Speaker 1: internal systems and the internal reporting have to be really improved. 551 00:34:16,640 --> 00:34:19,640 Speaker 1: It's not in measure of not having liquidity or capital 552 00:34:19,840 --> 00:34:23,120 Speaker 1: that I'm not. There's not really the issue. So there's 553 00:34:23,120 --> 00:34:26,280 Speaker 1: plenty of aquidity here for any you know, for Douga 554 00:34:26,320 --> 00:34:28,719 Speaker 1: Bank and again all our global banks because of what 555 00:34:28,840 --> 00:34:31,680 Speaker 1: the regular is they've done past two thousand and eight 556 00:34:31,680 --> 00:34:33,640 Speaker 1: and two thousand and nine. But then they go back 557 00:34:33,680 --> 00:34:35,920 Speaker 1: to the stock price. If you're just joining us folks worldwide, 558 00:34:35,920 --> 00:34:38,720 Speaker 1: we're wanted to bring a Gerard Cassidy RBC Capital Markets 559 00:34:39,200 --> 00:34:43,200 Speaker 1: for a few more minutes, pre Italy ten point five 560 00:34:43,280 --> 00:34:46,319 Speaker 1: zero euros and we're now down to nine point four 561 00:34:46,440 --> 00:34:49,279 Speaker 1: four euros. We found a modest bid here to be 562 00:34:49,360 --> 00:34:53,520 Speaker 1: retested in the coming excuse me, in the coming uh minutes, 563 00:34:53,560 --> 00:34:55,960 Speaker 1: Gerard Cassidy, I want to go back to the stock price. 564 00:34:56,280 --> 00:35:00,200 Speaker 1: Who's selling is this hedge funds? Is this speculators? Is 565 00:35:00,239 --> 00:35:04,520 Speaker 1: this long only by side institutional clients who are either 566 00:35:04,680 --> 00:35:09,160 Speaker 1: selling or they're being told by their general counsel to sell. Yes, 567 00:35:09,719 --> 00:35:13,360 Speaker 1: it's tough to determine who the sellers are. Certainly it 568 00:35:13,520 --> 00:35:17,960 Speaker 1: is we've seen, um the active traders, the hedge fund 569 00:35:18,200 --> 00:35:21,239 Speaker 1: traders certainly will move very quickly on news like that. 570 00:35:21,960 --> 00:35:25,120 Speaker 1: But again it's hard to really determine, you know, unless 571 00:35:25,120 --> 00:35:28,520 Speaker 1: there's huge blocks going across and and the trading desks 572 00:35:28,560 --> 00:35:30,400 Speaker 1: tell us you know that it was a long only, 573 00:35:30,600 --> 00:35:33,040 Speaker 1: so it's really hard to determine who's telling. But again, 574 00:35:33,719 --> 00:35:36,560 Speaker 1: as you know that this company is struggling with many issues, 575 00:35:36,640 --> 00:35:39,480 Speaker 1: this is just more of the more recent ones, obviously 576 00:35:39,560 --> 00:35:42,480 Speaker 1: this morning, but they are still wrestling with how do 577 00:35:42,560 --> 00:35:46,000 Speaker 1: they downsize their capital markets business and in the number 578 00:35:46,000 --> 00:35:49,320 Speaker 1: of employ years let go that is also reading on 579 00:35:49,440 --> 00:35:51,880 Speaker 1: this story. Very valuable to direct cast Andy, Thank you 580 00:35:51,920 --> 00:36:00,319 Speaker 1: so much with OURBC Capital Markets on short notice here. Yeah, 581 00:36:03,120 --> 00:36:07,319 Speaker 1: thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 582 00:36:07,360 --> 00:36:12,719 Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast 583 00:36:12,760 --> 00:36:17,000 Speaker 1: platform you prefer. I'm on Twitter at Tom Keene. Before 584 00:36:17,000 --> 00:36:20,840 Speaker 1: the podcast, you can always catch us worldwide. I'm Bloomberg 585 00:36:20,960 --> 00:36:21,240 Speaker 1: Radio