WEBVTT - Euro Isn't a Well-Designed System, Zingales Says 0:00:06.320 --> 0:00:13.040 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jay Leye. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:34.479 Bloomberg dot Com, and of course, on the Bloomberg. Yeah. So, 0:00:34.640 --> 0:00:37.519 days after the anti establishment five Star Movement and the 0:00:37.560 --> 0:00:40.480 anti immigrant League walked away from a bid to form 0:00:40.520 --> 0:00:44.280 a coalition Italian government, according to a senior state official, 0:00:44.600 --> 0:00:47.000 the president of Italy wants to find out whether they're 0:00:47.040 --> 0:00:49.680 ready to revive it. Joining us now, I'm ready pleased 0:00:49.680 --> 0:00:53.320 to say is Luigis and Galas Chicago, both school finance professor, 0:00:53.680 --> 0:00:56.120 and he joined us on the phone, Professors and Galas. 0:00:56.120 --> 0:00:59.600 It was started by a president who gave legitimacy to 0:00:59.640 --> 0:01:01.720 an I here that wasn't clearly on the agenda at 0:01:01.720 --> 0:01:06.640 the time. It's a curious event that's taking place in Italy. Luigi, yes, 0:01:06.760 --> 0:01:09.480 it is. I think that I agree with you. That 0:01:10.240 --> 0:01:13.440 was the president that spook the market more than the populace. 0:01:13.560 --> 0:01:17.320 That the fact that he raised the issue of you 0:01:17.440 --> 0:01:21.360 will exit and made us think out of not appointed. 0:01:21.480 --> 0:01:26.520 Somebody has announcements to really created a lot of uncertainty. 0:01:27.200 --> 0:01:28.959 I don't know what is going to have to really, 0:01:29.000 --> 0:01:31.480 the situation is very much in flux now. So, Professor, 0:01:31.520 --> 0:01:34.080 the key question I think for markets that everyone should 0:01:34.120 --> 0:01:36.319 be looking out for is whether we get a new 0:01:36.319 --> 0:01:39.600 election one and two, what kind of platform did these 0:01:39.640 --> 0:01:42.000 two parties run on in that election? Is it clear 0:01:42.040 --> 0:01:44.120 to you, Luigi, that if we had another election in 0:01:44.160 --> 0:01:47.160 Italy that those two parties would run on a platform 0:01:47.280 --> 0:01:51.760 to leave the Eurozone. No, I don't think that they 0:01:51.760 --> 0:01:54.240 will run on that platform. I think would be suicidal 0:01:54.320 --> 0:01:59.280 honestly to a campaign on that front, because people were 0:01:59.320 --> 0:02:02.120 started running to get their money out of the bank 0:02:02.480 --> 0:02:07.120 as the ballots accounted. So I don't think they will 0:02:07.160 --> 0:02:10.239 do it. I think that the the Democratic Party will 0:02:10.280 --> 0:02:13.800 try to train them to run a campaign the direction, 0:02:13.880 --> 0:02:16.480 because it is in his interest to do that. But 0:02:17.120 --> 0:02:19.640 I don't think this will happen. So for anyone worrying, 0:02:19.680 --> 0:02:22.600 Professor about an existential crisis in Europe, once again, what's 0:02:22.639 --> 0:02:26.560 your message to them at this point? So? I think 0:02:26.600 --> 0:02:29.679 that we're always in theistential crisis. I think that the 0:02:29.960 --> 0:02:36.160 problems of Italy indicate that the you is not a 0:02:37.280 --> 0:02:41.640 well designed system. And I think that everybody knows it, 0:02:42.440 --> 0:02:44.040 but nobody has the card to say. It is a 0:02:44.040 --> 0:02:47.720 bit like the Emperor's no close and we need to 0:02:47.760 --> 0:02:50.920 fix it. The question is is their willingness to fix it? 0:02:51.360 --> 0:02:54.200 And if they is not willing to fix it? Uh 0:02:54.919 --> 0:02:58.920 was stun who used to say, is something is not sustainable, 0:02:59.120 --> 0:03:02.360 eventually will not su state And I'm stating the obvious. 0:03:02.440 --> 0:03:05.639 But eventually we're obviously state. Whether it is because of 0:03:05.680 --> 0:03:08.160 the fight that movement, or because of this or because 0:03:08.200 --> 0:03:12.520 of that, that's that's sort of accident. The substance is 0:03:12.880 --> 0:03:15.880 we need to fix it, right, Luigi, wonderful to have 0:03:15.919 --> 0:03:18.280 you on in this time of turmoil in Italy. And 0:03:18.320 --> 0:03:20.400 it ar cons back to what was the book of 0:03:20.400 --> 0:03:22.720 the summer for me. I recall a number of years ago, 0:03:23.200 --> 0:03:28.720 your wonderful book on American capitalism. Describe European capitalism right now? 0:03:29.280 --> 0:03:34.520 Help our European listeners with what capitalism is in Europe. 0:03:34.560 --> 0:03:40.880 I really can't figure out a good definition. Actually is 0:03:41.000 --> 0:03:44.600 very different across countries, and I would say that it 0:03:44.760 --> 0:03:47.560 is one in this moment. One advantage of the U 0:03:47.960 --> 0:03:51.920 over the United States is that they seem to enforce 0:03:52.040 --> 0:03:56.320 the rule of competition better than the United States. The 0:03:56.360 --> 0:04:02.600 anti trust is more aggressive and is less easy to 0:04:02.640 --> 0:04:07.400 buy out the legislator. At the European level, I think 0:04:07.440 --> 0:04:12.480 it's just a transitional phase and eventually things will converge 0:04:12.600 --> 0:04:14.600 in the war state. But at the moment, I think 0:04:14.600 --> 0:04:19.840 this is in advantage with the United States. I mean 0:04:19.880 --> 0:04:22.840 with within it is. I guess where GDP is in 0:04:22.920 --> 0:04:25.520 the whole disappointment here has been where GDP has been 0:04:25.560 --> 0:04:28.320 in the United States for X number of years, and 0:04:28.360 --> 0:04:31.360 for Europe and and all that as well. A little 0:04:31.360 --> 0:04:35.840 bit of inflation today reported in Europe. Are you optimistic 0:04:35.920 --> 0:04:42.960 that we will see a power like inflation lift in America? 0:04:43.720 --> 0:04:46.680 I think that my reading of the data is that 0:04:47.120 --> 0:04:49.960 the lack of inflation is due to the lack of 0:04:50.440 --> 0:04:56.200 increasing wages. And ironically, maybe we've gone too much the 0:04:56.240 --> 0:05:01.039 other ways. There was a huge pressure to reduced wage, 0:05:01.080 --> 0:05:03.080 reduced the power of label. We do s this will 0:05:03.120 --> 0:05:06.640 use that eventually, maybe we over shot and and we 0:05:06.680 --> 0:05:10.200 need to give a little bit more of arguing power 0:05:10.279 --> 0:05:14.040 to h to label so that wages will go up. 0:05:14.120 --> 0:05:16.160 And when wage you will go up in station, we 0:05:16.200 --> 0:05:18.479 go up as well. The professor, Before we lose you. 0:05:18.520 --> 0:05:19.920 I think what's already stood out to a lot of 0:05:19.960 --> 0:05:24.640 market participants this week is how quickly liquidity evaporated in 0:05:24.720 --> 0:05:28.120 some of the world's largest markets, which we would expect 0:05:28.120 --> 0:05:30.120 to have liquidity at times of stress, and it just 0:05:30.240 --> 0:05:33.040 was not there. The Italian bond market is one of 0:05:33.080 --> 0:05:35.760 the largest bond markets on the planet, and what clearly 0:05:35.800 --> 0:05:39.040 happened this week was a move sparked by politics, but 0:05:39.160 --> 0:05:44.000 amplified by the complete evaporation of liquidity. How concerning is 0:05:44.040 --> 0:05:45.880 that for you, professor, and what's the lesson that we 0:05:45.920 --> 0:05:50.400 can learn from this week? It is definitely concerning. It 0:05:50.480 --> 0:05:54.160 reminds me of the temper tantrum that took place a 0:05:54.200 --> 0:05:56.440 few years back, when the night just started to announce 0:05:56.520 --> 0:06:01.120 that you will start increasing rage. I think that what happened, 0:06:01.120 --> 0:06:03.240 in my view, is that a lot of people were 0:06:03.320 --> 0:06:08.000 long on Italian bombs, not because they believed in Italy, 0:06:08.240 --> 0:06:13.120 just because was the highest security around and as a result, 0:06:13.200 --> 0:06:16.120 we're ready to rush to the door for the first 0:06:16.520 --> 0:06:18.720 at the first sign of problems. So I think that 0:06:19.120 --> 0:06:21.640 we have seen the effects of this reaching for il 0:06:22.520 --> 0:06:25.360 which is as we know, tend to be the stabilizing 0:06:25.960 --> 0:06:28.960 and I think to some extent this book has been 0:06:29.040 --> 0:06:32.760 useful because as all people, that is not a one 0:06:32.760 --> 0:06:35.000 way back and they can actually lose money, and so 0:06:35.279 --> 0:06:37.120 I'm sure that they're going to be more careful in 0:06:37.160 --> 0:06:40.800 the future. Luigi, one final question, if we could have 0:06:40.920 --> 0:06:43.360 you made plans to attend the World Cup this summer? 0:06:44.520 --> 0:06:49.400 One World Cup this year? Don't you know that, professor? Professor, 0:06:49.400 --> 0:06:51.279 there is a more important question for you. Would you 0:06:51.279 --> 0:06:54.120 accept the positioners finance minister in Italy? It was that 0:06:54.160 --> 0:06:58.400 would be a more important question. Nobody has offered it 0:06:58.480 --> 0:07:00.719 to be, so you can give me a shoa that 0:07:00.800 --> 0:07:03.839 I would be watching their the world happen well. But 0:07:03.920 --> 0:07:08.840 within this Luigi to Mr Farrow's important question, Carlo Cardarelli 0:07:08.960 --> 0:07:12.480 has been a wonderful and sustained guest on Bloomberg Surveillance 0:07:12.480 --> 0:07:15.800 over the years with his fiscal work and original work 0:07:15.800 --> 0:07:20.240 at the International Monetary Fund. To see Mr Cardarelli and 0:07:20.400 --> 0:07:25.080 Zingalis in tandem in Italy, would I would suggest lift 0:07:25.160 --> 0:07:30.200 the spirit of markets? Is that politically feasible in your 0:07:30.320 --> 0:07:36.320 Italy to have academics associated with this phrase technocrats really 0:07:36.400 --> 0:07:41.640 run the show? Is that feasible? So first of all, 0:07:41.840 --> 0:07:45.760 I don't think that being on Bloomberg is necessarily the 0:07:45.880 --> 0:07:54.600 stat to go to become minister. That's Joli, a prerequisite, Luigi, you, 0:07:54.960 --> 0:08:00.240 I'm sure, but the reality is actively I respect uh 0:08:00.600 --> 0:08:05.680 calibery badge. We have different views on many things, so 0:08:05.800 --> 0:08:08.560 I don't think that all technicals think to stay the same. 0:08:09.120 --> 0:08:13.000 And I think that it is important in my view 0:08:13.400 --> 0:08:18.280 to feel the pain that is around in Italy. And 0:08:18.680 --> 0:08:24.040 I think people underestimate how devastated the country is. Twenty 0:08:24.160 --> 0:08:29.960 years of no growth in a cap almost fifty of 0:08:30.120 --> 0:08:33.719 youth and employment. I think that this is that this 0:08:33.920 --> 0:08:37.520 is a country that has lost hope and forget the 0:08:37.559 --> 0:08:40.000 World Cup. I think that people are not even dataset 0:08:40.080 --> 0:08:44.080 about that because there are much bigger problems around. And 0:08:44.120 --> 0:08:48.400 I think that whether you're a technocrat or not, I 0:08:48.440 --> 0:08:53.560 think that what people want is somebody ruling them that 0:08:53.679 --> 0:08:56.840 feel that pain. Professor sing Goes, thank you so much 0:08:56.880 --> 0:09:01.160 for those important comments, particularly on your Italy. We greatly 0:09:01.240 --> 0:09:04.199 appreciate his attendance. He is Uh, of course with the 0:09:04.200 --> 0:09:07.760 Booth School, University of Chicago as well. Luigi as in, 0:09:22.280 --> 0:09:25.080 this is without question our interview of the day and 0:09:25.280 --> 0:09:29.320 is without question timely as we may see further tariffs 0:09:29.320 --> 0:09:33.640 today from the White House. Donald stras, I'm essentially invented 0:09:33.760 --> 0:09:37.960 China market economics, darkening the door of Mary lynch warton 0:09:38.000 --> 0:09:41.199 economics and others over the years, including the Milk and Institute. 0:09:42.240 --> 0:09:44.760 He is with Mr Hyman over at Evercore I s 0:09:44.800 --> 0:09:49.679 I and continues a true focus on China. Who was 0:09:49.720 --> 0:09:53.080 the first premier or president of China that you dealt 0:09:53.120 --> 0:09:56.880 with professionally? You don't go back to mount right. No, 0:09:57.360 --> 0:10:03.360 John Zaman, who was uh in the nineties. Uh, he was. 0:10:03.760 --> 0:10:15.440 He was a smart guy, UM focused um any consensus builder. 0:10:15.800 --> 0:10:20.559 Now we are back to Chairman Mao days. Uh political 0:10:20.600 --> 0:10:25.360 strong man rule under Jin Ping. Uh. It's not uh, 0:10:25.400 --> 0:10:28.520 not my idea of a good time. Can you explain 0:10:28.800 --> 0:10:34.600 to me how Mr g reacts to the bipolar advice 0:10:34.760 --> 0:10:39.000 that Mr Trump is getting, maybe personified by one view 0:10:39.000 --> 0:10:43.839 of free trader Lawrence Cudlow and another by Navarro singularly 0:10:43.880 --> 0:10:50.120 saying China is not evil but unfair in their trade. Uh. 0:10:50.320 --> 0:10:55.600 He listens uh politely. He and his team Uh Wangchi 0:10:55.679 --> 0:10:59.199 Shan who's a vice president, and Liu Hu who was 0:10:59.240 --> 0:11:01.720 a guy at DAVA and is in charge of the 0:11:01.800 --> 0:11:05.960 U S. John economic and financial relationship. Um, they listen politely, 0:11:06.800 --> 0:11:09.760 but they don't react to tweets. They don't react to 0:11:09.960 --> 0:11:15.760 speeches too, reports. They react to actions. So wait until 0:11:15.960 --> 0:11:20.280 you see Washington do something. Then you react, but not before, don't. 0:11:20.280 --> 0:11:22.240 I read this term in the last twenty four hours, 0:11:22.240 --> 0:11:23.480 and I think it was in the Li Times. It 0:11:23.600 --> 0:11:27.080 was microwave diplomacy. I think it's a fantastic term. Microwave 0:11:27.120 --> 0:11:32.199 diplomacy short quick. You know, we used to diplomacy happening 0:11:32.200 --> 0:11:35.440 over time, over years of a decade, with with goals 0:11:35.480 --> 0:11:38.800 of a long time horizons. This is very fast high heat. 0:11:39.720 --> 0:11:43.720 Does microwave diplomacy worked on I doubt it. I mean 0:11:43.800 --> 0:11:47.000 I I heat up my uh my cold coffee and 0:11:47.080 --> 0:11:49.800 a microwave now, and I guess twenty years ago, if 0:11:49.800 --> 0:11:51.880 I did it in a regular avenue would have taken 0:11:51.920 --> 0:11:56.959 a lot longer. I suppose it still works. Okay, but uh, 0:11:57.120 --> 0:12:00.520 I think, uh China, it looks at washing and I think, 0:12:00.520 --> 0:12:05.000 and they see, um, they don't see policy, they see results. 0:12:05.360 --> 0:12:09.120 They see flip flop. They don't know what way to move, 0:12:09.160 --> 0:12:12.920 and so accordingly they were wait until Washington does something 0:12:12.960 --> 0:12:15.080 and then they react. Is it good? To keep China 0:12:15.120 --> 0:12:16.559 on the back foot, and he's China on the back 0:12:16.559 --> 0:12:18.800 foot right now. I don't think China is on the 0:12:18.840 --> 0:12:24.680 back foot right now. Uh. Some people have said that Washington. 0:12:25.559 --> 0:12:29.600 I've said that China. See is Washington is unreliable and 0:12:29.880 --> 0:12:35.960 uh unpredictable, and I think it means unreliable and untrustworthy. Uh. 0:12:36.040 --> 0:12:40.319 This last week, Um, we said we the US said 0:12:40.440 --> 0:12:44.240 we're go. We will impose the fifty billion dollars worth 0:12:44.280 --> 0:12:47.400 of tariffs. Will not. Maybe that's drawing a line in 0:12:47.400 --> 0:12:51.400 the sand and maybe being unpredictable as a point guard 0:12:52.000 --> 0:12:55.520 is okay to go either way, but not in international relationships. 0:12:55.120 --> 0:12:57.800 Done the difference here? And John, I just I just 0:12:57.840 --> 0:13:00.120 did this in real time, Folks. When I say go 0:13:00.200 --> 0:13:02.400 to China, it's a bunch of Bologney. I get on 0:13:02.440 --> 0:13:04.840 a plane, I get in a car and go to 0:13:04.920 --> 0:13:08.480 some fancy hotel. I'm within a football field of the hotel, 0:13:09.080 --> 0:13:11.559 a soccer field, John, and then I get back in 0:13:11.600 --> 0:13:14.200 the fancy car and come home. This time I actually 0:13:14.200 --> 0:13:16.120 went into China, but I didn't go to cheng Do. 0:13:16.920 --> 0:13:21.240 How is all this playing across all of industrial China, 0:13:21.400 --> 0:13:23.760 not in Beijing, not in Shanghai not in a long 0:13:23.840 --> 0:13:28.360 called how's it playing every place else? Well, companies throughout 0:13:28.480 --> 0:13:32.200 China who are involved in international trade and and all 0:13:32.280 --> 0:13:37.679 are in one way or another UM are perplexed. They 0:13:37.679 --> 0:13:40.280 don't know what to do. Uh, there's this great deal 0:13:40.280 --> 0:13:43.000 of uncertainty because their biggest trading partner in the world 0:13:43.840 --> 0:13:50.120 is on an an uncertain path. Uh. So what do 0:13:50.160 --> 0:13:53.400 you do when you're uncertain? You run in place. You 0:13:53.440 --> 0:13:58.440 don't make long term commitments because you don't know whether 0:13:58.840 --> 0:14:01.120 the step that you take is going to ultimately be 0:14:01.160 --> 0:14:05.160 a step forward or back within This is the American feeling. 0:14:05.160 --> 0:14:07.560 A lot of our listeners are saying, right, John, you've 0:14:07.559 --> 0:14:11.040 been I give John for a huge credit for articulating 0:14:11.040 --> 0:14:15.160 the frustration over there taking of our technology. Liz Economy 0:14:15.200 --> 0:14:19.320 really features us in her book The Third Revolution of 0:14:19.360 --> 0:14:23.480 how they're appropriating our technology? How do you respond to that? 0:14:23.560 --> 0:14:26.680 Are they? Are they bad guys that we can't play 0:14:26.760 --> 0:14:30.360 there unless we give them patent and copyright. I think 0:14:30.600 --> 0:14:36.320 China has been a serial um uh intellectual property, a thief, 0:14:36.840 --> 0:14:38.880 probably the biggest in the world, the best in the 0:14:38.880 --> 0:14:42.760 world for a long time. I don't think that's likely 0:14:42.880 --> 0:14:47.480 to change. Excuse me, we're it can be a hat 0:14:47.520 --> 0:14:50.800 trick off. Okay, there you go. Uh, that's not gonna 0:14:50.880 --> 0:14:54.280 change in any material way. I think the forced technology 0:14:54.320 --> 0:14:58.880 transfer as a completely non Uh, that's a non item. 0:14:58.880 --> 0:15:02.720 No company is worse to operate in China, but if 0:15:02.760 --> 0:15:06.080 they do, they have to follow China's rules. No companies, 0:15:06.280 --> 0:15:08.760 Chinese companies are not forced to operate in the US. 0:15:09.000 --> 0:15:11.120 If they do, they're going to follow the US rules. 0:15:11.200 --> 0:15:14.360 I think that's a non item. Uh. And three oh 0:15:14.360 --> 0:15:18.240 one tariffs are not going to help this. They are 0:15:18.880 --> 0:15:21.760 a step back. They are a lose lose, not a 0:15:21.760 --> 0:15:25.200 win lose or a lose win or a win win. 0:15:25.240 --> 0:15:29.600 They are a lose lose lose loses the red both sides. 0:15:29.840 --> 0:15:32.440 They're not forced to operate there though done. But the 0:15:32.440 --> 0:15:36.080 problem arises when the barriers to entry for Chinese companies 0:15:36.080 --> 0:15:38.080 in the United States are much lower than the barriers 0:15:38.120 --> 0:15:40.760 to entry for the United States into China. And I 0:15:40.800 --> 0:15:42.720 think it makes sense that we have an administration in 0:15:42.720 --> 0:15:45.040 the United States that tries to level the playing field. 0:15:45.280 --> 0:15:48.160 That makes sense. Surely, sure isn't that what they're trying 0:15:48.200 --> 0:15:50.560 to do. I think that is what they are that 0:15:50.760 --> 0:15:54.320 they're trying to do. We'll see how successful they are 0:15:54.400 --> 0:15:59.280 at it. China is has a very different UH strategy 0:15:59.320 --> 0:16:03.560 that state cap realism. Unlike ours, it has its pluses 0:16:03.560 --> 0:16:06.760 and within this UH done stress, I mean, if you're 0:16:06.800 --> 0:16:11.320 just joining us with a S. Donald Within this is 0:16:11.840 --> 0:16:14.600 the labor arbitrage that Steve Roach has talked about it 0:16:14.680 --> 0:16:18.359 years at Morgan Stanley and Yale, which is that marginal 0:16:18.520 --> 0:16:23.800 labor dollar in China migrating to Vietnam, migrating to other 0:16:24.040 --> 0:16:28.040 Asian geographies maybe Malaysia is one example. Give us an 0:16:28.160 --> 0:16:33.760 update on how China competes in a more advanced labor wage. Well, 0:16:34.120 --> 0:16:38.800 the uh this is exactly what is happening is but 0:16:38.960 --> 0:16:43.560 this is not not new. Is the the medium scale 0:16:43.640 --> 0:16:48.720 manufacturing jobs, the low scale manufacturing jobs are migrating, have 0:16:48.960 --> 0:16:52.560 migrated to the lower wage economies that will continue on 0:16:52.640 --> 0:16:56.280 from Vietnam to Africa and so forth. At the high end, 0:16:56.880 --> 0:17:00.720 our my own view is our USK through twelve education 0:17:00.800 --> 0:17:04.480 system is completely broken. China's is the best in the world. 0:17:04.760 --> 0:17:07.679 And what China has more than anything else is human 0:17:07.760 --> 0:17:13.040 capital that is of great value and importance. Alway goes 0:17:13.080 --> 0:17:15.119 a minute a half lift, Have done stress, I might 0:17:15.160 --> 0:17:20.720 want to talk about pollution. Can a totalitarian structure find 0:17:20.760 --> 0:17:26.119 the incentives to diminish air and water pollution? Or is 0:17:26.160 --> 0:17:29.760 that really want? An open capitalistic system is good at 0:17:30.720 --> 0:17:35.520 um Either side can do that. China, I think does 0:17:35.560 --> 0:17:40.480 not use the pricing UH tool well as they could 0:17:41.040 --> 0:17:46.679 on environment the force tool. Can they force? Sure? They 0:17:46.720 --> 0:17:49.720 can um uh And they are doing that. And I 0:17:49.760 --> 0:17:52.400 will tell you that I think the most important economic 0:17:52.520 --> 0:17:56.159 dynamic in China for the next twenty years is environmental 0:17:56.200 --> 0:17:59.840 preservation and remediation. They know they have to clean it up. 0:17:59.840 --> 0:18:02.359 They have to do that for their own self preservation. 0:18:02.440 --> 0:18:05.159 Is the leadership at the margin? Is it finally getting 0:18:05.160 --> 0:18:10.400 better air quality? In UH? Fifty cities in China? Biggest 0:18:10.440 --> 0:18:14.520 ones are down air quality. The air quality index is 0:18:14.560 --> 0:18:19.400 down from five years ago. It's still bad, but it's 0:18:19.520 --> 0:18:23.000 much better than it was. We continue to improve. Don stress, 0:18:23.040 --> 0:18:25.200 I'm thinking so much with the evercres I s I 0:18:25.320 --> 0:18:40.360 on China, Gino Martin Adams, with them, We're gonna really 0:18:40.400 --> 0:18:44.600 dig down here now into much more technical discussion of 0:18:44.640 --> 0:18:46.560 the equity markets. We do this for the cf A 0:18:46.680 --> 0:18:51.040 crew staggering late June UH and you know, see if 0:18:51.040 --> 0:18:54.080 a one, two, three, four, five, six. Where in the 0:18:54.119 --> 0:18:57.960 accounting statement is the dynamics that interest you the most 0:18:58.480 --> 0:19:01.240 in American corporations. I think it's a really good question, 0:19:01.280 --> 0:19:03.520 because what we've seen over the last several years is 0:19:03.560 --> 0:19:08.240 actually a migration of investor attention up the income statement 0:19:08.840 --> 0:19:12.480 toward the balance sheet. Right, so investors are actually paying 0:19:12.600 --> 0:19:17.280 for sales beats and uh discouraging sales misses more so 0:19:17.320 --> 0:19:20.159 than they're paying for earning speats and discouraging earnings misses 0:19:20.240 --> 0:19:24.000 in stock price reactions. We also see over the longer term, 0:19:24.160 --> 0:19:28.960 companies that are reporting consistent and robust sales growth. So 0:19:29.080 --> 0:19:32.439 companies with five year average sales growth that exceeds the 0:19:32.480 --> 0:19:36.440 market are outperforming companies with five year slower sales growth, 0:19:36.440 --> 0:19:38.760 and we're not seeing that extreme distinction on the part 0:19:38.800 --> 0:19:41.280 of earnings. You see it with cash flow as well, 0:19:41.320 --> 0:19:44.240 So cash flow like sales towards the top the upper 0:19:44.400 --> 0:19:48.880 end of the income statement, definitely providing performance. And then 0:19:48.960 --> 0:19:50.520 I also think the other thing to talk about is 0:19:50.560 --> 0:19:52.360 the balance sheet. When we've seen over the last year, 0:19:52.400 --> 0:19:56.240 in particular, is investors paying up for companies with lower 0:19:56.280 --> 0:20:01.199 debt or lower leverage ratios and certain punishing companies that 0:20:01.280 --> 0:20:03.720 have utilized debt to a large degree, to the extent 0:20:03.800 --> 0:20:07.480 that their debt to EBITDA is above average, and especially 0:20:07.600 --> 0:20:10.600 the companies with debt to EBITDA ratios well above average 0:20:10.640 --> 0:20:14.040 have actually underperformed substantially. From where you sit, the synthesis 0:20:14.080 --> 0:20:19.080 of all Bloomberg intelligence, what is the dynamic if yields 0:20:19.400 --> 0:20:24.760 lift to that debt burden. It's not linear, it's it 0:20:24.920 --> 0:20:27.720 is anywhere near where it is an inertial force. It 0:20:27.800 --> 0:20:32.000 really causes angst, not yet, because a lot of the 0:20:32.080 --> 0:20:35.040 debt is actually secured at long term low interest rates 0:20:35.080 --> 0:20:38.520 that do not reset. So that the positive aspect of 0:20:38.560 --> 0:20:42.639 this exactly so, even though rates are going higher, the 0:20:42.720 --> 0:20:45.919 companies are not experiencing a tremendous amount of pressure on 0:20:45.960 --> 0:20:49.199 their current debt. They can certainly sustain payments on that 0:20:49.280 --> 0:20:53.159 debt with earnings accelerating. The problem becomes later in the 0:20:53.200 --> 0:20:56.520 cycle if rates reset higher on a more permanent basis, 0:20:56.520 --> 0:20:58.959 say five years from now, when companies go back to 0:20:58.960 --> 0:21:01.800 tap the debt market, they're going to have to pay 0:21:01.800 --> 0:21:04.280 a lot more for new debt. They're gonna have to 0:21:04.320 --> 0:21:06.600 pay a lot more for that maturing debt to refinance 0:21:06.680 --> 0:21:08.640 the debt. The other thing that I think is really 0:21:08.680 --> 0:21:11.960 interesting is in the tax package that was passed in December. 0:21:12.400 --> 0:21:16.640 There's inherently a component of it that disincentivizes debt use. 0:21:17.200 --> 0:21:19.600 Because companies have been able to write off their interest 0:21:19.640 --> 0:21:23.360 expense UM when it comes to their tax bills for 0:21:23.400 --> 0:21:26.800 several years now, there's been a tremendous incentive to utilize debt, 0:21:26.800 --> 0:21:30.439 which explains partially at least why debt has grown as 0:21:30.560 --> 0:21:33.240 much as it has. As part of the tax component 0:21:33.359 --> 0:21:35.320 or a tax package, this year, they will only be 0:21:35.320 --> 0:21:40.320 able to write off, of UM that interest expense to 0:21:40.359 --> 0:21:44.679 the extent that that interest expenses percentage of underlying earnings, 0:21:44.720 --> 0:21:47.560 and going forward that will be the percentage that they 0:21:47.560 --> 0:21:51.680 can write off will become less and less over time. Yeah, 0:21:51.720 --> 0:21:54.719 so we're starting to disincentivize debt, which you know depends 0:21:54.720 --> 0:21:57.920 on if this tax reform becomes permanent. Right It's it's 0:21:57.960 --> 0:22:00.919 there's a lot that can happen in the next several years. 0:22:00.920 --> 0:22:02.840 But I think as rates rise, if we are going 0:22:02.880 --> 0:22:05.680 to continue to disincentivize debt, that could very much change 0:22:05.720 --> 0:22:08.120 the funding structure of companies as well. Something to look 0:22:08.119 --> 0:22:09.800 out for in the longer term, where is the tax 0:22:09.840 --> 0:22:15.120 dividend going the tax dividends, so that the extra cash, Yeah, 0:22:15.280 --> 0:22:18.360 it's for the most part so far going towards capital 0:22:18.400 --> 0:22:22.000 spending plans. Right, I wouldn't go so far as to 0:22:22.040 --> 0:22:24.560 say that we've actually deployed a lot of that extra 0:22:24.640 --> 0:22:29.040 cash or the savings from tax. Initially, companies suggested that 0:22:29.080 --> 0:22:31.080 they were going to pay it out in the form 0:22:31.119 --> 0:22:35.720 of wage increases, bonuses, one time bonuses to employees. And 0:22:35.760 --> 0:22:37.720 through the course of the first quarter earning season, which 0:22:37.760 --> 0:22:40.840 we just completed, what we found is companies starting to 0:22:40.880 --> 0:22:45.560 announce capital spending plans. In Mass we saw the capital 0:22:45.600 --> 0:22:48.719 spending the next twelve months. Capital spending growth is now 0:22:48.760 --> 0:22:51.520 expected to accelerate eighteen percent, for example, and we've been 0:22:51.560 --> 0:22:53.640 running at a pace below ten percent for the last 0:22:53.720 --> 0:22:57.520 year or so. So there is an evolution of um 0:22:57.680 --> 0:23:00.920 potential capex growth playing out through the earning stream. The 0:23:00.960 --> 0:23:04.520 company announcements. There's a little bit of buyback growth, so 0:23:04.560 --> 0:23:06.760 they are starting to deploy it back to shareholders, though 0:23:06.760 --> 0:23:09.520 I'd say that it's pretty slow in coming and it's 0:23:09.640 --> 0:23:12.840 very narrow, not that many companies are announcing it. Though 0:23:12.880 --> 0:23:16.680 we are seeing buy back growth accelerate, and some companies, 0:23:16.680 --> 0:23:19.760 such as energy companies for example, have really been ahead 0:23:19.800 --> 0:23:21.760 of this. They've started to deploy capital in the form 0:23:21.840 --> 0:23:26.240 of buybacks and dividends where they hadn't in past years. 0:23:26.359 --> 0:23:28.480 So this sounds positive on the debt side because there 0:23:28.560 --> 0:23:30.600 might be less issuance on the equity side because it 0:23:30.600 --> 0:23:32.800 should lengthen the cycle. Um if we do get this 0:23:32.880 --> 0:23:35.679 camp X story and supply side response when you have 0:23:35.800 --> 0:23:39.439 a fragile story internationally in a m now increasingly so 0:23:39.920 --> 0:23:42.680 in Europe too, do we see a buy America theme 0:23:42.800 --> 0:23:45.159 come back into this market in a way that we 0:23:45.240 --> 0:23:48.560 had things in say the back end early seven seen. 0:23:48.840 --> 0:23:51.159 Oh it's interesting because we have actually seen that the 0:23:51.200 --> 0:23:54.399 small cap stocks have outperformed tremendously. When we talk about 0:23:54.720 --> 0:23:56.680 large cap stocks have sort of been stuck in this 0:23:56.880 --> 0:23:58.919 malaise for the last two weeks, just stuck at their 0:23:58.960 --> 0:24:02.879 Hunter day moving every ridge relatively volatile on recent news. 0:24:03.080 --> 0:24:07.520 But small caps are making new highs. Microcap stocks are 0:24:07.520 --> 0:24:11.560 making new highs. So the companies that are more domestically focused, 0:24:11.600 --> 0:24:14.600 the companies that benefit when the dollar rallies that are 0:24:14.640 --> 0:24:18.720 more sheltered from international risks are absolutely doing better. It's 0:24:18.800 --> 0:24:21.879 that also going to mean a switch from from growth 0:24:21.920 --> 0:24:24.639 to value as well, given that those growth names are 0:24:24.680 --> 0:24:28.679 international by by definition on the spire, So normally it 0:24:28.760 --> 0:24:33.600 would and it really intriguingly has not yet. So you 0:24:33.640 --> 0:24:36.400 would think that the recovery and small caps, the recovery 0:24:36.480 --> 0:24:40.080 and dollar focused companies, the recovery and the domestic names 0:24:40.440 --> 0:24:44.080 would start to produce a shift in value stocks in 0:24:44.119 --> 0:24:46.520 the SMP five hundred, and we have not seen that 0:24:46.560 --> 0:24:48.560 in mass yet. As a matter of fact, that financials 0:24:48.560 --> 0:24:51.280 in the SMP five have been one center of extraordinary 0:24:51.320 --> 0:24:55.560 weakness in this environment. It's a it's a big conuntry 0:24:56.760 --> 0:24:59.199 circle back to the income statement. Is that I mean 0:24:59.240 --> 0:25:02.840 Charles Peabody is been brilliant on this portalent. Pebody was bullish, 0:25:02.840 --> 0:25:05.760 bullersh look like a genius. He flips to more negative. 0:25:05.840 --> 0:25:07.760 Now he looks like a genius. And is it because 0:25:07.800 --> 0:25:10.080 of a real question or revenue shortfall? I think it 0:25:10.200 --> 0:25:12.320 is for the top line companies, that's at least part 0:25:12.320 --> 0:25:14.639