WEBVTT - Too Much Money Chasing Too Few Deals: Oaktree's Marks 0:00:05.800 --> 0:00:08.360 Welcome to the Bloomberg p m L Podcast. I'm pim 0:00:08.400 --> 0:00:11.200 Fox along with my co host Lisa A. Bramowitz. Each 0:00:11.240 --> 0:00:14.440 day we bring you the most important, noteworthy, and useful 0:00:14.480 --> 0:00:17.079 interviews for you and your money, whether you're at the 0:00:17.120 --> 0:00:20.360 grocery store or the trading floor. Find the Bloomberg p 0:00:20.520 --> 0:00:30.320 m L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. 0:00:30.360 --> 0:00:33.200 I am so pleased to bring in our next guest, 0:00:33.320 --> 0:00:36.560 Howard Barks. He has written a new memo. He of course, 0:00:36.640 --> 0:00:40.080 is co founder of oak Tree Capital and UH is 0:00:40.120 --> 0:00:44.280 the biggest distressed debt fund in the world. And he 0:00:44.360 --> 0:00:48.120 joins us here in our eleven three oh studios And Uh, Howard, 0:00:48.159 --> 0:00:49.640 thank you so much for being here. You just wrote 0:00:49.640 --> 0:00:52.720 a new memo, the seven worst words in the world. 0:00:53.440 --> 0:00:58.520 What are they for an investor? Too much money, chasing 0:00:58.560 --> 0:01:02.000 too few deals? And we're there right now. Well, I 0:01:02.120 --> 0:01:05.400 think that where you know, life in the investment world 0:01:05.520 --> 0:01:08.000 is not black or white, as although many people try 0:01:08.040 --> 0:01:11.959 to say that, Uh. The environment is not the worst 0:01:12.000 --> 0:01:14.920 for investing anyone has ever seen. It's also far from 0:01:15.000 --> 0:01:17.680 the best. UH. And if you draw a dividing line 0:01:17.680 --> 0:01:20.839 down the middle, I would say we're in the vicinity 0:01:21.040 --> 0:01:25.319 of too much money chasing too few deals. Howard Marks, 0:01:25.400 --> 0:01:28.360 you are the author of mastering the market cycle, getting 0:01:28.400 --> 0:01:32.240 the odds on your side, and that caused me also 0:01:32.360 --> 0:01:35.440 to reread your I guess we can come. We call 0:01:35.480 --> 0:01:38.840 it a famous memo about the race? Can we call 0:01:38.840 --> 0:01:43.679 it the race to the bottom that basically called the 0:01:43.800 --> 0:01:48.920 collapse and stocks and financial assets. You say, now that 0:01:49.000 --> 0:01:52.800 we're closer to what two thousand six, does that kind 0:01:52.800 --> 0:01:54.840 of ring a bell? Is that what echoes in your 0:01:54.840 --> 0:01:57.200 mind when you look at current conditions? I think it's 0:01:57.200 --> 0:02:00.400 fair to say, Uh, you know, conditions are not as 0:02:00.400 --> 0:02:03.520 bad even as two thousand six. The banks are not 0:02:03.600 --> 0:02:06.360 as heavily levered as they were. Uh. There is no 0:02:06.480 --> 0:02:09.840 analog in the investment world today to the subprime mortgages 0:02:10.400 --> 0:02:15.160 in their um magnitude infallaciousness. We don't have so many 0:02:15.320 --> 0:02:19.720 levered entities out there waiting to melt down. Uh. But 0:02:20.000 --> 0:02:23.000 what we do have is a lot of money chasing 0:02:23.200 --> 0:02:26.480 not too many deals. That causes the prices to be 0:02:26.600 --> 0:02:31.720 a bit up, which produces lower prospective returns and greater risk. Howard, 0:02:31.760 --> 0:02:34.080 when you say that there's not a direct analog, I 0:02:34.160 --> 0:02:36.440 think about some of the ways that this time is 0:02:36.560 --> 0:02:39.320 different than in two thousand five two six, and one 0:02:39.360 --> 0:02:41.600 of them is the flood of cash and to direct 0:02:41.760 --> 0:02:45.160 lending funds and let direct lending firms and away from 0:02:45.200 --> 0:02:49.240 the big banks. Uh. You had a quote referencing this, 0:02:50.080 --> 0:02:52.200 what the wise man does in the beginning, the fool 0:02:52.400 --> 0:02:55.160 does in the end. How do you see this ending? Well? 0:02:55.200 --> 0:02:58.640 If if too much money is the seven worst words 0:02:58.639 --> 0:03:01.320 in the world, what wise man doesn't the beginning the 0:03:01.360 --> 0:03:03.880 fool does in the ends is the most important single 0:03:04.000 --> 0:03:10.320 investment adage. Every trend which gets recognized in the early 0:03:10.400 --> 0:03:14.840 days by the intelligent few and profited from. When those 0:03:15.040 --> 0:03:18.800 profits become visible, everybody else wants to jump on the 0:03:18.840 --> 0:03:22.960 bandwagon too, even though prices may now be the higher 0:03:22.960 --> 0:03:26.200 than they should be. And when everybody jumps in at 0:03:26.240 --> 0:03:29.160 the end, Uh, that's a little on the late side. 0:03:29.240 --> 0:03:31.359 So I guess that my question is where are we 0:03:31.440 --> 0:03:33.600 with that and what's going to be the consequence? Well, 0:03:33.639 --> 0:03:36.880 direct lending is is one of the areas that has 0:03:36.920 --> 0:03:41.360 been very popular. Popular popularity is the enemy of the 0:03:41.400 --> 0:03:43.520 investor who wants to make a lot of money. Obviously, 0:03:43.560 --> 0:03:46.320 if you buy things or do things that are extremely popular. 0:03:46.640 --> 0:03:49.440 You should you're you're, you shouldn't expect to be getting 0:03:49.440 --> 0:03:52.400 a bargain. A lot of money has flooded into direct lending. 0:03:52.480 --> 0:03:54.920 I say in the memo that in the last five 0:03:55.000 --> 0:03:57.640 years there have been about three d and twenty new 0:03:58.240 --> 0:04:02.240 direct lending funds, of which eight five were first time funds, 0:04:02.480 --> 0:04:05.400 as compared to the previous five years, in which there 0:04:05.400 --> 0:04:08.840 were about eighty direct lending funds, of which seventeen were 0:04:08.880 --> 0:04:11.320 first time funds. So obviously a lot more funds, a 0:04:11.320 --> 0:04:14.560 lot more money, a lot more rookies, UH doing their 0:04:14.600 --> 0:04:18.599 first direct lending funds. Those are not the elements that 0:04:18.680 --> 0:04:24.000 make for great results. A lot of debt outstanding right now. 0:04:24.040 --> 0:04:29.200 What's your call on distress debt? Well, at the present time, UH, 0:04:29.240 --> 0:04:32.560 you know, the the the distressed debt business is UH 0:04:32.760 --> 0:04:38.640 pretty snoozy. Uh. In this kind of environment technical definition, 0:04:38.720 --> 0:04:41.800 In this kind of environment with UH, with a very 0:04:41.839 --> 0:04:45.560 strong economy and a very accommodating capital market, you're unlikely 0:04:45.600 --> 0:04:48.360 to get much distress and the companies that get into 0:04:48.360 --> 0:04:53.520 trouble are are likely to deserve it. Now, we believe 0:04:53.800 --> 0:04:59.080 and hope that the large amount of lending and perhaps 0:04:59.400 --> 0:05:03.400 less care just lending which is taking place today may 0:05:03.680 --> 0:05:08.000 result when the economy weakens in a cascade of the 0:05:08.080 --> 0:05:12.080 stress debt. And and we hope to be busy right now, 0:05:12.960 --> 0:05:16.240 we're pretty much working on old deals much more than new. 0:05:16.600 --> 0:05:18.320 When you say you hope to be busy, does that 0:05:18.360 --> 0:05:20.560 mean that you're putting aside a lot of cash to 0:05:20.640 --> 0:05:26.640 swoop in should there be more distress. We organized a 0:05:26.720 --> 0:05:33.160 standby fund for distress debt investing UH in eight and 0:05:33.200 --> 0:05:36.960 a half billion. That's our second largest fund in history, 0:05:37.000 --> 0:05:39.680 I think, probably the second largest fund in the history 0:05:39.680 --> 0:05:42.320 of the sector. And we have done very little with 0:05:42.360 --> 0:05:45.279 that so far. It's it's largely just sitting on the 0:05:45.320 --> 0:05:48.160 shelf in reserve. But you know, you have to pre 0:05:48.279 --> 0:05:50.640 raise your money. In our business, nobody goes in at 0:05:50.640 --> 0:05:53.160 the bottom. Well, but but two investors pushed back. Then 0:05:53.200 --> 0:05:55.159 do they say, all right, we were hoping to swoop in. 0:05:55.240 --> 0:05:59.920 It hasn't happened. To forget it. Our investors, I will 0:06:00.160 --> 0:06:03.719 our very patients. Uh. They we don't make claims for 0:06:03.800 --> 0:06:07.760 being able to time this stuff, and so uh. And 0:06:07.800 --> 0:06:10.760 I think the investors realized that it's desirable to have 0:06:11.000 --> 0:06:14.520 a commitment for the stress debt a commitment to oak 0:06:14.560 --> 0:06:19.440 Tree for that moment, but we don't claim to know 0:06:19.520 --> 0:06:21.640 when it will come. You know, they haven't put up 0:06:21.640 --> 0:06:26.080 the money yet. It's just commitments. We haven't charged any fees. 0:06:26.920 --> 0:06:31.640 So I think our investors will be happy to be patient. 0:06:32.480 --> 0:06:35.680 Do you see investors currently playing the game a hot potato? 0:06:38.560 --> 0:06:43.520 I think, well, you know, in in uh, in private equity, Uh, 0:06:43.600 --> 0:06:49.440 we still see uh, the the trend towards what the 0:06:49.480 --> 0:06:52.560 British call passed the parcel, and you call hot potato. 0:06:53.279 --> 0:06:57.520 You know, you make an investment, it does well, it appreciates. Uh. 0:06:57.760 --> 0:06:59.880 Maybe the fund that made the investment is coming to 0:06:59.920 --> 0:07:03.200 the end of its life that maybe the managers would 0:07:03.200 --> 0:07:06.560 like to realize they're carried interest in the profits, so 0:07:06.640 --> 0:07:09.600 they sell it onward to some other fund which is 0:07:09.640 --> 0:07:12.400 early in its investment life and wants to start putting 0:07:12.400 --> 0:07:16.480 money to work. I think that's the technical definition of 0:07:16.560 --> 0:07:20.920 hot potato. Throughout your memo, you were saying that in 0:07:20.960 --> 0:07:23.720 this environment. You're not saying that there's a bond bubble 0:07:23.840 --> 0:07:26.680 or that we're headed toward an imminent and catastrophic crash 0:07:26.680 --> 0:07:29.720 by any means, but just saying that in this period 0:07:29.800 --> 0:07:33.640 of elevated demand and incredible liquidity, people have to lower 0:07:33.680 --> 0:07:37.560 their returns expectations and be cautious. And I'm just wondering 0:07:37.840 --> 0:07:42.560 from your perspective. We've talked about this before, returns going forward? 0:07:42.800 --> 0:07:47.920 Has that Has your view on that changed at all? Um? Exactly, Lisa, UM. 0:07:47.960 --> 0:07:55.520 I mean, you know, debt today offers modest returns. Interest 0:07:55.640 --> 0:07:59.480 rates are still close to the lowest in history. The 0:07:59.560 --> 0:08:03.120 yields breads above those base rates are not that high. 0:08:03.200 --> 0:08:07.040 They've come down as demand has has picked up. UM. 0:08:07.160 --> 0:08:12.640 So you know, returns, while sounding generous compared to other markets, 0:08:13.040 --> 0:08:17.080 are still low in the context of history. UM. And 0:08:17.560 --> 0:08:21.360 so I don't think people should be uh that excited 0:08:21.880 --> 0:08:25.080 about the prospective returns. And as you say, I think 0:08:25.120 --> 0:08:28.720 the most important thing is to exercise caution. So what 0:08:28.800 --> 0:08:34.560 returns are feasible to expect? It depends on the asset class. Hi, 0:08:34.640 --> 0:08:38.520 your bonds pay about six uh, not a king's ransom, 0:08:38.640 --> 0:08:42.840 but but better than treasuries. Uh. Direct lending might be 0:08:42.960 --> 0:08:46.600 able to produce returns in the high single digits if 0:08:46.600 --> 0:08:50.240 it's not levered um and and that sounds even better. 0:08:50.320 --> 0:08:52.360 Of course, you give up your liquidity, you get that 0:08:52.480 --> 0:08:57.440 you uh perhaps lend to uh less well tested companies 0:08:57.440 --> 0:09:00.880 and you enjoy less diversification, so you pay a price 0:09:01.520 --> 0:09:05.360 for the excess returns. But you know, um, the old 0:09:05.440 --> 0:09:08.440 Jim Morrison song been down so long it looks like 0:09:08.559 --> 0:09:11.160 up to me. I think that's how people feel today. 0:09:11.160 --> 0:09:15.760 About eight or nine percent the US thirty year treasury 0:09:16.440 --> 0:09:22.000 has reached its highest level and yield. Since you speak 0:09:22.000 --> 0:09:24.840 about three things when you look at investing, recent history, 0:09:24.920 --> 0:09:28.080 human emotion, and asset pricing. We talked a little bit 0:09:28.080 --> 0:09:32.319 about recent history. Tell us about human emotion and asset pricing. 0:09:33.240 --> 0:09:35.600 You know him. One of the best things about the 0:09:35.640 --> 0:09:38.760 market today in general is that we do not see 0:09:38.760 --> 0:09:43.320 a prevalence of euphoria. The people in the media, we 0:09:43.400 --> 0:09:45.840 don't hear them saying, oh, this is your last best 0:09:45.920 --> 0:09:47.719 chance to get in on the market before it goes 0:09:47.760 --> 0:09:50.040 to the moon. The book Doubt thirty six thousand has 0:09:50.080 --> 0:09:54.199 not been reissued. That's all good. We want to see levelheadedness. 0:09:54.840 --> 0:09:57.880 What the challenges is that even people, even though people 0:09:57.920 --> 0:10:01.600 aren't thinking bullish, they're acting bullish, are dropping their caution 0:10:01.960 --> 0:10:04.880 to move out the risk curve to take on riskier 0:10:04.920 --> 0:10:08.479 assets in the hope that they can provide decent returns 0:10:08.800 --> 0:10:12.440 in a low return world, and it is their behavior 0:10:12.559 --> 0:10:15.280 that affects the condition of the market, and that's why 0:10:15.360 --> 0:10:19.440 we're calling for caution. I'm wondering, since you're firm does 0:10:19.440 --> 0:10:23.320 so much on the ground research of companies, you have 0:10:23.360 --> 0:10:26.880 an incredible view into the U. S economy, and I'm wondering, 0:10:27.120 --> 0:10:30.319 do you think that people are overly confident in its 0:10:30.360 --> 0:10:33.280 strength right now? I think when you when you say 0:10:33.400 --> 0:10:37.680 it's strength right now is great in the economy is 0:10:37.760 --> 0:10:44.079 very strong. Uh. The question is is it's sustainable? Is 0:10:44.720 --> 0:10:52.679 the performance of a sign of a future trend? Or 0:10:52.880 --> 0:10:56.200 is it a highly stimulated result of the tax bill, 0:10:56.800 --> 0:11:02.760 in which case favorable comparisons will become their difficult Uh. 0:11:02.800 --> 0:11:05.720 You know I always say that doctors rarely give shots 0:11:05.760 --> 0:11:10.680 of adrenaline to healthy patients. Uh. Will the tax bill 0:11:11.520 --> 0:11:17.520 produce over stimulation of the economy, necessitating the Fed increasing 0:11:18.480 --> 0:11:22.640 rates further in order to prevent inflation? And will that 0:11:22.760 --> 0:11:28.240 have a negative effect on economic growth? I have a 0:11:28.360 --> 0:11:32.560 very strongly held view, and that is we'll see as 0:11:32.600 --> 0:11:37.320 as the author of Mastering the Market Cycle, does the 0:11:37.440 --> 0:11:43.880 popularity and interest in bitcoin and marijuana related stocks ring 0:11:43.920 --> 0:11:47.760 a bell. You know it does, PIM and I wrote 0:11:47.800 --> 0:11:52.599 a memo in July of seventeen mentioned bitcoin, got a 0:11:52.640 --> 0:11:55.520 lot of attention for that. I don't want to invade 0:11:55.559 --> 0:12:00.559 against bitcoin or against pot stocks, but the and I 0:12:00.600 --> 0:12:05.080 want to point out is that the ability to have 0:12:05.360 --> 0:12:08.880 an asset like Bitcoin on other coins and have Bitcoin 0:12:09.000 --> 0:12:13.280 go up nineteen x last year should put people on 0:12:13.440 --> 0:12:16.520 notice that this is a climate in which speculative behavior 0:12:16.640 --> 0:12:20.560 is taking place. It is that that these kinds of 0:12:20.559 --> 0:12:26.600 phenomena like you mentioned do not occur in cautious, skeptical, disciplined, 0:12:26.880 --> 0:12:31.360 risk averse markets. And you know, the best, the biggest, 0:12:31.400 --> 0:12:34.920 the easiest money in the investment business is to buy 0:12:34.960 --> 0:12:39.199 when people are skeptical, discipline, risk averse, and even terrified. 0:12:39.880 --> 0:12:43.600 Nobody would say that's today, well done. Thank you very 0:12:43.679 --> 0:12:46.240 much for being with us. A pleasure. Howard Marks He 0:12:46.360 --> 0:12:49.520 is the co chairman of oak Tree Capital. He is 0:12:49.559 --> 0:12:53.040 the author of the new book Mastering the Market Cycle, 0:12:53.360 --> 0:13:08.280 Getting the Odds on Your Side. The topic now is trade, 0:13:08.360 --> 0:13:10.760 and our guest is Robert Lawrence. He is the Albert 0:13:10.760 --> 0:13:13.640 Williams Professor of Trade and Investment at the John F. 0:13:13.720 --> 0:13:17.240 Kennedy School of government at Harvard University. He is also 0:13:17.280 --> 0:13:21.800 a senior Fellow at the Peterson Institute for International Economics, 0:13:22.160 --> 0:13:25.000 and he previously served as a member of the Council 0:13:25.000 --> 0:13:30.360 of Economic Advisors under President Bill Clinton. Robert Lawrence, thank 0:13:30.360 --> 0:13:32.960 you very much for being with us. Will this new 0:13:33.040 --> 0:13:36.360 trade agreement, as far as you know it, will it 0:13:36.559 --> 0:13:42.160 increase employment in the automobile industry? I think it could, 0:13:43.480 --> 0:13:49.160 although it's not perfectly clear because there are some positive 0:13:49.160 --> 0:13:53.640 effects and some potentially negative effects. So so I would 0:13:53.640 --> 0:13:58.439 say I would expect some moderate effect on the auto 0:13:58.520 --> 0:14:02.680 industry's employment in the US. Do you think, Professor Lawrence, 0:14:02.720 --> 0:14:05.800 that on the whole this is a a sort of 0:14:05.840 --> 0:14:10.600 bent more toward free trade or more toward protectionism. I 0:14:10.640 --> 0:14:17.480 think it's it's it's bent more towards protection. But we 0:14:17.480 --> 0:14:20.480 we kind of has escaped a bullet because it's not 0:14:21.240 --> 0:14:24.960 a certainty. NaSTA has now been renewed, and there were 0:14:25.040 --> 0:14:28.680 many people who were worried about that. Um it has 0:14:28.720 --> 0:14:31.480 been improved in certain respects, in the sense of things 0:14:31.520 --> 0:14:35.920 like the digital economy are now included, labor and environment 0:14:35.960 --> 0:14:40.160 are treated within the agreement. But I would say there's 0:14:40.200 --> 0:14:43.520 a lot of constraints more constraints being placed on the 0:14:43.560 --> 0:14:47.640 auto industry. They've raised the amount of value added required 0:14:47.720 --> 0:14:51.120 to qualify for NaSTA. So there are a number of 0:14:51.200 --> 0:14:56.040 measures which are less free trade, if you will, what 0:14:56.240 --> 0:14:59.320 it's a but, but it's not. I don't think it's 0:14:59.320 --> 0:15:03.440 a momentous change. And the effect on US farmers, for example, 0:15:03.520 --> 0:15:09.560 with the Canadian dairy market, yes, well, there are slight improvements, 0:15:09.880 --> 0:15:12.880 but if you look at the numbers involved, their their minuscule, 0:15:14.040 --> 0:15:19.320 so so um, again it's kind of um, it's a change, 0:15:19.800 --> 0:15:22.360 but the amount of additional dairy that that we're going 0:15:22.400 --> 0:15:25.040 to be able to sell in Canada is going to 0:15:25.080 --> 0:15:28.240 be increased, but the quota is on the you know, 0:15:28.680 --> 0:15:32.080 less than ten percent more. Professor Lawrence, I want to 0:15:32.120 --> 0:15:35.640 get your your thoughts on what this new agreement does 0:15:35.760 --> 0:15:38.920 for the US. Is a path forward with China. Some 0:15:38.920 --> 0:15:41.320 people are saying it actually sets a precedent and give 0:15:41.400 --> 0:15:45.400 some sort of view into President Trump's trade policy. Do 0:15:45.400 --> 0:15:50.640 you agree with that? Well, I think it has elements 0:15:50.680 --> 0:15:54.840 that are aimed at China. You know, there's a there's 0:15:54.920 --> 0:15:59.400 quite a remarkable provision which says that if if the 0:15:59.480 --> 0:16:03.800 Canadians try to all the Mexicans try to negotiate a 0:16:03.840 --> 0:16:08.800 free trade agreement with with China. Now the United States 0:16:08.800 --> 0:16:12.600 has the right to withdraw from NaSTA. In other words, 0:16:12.680 --> 0:16:16.080 we eat they're they're using this agreement has trying to 0:16:16.120 --> 0:16:21.880 put leverage on China and to constrain its opportunities. UM. 0:16:21.880 --> 0:16:26.040 It's also in Canada not very popular because it's seen 0:16:26.080 --> 0:16:29.280 by some as an intrusion on Canadian sovereignty and their 0:16:29.360 --> 0:16:34.200 ability to conduct their trade policies. UM. By and large, 0:16:34.240 --> 0:16:38.400 it is sort of closing the US market and the 0:16:38.440 --> 0:16:43.200 North American market somewhat to Chinese who might want might 0:16:43.240 --> 0:16:46.640 have wanted to have sell more cars in the United States, 0:16:46.640 --> 0:16:49.960 something that they aren't doing much now but potentially in 0:16:50.000 --> 0:16:54.000 the future. But on the other hand, you know, the 0:16:54.720 --> 0:17:02.280 tariffs on UH steel and aluminum remain in place, and um, 0:17:02.320 --> 0:17:04.960 that's going to make it less attractive for American auto 0:17:05.160 --> 0:17:09.760 manufacturers to produce cars for the Chinese market. And then 0:17:09.800 --> 0:17:13.119 we also have the tariffs against our cause the Chinese 0:17:13.119 --> 0:17:16.199 are lowering their tariffs in general in automobiles, but not 0:17:16.320 --> 0:17:21.119 against US. So I would say on that front, and 0:17:21.280 --> 0:17:23.880 it hit had unless we get rid of those tariffs 0:17:23.960 --> 0:17:27.920 with with China and get out of that war. Um, 0:17:28.320 --> 0:17:30.560 we're actually and that's where I think some of the 0:17:30.640 --> 0:17:34.600 negative effects of the NAFTA will come. We're not encouraging 0:17:35.280 --> 0:17:39.240 the auto firms to use the US as a base 0:17:39.320 --> 0:17:43.760 for production for exports. You're referring to that section too. 0:17:43.960 --> 0:17:48.119 Three to the tariff protections. Correct, Yes, we have tariffs 0:17:48.119 --> 0:17:51.280 on steel and illuminium in the name of national security. 0:17:52.320 --> 0:17:55.919 There's also the threat that in the future we could 0:17:56.200 --> 0:18:02.000 um put additional tariffs on automobiles the name of national security. Now, 0:18:02.040 --> 0:18:06.240 what the what the Mexicans and Canadians have gotten out 0:18:06.240 --> 0:18:09.639 of this agreement is they're going to be side letters 0:18:09.640 --> 0:18:12.639 in which at least their current volumes aren't going to 0:18:12.680 --> 0:18:17.000 be subject to those Paris, Professor Lawrence, I'd love your 0:18:17.040 --> 0:18:21.760 thoughts just going forward about what this negotiation process has 0:18:21.840 --> 0:18:24.560 done to the political good will between the US and 0:18:24.640 --> 0:18:30.760 Mexico and Canada. UM. I think it's the it's a 0:18:30.800 --> 0:18:35.560 good question. I think are in general, are feelings of 0:18:35.680 --> 0:18:39.639 closeness to to UM to the Canadians, their their feelings 0:18:39.640 --> 0:18:43.080 of closeness to US, I think are have been damaged 0:18:43.400 --> 0:18:46.920 as a result of this. I think you know, they've 0:18:46.960 --> 0:18:50.439 got the sense that it's it is America trying to 0:18:50.440 --> 0:18:54.240 put America first. But I think they're also heaving a 0:18:54.359 --> 0:18:57.159 sigh of relief that things aren't as bad as they 0:18:57.200 --> 0:19:03.600 could have been. The the trade pact that is set 0:19:03.640 --> 0:19:05.960 to be voted on by Congress, do you believe it's 0:19:05.960 --> 0:19:13.239 a template for U s trade negotiations with China? Not really, um. 0:19:14.400 --> 0:19:18.240 I think the kind of questions, the really tough questions 0:19:19.359 --> 0:19:23.520 that we're going to face with China, aren't really dealt 0:19:23.600 --> 0:19:28.040 with in this trade agreement. One dimension where I would 0:19:28.240 --> 0:19:30.800 I would I would say it's it's kind of a 0:19:30.840 --> 0:19:36.560 template is that currency of the were included in this agreement, 0:19:37.240 --> 0:19:39.399 and I think if we ever had an agreement with China, 0:19:39.720 --> 0:19:44.040 we'd want to cover currency and currency manipulation. So in 0:19:44.080 --> 0:19:47.159 that sense, we've done something. But the big problems with 0:19:47.280 --> 0:19:52.600 China that relate to the protection of intellectual property and 0:19:52.680 --> 0:19:57.919 the false transfer of technologies to China, and how do 0:19:58.000 --> 0:20:01.959 we deal with state owned enterprise as in China, those 0:20:02.000 --> 0:20:05.240 aren't really dealt with in this agreement because they're not 0:20:05.320 --> 0:20:09.440 problems that we have with the with the Canadians or 0:20:09.480 --> 0:20:14.280 the Mexican Professor Lawrence, Just to sort of wrap up 0:20:14.320 --> 0:20:17.280 one thing that's been on my mind is whether President 0:20:17.320 --> 0:20:20.639 Trump wants a trade agreement with China. And there was 0:20:21.000 --> 0:20:25.000 a news report out yesterday about rising tensions in in 0:20:25.040 --> 0:20:30.880 the South Seas between Chinese warships and US warships. How 0:20:30.880 --> 0:20:33.080 do you see this whole thing evolving and and sort 0:20:33.080 --> 0:20:37.320 of what's the compass. I'm very worried about that. Um. 0:20:37.440 --> 0:20:41.400 I mean, I think he would like a trade agreement 0:20:41.480 --> 0:20:45.520 with China in which they totally surrender, and he's playing 0:20:45.600 --> 0:20:48.960 for that one and absent that. By that, I mean 0:20:49.000 --> 0:20:52.359 they agree to give up a lot of their industrial policies, 0:20:52.480 --> 0:20:56.200 which are the the core element of their development strategy. 0:20:56.880 --> 0:20:59.080 And I don't see that as very likely. And I 0:20:59.119 --> 0:21:01.040 think that's all aim at ly what he would like 0:21:01.119 --> 0:21:03.919 to see happen, or certainly people who are advising him 0:21:03.960 --> 0:21:08.560 would like to see happen. And so I believe that 0:21:08.640 --> 0:21:11.760 these tariffs are going to remain in place for a 0:21:11.800 --> 0:21:16.200 long time, unfortunately, and I think it's going to be 0:21:16.280 --> 0:21:21.119 damaging too to our trade, uh to to our to 0:21:21.520 --> 0:21:26.880 our economy and and and to the Chinese economy. Professor 0:21:26.920 --> 0:21:29.840 lawrenced just quickly, what have we learned as part of 0:21:30.320 --> 0:21:33.800 the negotiating style of the U. S. Trade representative Visa v. 0:21:34.359 --> 0:21:37.520 Mexico and Canada. And what can we take away from 0:21:37.520 --> 0:21:42.439 this example. Well, I think both in this case and 0:21:42.600 --> 0:21:49.280 in the case of the Korea agreement, um, they they 0:21:48.760 --> 0:21:53.520 they use it. They weighed the big stick. But when 0:21:53.880 --> 0:21:59.200 the time comes, actually, uh, you know, President Trump had 0:21:59.280 --> 0:22:03.200 called this the NaSTA, the worst agreement, you know, he'd 0:22:03.200 --> 0:22:07.520 ever seen. But in fact what he ultimately agreed to 0:22:07.960 --> 0:22:11.760 in the case of both the Korea and this new 0:22:11.800 --> 0:22:18.480 agreement with Canada Mexico is a is a modification. Professor 0:22:18.560 --> 0:22:20.479 Robert Lawrence, thank you so much for being with us. 0:22:20.520 --> 0:22:22.840 We're gonna have to leave it. They're really illuminating an 0:22:22.840 --> 0:22:26.280 important conversation. The Albert L. Williams, Professor of a Trade 0:22:26.320 --> 0:22:29.560 Investment in John F. Kennedy School of Government at Harvard University, 0:22:29.840 --> 0:22:33.240 also a senior Fellow at the Peterson Institute for International Economics, 0:22:33.480 --> 0:22:36.480 as well as a former member of the Council of 0:22:36.520 --> 0:22:51.240 Economic Advisors for President Clinton. Just this week we heard 0:22:51.440 --> 0:22:56.639 from the President of the European Commission, Jean Claude Junker, saying, 0:22:56.760 --> 0:22:59.440 we have to do everything to avoid a new Greece 0:23:00.200 --> 0:23:04.439 this time in Italy crisis. Here to tell us about 0:23:04.440 --> 0:23:09.000 it is Ferdinando Giuliano. Here's our Bloomberg opinion editor based 0:23:09.080 --> 0:23:11.960 in Rome, and he joins us. Now, Ferdinando, thank you 0:23:12.040 --> 0:23:14.200 very much for being with us. Maybe just spell out 0:23:14.280 --> 0:23:16.840 for people who have not been following the back and 0:23:16.920 --> 0:23:21.520 forth in Italian politics, who are the players and how 0:23:21.560 --> 0:23:25.440 did they get into so much trouble. So the players 0:23:25.480 --> 0:23:29.600 are the two populist parties, the Five Star Movements and 0:23:29.680 --> 0:23:34.679 the League, which after the March the fourth election, decided 0:23:34.760 --> 0:23:40.560 to team up and form these uh coalition of strange bedfellows, 0:23:40.560 --> 0:23:42.959 because remember the two parties run against each other at 0:23:43.000 --> 0:23:46.679 the election, but then decided to form this anti establishment 0:23:46.720 --> 0:23:50.720 government and their economic program, which was published in mid May, 0:23:51.119 --> 0:23:56.920 included spending commitments which topped a hundred billion euros according 0:23:56.960 --> 0:24:00.879 to independent estimates. So that started freeing out the bond 0:24:00.920 --> 0:24:06.000 market and you started seeing Italian bond deals going up 0:24:06.720 --> 0:24:11.399 in UH May June, and then it's really been a 0:24:11.480 --> 0:24:16.439 roller coaster with the finance minister, technocrat Giovann Tria, trying 0:24:16.480 --> 0:24:19.280 to reassure the markets that the deficit and the debt 0:24:19.359 --> 0:24:22.840 will be under kept under control. Now, remember Italy's public 0:24:22.920 --> 0:24:25.280 debt is one of the largest in the world, over 0:24:25.359 --> 0:24:28.119 one hundred and thirty percent of cross domestic products. So 0:24:28.400 --> 0:24:31.640 investors are watching very closely. So on the one hand, 0:24:31.680 --> 0:24:34.000 we have the finance minister. On the other hand, we 0:24:34.040 --> 0:24:36.720 have the leaders of the two parties really want to 0:24:36.720 --> 0:24:39.720 make good on their promises because they want to deliver 0:24:39.960 --> 0:24:42.600 change and bring growth. And at the moment we are 0:24:42.640 --> 0:24:47.399 at the crunch point because the deficit targets for the 0:24:47.440 --> 0:24:49.840 next year in the forthcoming year need to be published. 0:24:49.960 --> 0:24:52.119 Well they really had to be published last week, but 0:24:52.200 --> 0:24:56.040 we'll be published within hours or days, and investors are 0:24:56.600 --> 0:25:01.760 watching very closely to understand how toward extend these parties 0:25:01.920 --> 0:25:07.400 will really continue with their spending pledges and we'll put 0:25:07.440 --> 0:25:10.080 them into practice. You know, it seemed like there are 0:25:10.160 --> 0:25:13.040 this good news overnight out of Italy, right we had 0:25:13.520 --> 0:25:16.040 a sort of announcement that there was a plan to 0:25:16.160 --> 0:25:19.320 reduce the deficit. The problem was it also came with 0:25:19.440 --> 0:25:23.359 increasing stimulus, and at first the markets thought, oh, this 0:25:23.440 --> 0:25:25.959 is good news, and then based on where bondyields are, 0:25:26.000 --> 0:25:28.360 they came down a little bit. But I mean, they're 0:25:28.400 --> 0:25:30.360 not buying it. Does this make sense to you? Their 0:25:30.440 --> 0:25:34.520 latest plan. Well, the plan at the moment is, as 0:25:34.560 --> 0:25:37.000 you said, you know, very hard to believe. Today we 0:25:37.040 --> 0:25:40.560 had the Finance Minister saying he's targeting at two point 0:25:40.600 --> 0:25:45.960 four percent um depthicit for next year. However, it also 0:25:46.000 --> 0:25:50.080 made clear that the deficit, the structural depthicity without any 0:25:50.119 --> 0:25:53.679 additional measure, would be two percent of GDP, and he 0:25:53.760 --> 0:25:57.119 wants to do raise investment by another not point percent 0:25:57.200 --> 0:25:59.760 of GDP, So that takes us already to two point 0:25:59.760 --> 0:26:03.520 two percent of GDP. Now we have just a little margin, 0:26:03.640 --> 0:26:07.040 which is around three point five billion to really make 0:26:07.119 --> 0:26:10.800 good on all these promises, lowering the pension age, some 0:26:10.840 --> 0:26:13.720 sort of income support scheme for the poor, lower taxes 0:26:13.920 --> 0:26:17.359 which these parties are throwing around. So it's at the 0:26:17.440 --> 0:26:20.800 moment it's very hard to square how you can keep 0:26:20.840 --> 0:26:24.200 the deficit under control make good on your promises at 0:26:24.200 --> 0:26:27.600 the time when the Italian and European economy really seemed 0:26:27.640 --> 0:26:35.280 to be slowing. Ferdinando the Commissioner for Economic Affairs, Pierre Moscovici, 0:26:35.840 --> 0:26:39.600 has released part of a text of a speech that 0:26:39.640 --> 0:26:43.360