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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Ley.

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Speaker 1: We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg Let's

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Speaker 1: bring It. Stephen Gallows Showers, Steam Capital Market's head of

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Speaker 1: fex strategy. He joins us on the phone. Stephen, one

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Speaker 1: line from you. These are dramatic times and the entire

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Speaker 1: global order is shifting, and I haven't even touched upon

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Speaker 1: the broader European political backdrop. Steve. We just want me

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Speaker 1: through that what it means for foreign exchange. Oh well,

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Speaker 1: I feel like I've been banging on this drum for

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Speaker 1: a while. Now I'll repeat it again. The forces that

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Speaker 1: we had been come had become accustomed to prior to

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Speaker 1: the global financial crisis, and also in the immediate aftermath

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Speaker 1: of the GFC two thousand and a two thousand and nine,

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Speaker 1: when the set started quee those forces have been going

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Speaker 1: into reverse in terms of US trade policies, in terms

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Speaker 1: of the trend towards a smaller or in fact that

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Speaker 1: the US will probably be a net exporter of petroleum

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Speaker 1: petroleum products over the course of the next year or so,

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Speaker 1: UH in terms of the structural problems that are are

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Speaker 1: coming to the service in China, in terms of reserve

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Speaker 1: accumulation by major central banks, the big net exporting countries

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Speaker 1: of the world, Germany, China, that they're struggling. So things

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Speaker 1: are shifting. And this is a dramatic about face for

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Speaker 1: the global economy. And that's why the dollar is doing

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Speaker 1: well almost mechanically by default, the dollar global did the

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Speaker 1: world economy, global trade is dollar based UH and and

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Speaker 1: and because it's dollar based, the initial at least the

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Speaker 1: initial phase of this shift is destined to be are positive,

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Speaker 1: even as you point out that the US manufacturing clearly

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Speaker 1: is taking a hit now, though I would point out

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Speaker 1: that that's only around a tenth of US GDP, so

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Speaker 1: it's not as big of a problem in the U

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Speaker 1: s that it is for for example, Germany. UM. But

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Speaker 1: but it's it's it's a mechanical, almost a mechanical appreciation

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Speaker 1: of the US dollar because things are are worse, so

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Speaker 1: much worse elsewhere in the global economy. So Stephen, in

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Speaker 1: the here and now, the shock absorber in foreign exchange

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Speaker 1: is the US dollar. That's why we seek dollar strength.

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Speaker 1: And you say that's a mechanical response to what is

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Speaker 1: happening around the world. What UN depends a pivot away

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Speaker 1: from that story, away from that mechanical response that feeds

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Speaker 1: dollar strength. What UN depends that change. So you basically,

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Speaker 1: I think what you're asking for is when does the

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Speaker 1: inflection point come. I guess there are a number of

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Speaker 1: things that could cause this. You you could have a

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Speaker 1: reversal of the Trump trade policy, so Trump could lose

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Speaker 1: the White House UH in twenty The U s could

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Speaker 1: have a dramatic and severe recession which causes enough fed

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Speaker 1: easing to to to cause a flow, huge flow back

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Speaker 1: into emerging markets again despite their structural problems which have

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Speaker 1: come to the surface. But I tend to think I'm

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Speaker 1: not I'm not banking on a Trump win in or

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Speaker 1: anything like that. And it's too early to tell, but

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Speaker 1: I tend to think a lot of what has started

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Speaker 1: is going to be very difficult to reverse because countries

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Speaker 1: are being forced to turn more inwards. China is turning

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Speaker 1: more inward, and and and you can be this in

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Speaker 1: the data. You can see it in terms of what's

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Speaker 1: happening to supply chains in the Southeast Asia region. Stephen go,

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Speaker 1: I love the long term view. In the bigger picture,

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Speaker 1: I'm just trying to play pay for school supplies. What's

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Speaker 1: the trade right now, given this mechanical dollar movement, what's

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Speaker 1: a trade that's more most efficacious to make some money?

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Speaker 1: Well for the time being, as we approached the fom

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Speaker 1: C rate decision for September, or the debate about whether

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Speaker 1: or not they do twenty or fifty, or they're even

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Speaker 1: more debblish than fifty, that's going to rate. So I

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Speaker 1: don't think now at the time where I would be

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Speaker 1: adding to my long positions in the dollar versus the

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Speaker 1: major G ten currents or any currency, really i'd be waiting.

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Speaker 1: We've also got the ECB in front of that, and

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Speaker 1: they could disappoint as well. So there's a lot of

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Speaker 1: policy noise coming over the next couple of weeks. But

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Speaker 1: ultimately I wanted a cold long dollar versus G ten.

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Speaker 1: But I think in terms of the end crosses, I

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Speaker 1: still think we're probably going to see broader based the

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Speaker 1: end strength versus a number of currencies over the next

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Speaker 1: few months, and to our global audience, we look at

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Speaker 1: yen is a dominant currency with its own unique characteristics.

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Speaker 1: Identify your belief in yen and identify the domestic why

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Speaker 1: of your belief from a Tokyo standpoint, why does yen

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Speaker 1: do what Stephen Gallis thinks that will do well? Of course,

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Speaker 1: you have the first on the on the first instance,

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Speaker 1: again mechanical rally in the end when global rates are

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Speaker 1: japanized or suppressed, right, so it's almost a mechanical reaction.

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Speaker 1: And then of course you have the non non commercial

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Speaker 1: or the speculative flow front running that move, getting long

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Speaker 1: yen in anticipation of lower rates outside of Japan. But

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Speaker 1: I think Japan, to a degree, because of its very

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Speaker 1: strong external fundamentals, faces the same problem that Switzerland does.

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Speaker 1: Japanese investors and Swiss investors do not routinely invest enough

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Speaker 1: abroad to fully recycle the current account surplus, and that

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Speaker 1: means their central banks are always going to be resisting

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Speaker 1: strengthen their domestic currencies when global forces turn against risk assets,

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Speaker 1: and we I think that. I think the problem is

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Speaker 1: even more acute in Switzerland, which is why I don't

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Speaker 1: believe the SNB when it tells me that the Swiss

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Speaker 1: Frankie is overvalued. In fact, I think from the perspective

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Speaker 1: of a Swiss investor, the Swiss Frank is undervalued because

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Speaker 1: they want a stronger Swiss Frank so that they can

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Speaker 1: go broad and buy more or foreign assets. They're too

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Speaker 1: expensive at these levels. Why not just invest in the

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Speaker 1: domestic economy, which is exactly what Japanese investors do. Um

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Speaker 1: so so I think this is this is part of

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Speaker 1: the issue here that these central banks faced. Um there,

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Speaker 1: their domestic investors don't want to plow enough of their

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Speaker 1: capital into foreign assets to allow the current current account

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Speaker 1: surpluses to be offset. Stevin Yellow, thank you so much,

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Speaker 1: cap Markets. As we get started on just a cacophony

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Speaker 1: of new soil right now, it is important to identify

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Speaker 1: who Steve saying is absolutely definitive on the reach of

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Speaker 1: Hong Kong from the time of a colony, forward to

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Speaker 1: the Great Transition and onto this modern age. He's at

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Speaker 1: U l uh So as China Institute. He's saying, we

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Speaker 1: are just thrilled that you could join us today. She saying,

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Speaker 1: what do you take of this moment where a chief

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Speaker 1: executive partially capitulates to protesters. Explained this moment in Steve

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Speaker 1: sayings Hong Kong. Well, I think it's a very positive step.

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Speaker 1: That's the Chief Executive in Hong Kong, Carry Lamb has

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Speaker 1: finally with joined the two bills, which was the trigger

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Speaker 1: for the summer of discontent in Hong Kong. But I'm

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Speaker 1: afraid that it is truly too too late for most

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Speaker 1: of the demonstrators in Hong Kong. So that is not

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Speaker 1: going to put an end to the problems we have

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Speaker 1: seen in Hong Kong. I think there will be more

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Speaker 1: people coming out in the demonstrations in the a few

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Speaker 1: weeks coming. How is she influenced in two thousand nineteen

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Speaker 1: by Beijing. It's different than when you wrote a modern

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Speaker 1: history of Hong Kong, isn't it. Yes, Now, at the

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Speaker 1: beginning of this summer, in June and perhaps the beginning

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Speaker 1: of July, it was clear that Carry Lamb, the Chief

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Speaker 1: Executive in Hong Kong, was in charge of policies in

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Speaker 1: Hong Kong. Sometimes in July it would appear that she

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Speaker 1: no longer was fully in charge and that she was

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Speaker 1: by then receiving instructions from Beijing. So the latest move

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Speaker 1: she has made in terms of finally agreeing to withdraw

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Speaker 1: the two bills would have been acting on instructions or

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Speaker 1: at least approval from Beijing. This is not just what

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Speaker 1: Carry Lamb is doing. This is the Communist Party of

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Speaker 1: China applying um a soft approach at the moment after

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Speaker 1: having used a hard line, repressive approach that has failed

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Speaker 1: to achieve the results they want. So, Professor, on a

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Speaker 1: daylight today, Carrie Lamb will be the full guy. But

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Speaker 1: I just wonder, from your reading from your research, to

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Speaker 1: what degree President ch Jing pingas overstepped in the last

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Speaker 1: several months. I think we are talking about presidents she

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Speaker 1: overstepping in the last six years or so. Explore that forest, Professor.

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Speaker 1: There is an inherent tension in the arrangement for Hong

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Speaker 1: Kong's to be kept as a special administrative regent in

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Speaker 1: China under the formula called one Country, two systems. For

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Speaker 1: people in Hong Kong, one country, two systems is there

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Speaker 1: to protect their wage of life for fifty years from

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Speaker 1: until twenty seven. For the Chinese Communist Party has always

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Speaker 1: been a transitional arrangement and at some stage Hong Kong

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Speaker 1: will be properly part of China, and therefore for about

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Speaker 1: twenty years after nineteen nearly twenty years, not quite twenty um.

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Speaker 1: Both sides allow for his degree of ambiguity. The Chinese

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Speaker 1: do not push too far, and Hong Kong people accept

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Speaker 1: that they really are not able to exercise the degree

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Speaker 1: of autonomy that they would have they would have liked.

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Speaker 1: After Sen being became leader of China, he started to

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Speaker 1: push much more aggressively towards Hong Kong, requiring people in

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Speaker 1: Hong Kong to demonstrate their support of the Chinese government

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Speaker 1: and of China more generally. And that's when you started

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Speaker 1: getting the push back from the younger generations in Hong Kong,

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Speaker 1: the generation of Joshua Wang and Actnes Joe, and these

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Speaker 1: are the people who became leaders of the movements in

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Speaker 1: twenty fourteen to push back, and they start off a

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Speaker 1: school children, school kids in high schools, refuse things to

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Speaker 1: learn uh Chinese curriculum. This is the pushback that slowly

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Speaker 1: generated a very widespread discontent in Hong Kong over the

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Speaker 1: degree of autonomy as they have. And when the protest

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Speaker 1: came up this summer, a lot of them feel that

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Speaker 1: this is the last chance they have to come out

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Speaker 1: and defend Hong Kong's where your life or they will

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Speaker 1: lose it. So, Professor, this is one forum where we

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Speaker 1: are seeing this pushback play out quite clearly and sometimes

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Speaker 1: violently on the screens of our TVs and smartphones around

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Speaker 1: the world. I just wonder whether the trade story is

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Speaker 1: also a story of pushback against China and China trying

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Speaker 1: to exert its economic power on the global stage in

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Speaker 1: ways that are not favorable to develop world into the

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Speaker 1: West and the way of living that some people have experienced.

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Speaker 1: The professor talk to me about that, how the situation

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Speaker 1: in Hong Kong has parallels to the blowback perhaps that

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Speaker 1: the president of China is experiencing on the trade front. Well,

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Speaker 1: the events in Hong Kong in this summer, I think

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Speaker 1: was not really ties to the trade war. Um. It

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Speaker 1: is tied to the approach that She Jimping has adopted

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Speaker 1: in making China much more assertive, and in that assertiveness

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Speaker 1: he's generated a change in the view of the U

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Speaker 1: S establishments on how to deal with China, and the

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Speaker 1: trade war is part of that pushback from the American establishment.

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Speaker 1: So they are kind of in parallel and in that

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Speaker 1: sense of link, but they are not directly related in

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Speaker 1: a coursal way. Professor. One final question, what is the

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Speaker 1: professor saying to do list for Donald Trump? What can

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Speaker 1: the President of the United States do to advocate for

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Speaker 1: the people of Hong Kong. On well, for the President

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Speaker 1: of the United States, I think the really important issue

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Speaker 1: is to make sure that the US Hong Kong Policy Act,

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Speaker 1: which gives Hong Kong special advantages and special treatment separate

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Speaker 1: from that being received by the POC the People's Refubrict

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Speaker 1: of China, is being absolutely enforced to the latter. And

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Speaker 1: in this spirit that Hong Kong must be maintaining is

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Speaker 1: degree of autonomy UH guaranteed in the sin of British

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Speaker 1: agreements of n for Hong Kong to continues to receive

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Speaker 1: the advantages givens in the Hong Kong Policy Act, and

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Speaker 1: we iterate that if this is being violated then the U.

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Speaker 1: S Government will take it very very seriously. Indeed that

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Speaker 1: may deter the Chinese government from overstepping them. Hong Kong

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Speaker 1: ste saying thank you so much, University of London. So

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Speaker 1: as of course his classic twenty years ago, the modern

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Speaker 1: history of Hong Kong is just an absolute extraordinary. At

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Speaker 1: the time when d Serby with us David Serby of

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Speaker 1: Van Kora all sorts of work institutionally with explaining why

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Speaker 1: you don't have to buy Amazon and Apple to move forward.

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Speaker 1: There's a few other stocks out there's if you ever

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Speaker 1: seen the skew to large cap David Serby like we've

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Speaker 1: got right now. Is this typical or is this like

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Speaker 1: never never before December was the last time we've seen

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Speaker 1: this kind of skew of large caps trading at okay

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Speaker 1: to earnings valuation in excessive small cap the same story

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Speaker 1: and growth to value. So you do you go out

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Speaker 1: eighteen months from December n nine and say it's gonna

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Speaker 1: be ugly eighteen months from now, it wasn't. If you're

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Speaker 1: a small cap value investor, you had positive returns in

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Speaker 1: a market that was on its way to decline. I'm

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Speaker 1: looking at a sharp ratio for mid caps right now.

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Speaker 1: That's pretty cool, and that is risk and reward. Let's

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Speaker 1: identify those two right now. What's the reward in mid

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Speaker 1: cap and small cap versus the up up up for

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Speaker 1: large cap right now? Particularly in a small cap space.

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Speaker 1: I think there's two ingredients. Number one is the ability

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Speaker 1: to find stocks where five or fewer Wall Street analysts

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Speaker 1: follow the company compared to what stocks go up. Then

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Speaker 1: if nobody's falling them, nobody knows they're there because they're

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Speaker 1: under followed. You can do your homework on the company

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Speaker 1: and identify value where the company is going up, where

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Speaker 1: it's migrating from small to mid cap. You catch them

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Speaker 1: early before they go into the Russell two thousand index.

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Speaker 1: That's a great formula. And as you and I have

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Speaker 1: talked about repeatedly, the Bloomberg spinoff, the index back to

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Speaker 1: two thousand and two, it's compounded at fourteen percent versus

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Speaker 1: the overall market at less than ten percent. You've talked

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Speaker 1: about that a lot on this program for our listeners

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Speaker 1: that might have missed it. Talked to us about what

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Speaker 1: that actually is. It is It is when Jonathan, when

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Speaker 1: a large company spins off a smaller company, they're typically

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Speaker 1: doing it to unlock value to let the small company

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Speaker 1: flourish on its loan that they don't have to siphon

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Speaker 1: off their cash flow to the large camp beast. So

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Speaker 1: as as an example, Sendance spun off Wyndham Hotels a

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Speaker 1: number of years ago, Discover, which is migrated to a

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Speaker 1: MidCap stock spun out of Dean Witter a number of

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Speaker 1: years ago. We see spinoffs all the time. They're usually

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Speaker 1: twenty to thirty a year. We try to find the

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Speaker 1: fifteen best, and the spinoffs are a great formula for

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Speaker 1: long term alpha generation. They haven't worked since April of

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Speaker 1: this year, but the long term success story is I

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Speaker 1: think is very validated. Let's talk about what's been happening

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Speaker 1: over the last couple of months. Small camps on the

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Speaker 1: performing launche caps, which is a curious story for a

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Speaker 1: lot of people because the risk look international and you

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Speaker 1: would think the multinationals will get hit more than inside

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Speaker 1: of the small caps, which are exposed to way relatively

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Speaker 1: better US economy compared to the rest of the world.

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Speaker 1: What is the story there, David? For you, I think

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Speaker 1: it's while you thought that small caps would hold up

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Speaker 1: better because they had less China exposure and less trade sensitivity.

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Speaker 1: Overriding that in the tug of war has been slower

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Speaker 1: global global growth, slower US growth. We saw it with

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Speaker 1: the I s M numbers yesterday. I think that's trump

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Speaker 1: small cap in the near term. The greater uncertainty as

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Speaker 1: as UH compelled people to flee to large cap certainty,

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Speaker 1: particularly in a growth space. It's put small cap on hold.

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Speaker 1: I mean the names. I mean Windom Hotel, I think

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Speaker 1: a lot of her people know, people don't know d

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Speaker 1: x C Technologies, Granite Point, UH Cars, dot Com, I

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Speaker 1: mean all these names that And I'm as guilty as

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Speaker 1: this as anybody the media doesn't cover. Is at the

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Speaker 1: same old, same old decade or is there something new

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Speaker 1: this time around with microcap, small cap and mid cap

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Speaker 1: that the success story goes back to at least the twenties,

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Speaker 1: if not longer that over the longer term, small caps

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Speaker 1: will I'll perform anywhere from one to one and a

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Speaker 1: half percentage points annualized and over a long term time period.

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Speaker 1: I like to say that's what's going to get me

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Speaker 1: to retirement. A little bit bigger scale of what happened

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Speaker 1: with the autumn of two. They're massive underperformance over over

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Speaker 1: the last eleven months. I think that's global growth uncertainty,

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Speaker 1: US growth slowing at that time. What was the prospect

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Speaker 1: of not higher but lower interest rates that took small

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Speaker 1: caps down? David's Harvey, thank you so much. Within too

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Speaker 1: short a time, mid cap small cap if you're in

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Speaker 1: Asian studies and we've had the immense honor on this

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Speaker 1: program to speak with people like Orville Shell of Berkeley

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Speaker 1: and Jonathan Spends, the Giant of Yale. And another one

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Speaker 1: is someone who framed New England Chinese studies. Her name

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Speaker 1: is Ellen Widmer and she was a hero to so

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Speaker 1: many back when nobody did Asia studies, nobody did China

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Speaker 1: studies out of Wesleyan, uh and Colombia as someone who

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Speaker 1: has lived the Chinese live and writes about it to

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Speaker 1: this day. And Stevenson Yang joins us writing for Bloomberg

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Speaker 1: Opinion as well. Well, how lonely was it doing China

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Speaker 1: studies at Wesleyan a few years ago? Uh? Well, it's

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Speaker 1: it's pretty terrifying to be placed alongside those names. And

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Speaker 1: I would never place myself with them. Um, I didn't

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Speaker 1: do Chinese studies. I just stumbled into China in about

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Speaker 1: five because it was a better job than journalism. Well

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Speaker 1: that's good, I mean, John and I are looking for

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Speaker 1: that China I are looking for that is well, the

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Speaker 1: China of How different is it now? Elizabeth Economy would say,

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Speaker 1: there's a huge difference with this new regime. Well, uh,

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Speaker 1: it's let's let's say the post eighty nine China was very,

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Speaker 1: very different from the eighty five China eight five China was.

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Speaker 1: Five to eighty nine was a very exciting period, a

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Speaker 1: lot of opening up, a lot of chaos, really, people

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Speaker 1: earning a lot more money than they had ever imagined before,

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Speaker 1: people starting new new companies, all sorts of things. But

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Speaker 1: after eighty nine things changed. What you've written about recently

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Speaker 1: is the dollar dynamic, and we hear a lot about

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Speaker 1: this from financial types with suits and ties on. Explained

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Speaker 1: to us your take on how we can manage this

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Speaker 1: relationship through how we controlled dollar flow internationally in dollar

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Speaker 1: flow with China. Yeah, it's it's time for people to

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Speaker 1: realize that the capital account is inextricably linked with current

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Speaker 1: account and that we can't simply focus on trade flows

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Speaker 1: to try to correct things. Actually, the capital account is

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Speaker 1: a better way to address it, and the way to

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Speaker 1: address it is to raise rates on US treasuries, raise

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Speaker 1: long term US rates, which will reduce capital flow into

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Speaker 1: China and increase capital flow outside of China. What's so

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Speaker 1: important about this, John, is it's not just raizor rates

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Speaker 1: for one reason. There's a set of reasons, including international

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Speaker 1: in the efficacy of rates. So and you go through

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Speaker 1: this very detailed piece on Bloomberg Opinion, which essentially lays

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Speaker 1: out the following logic that if the trade war objective

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Speaker 1: is to even the playing field for American firms, when

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Speaker 1: you think about the Federal Reserve, the presidents should be

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Speaker 1: ordering them not to cut interest rates. Just just paste

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Speaker 1: that together for a lot of our listeners that might

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Speaker 1: not be following the logic, just make that work. Well.

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Speaker 1: For the last ten years, a little over ten years

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Speaker 1: since the Great for the Global financial crisis, US interest

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Speaker 1: rates have been closed to zero, and that has caused

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Speaker 1: probably about two trillion dollars to flow into China. That

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Speaker 1: free money, essentially has been what's fueled the Chinese investment

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Speaker 1: boom and made them able to compete unfairly with US firms.

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Speaker 1: Is that a little vague for you? Well know, I

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Speaker 1: just think we should explore for the Federal Reserve more

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Speaker 1: specifically here in the United States. You think it would

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Speaker 1: be better than for the US central banks be raising rights.

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Speaker 1: What damage would not do domestically in the US. That

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Speaker 1: would do damage to the US public markets, for sure,

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Speaker 1: but it would not do damage to the US consumer

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Speaker 1: or the US average average person um. And it's time

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Speaker 1: for public markets to come down, I mean within the

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Speaker 1: public markets, and it's just very very quickly here. What

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Speaker 1: do you look for in the Hong Kong debate? Is

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Speaker 1: but a too mud was mourning or our morning and

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Speaker 1: I'm calling what do you look forward to that is

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Speaker 1: coming into a solution? That is a fascinating thing going

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Speaker 1: on in Hong Kong. Unfortunately, if Carrie Lamb had made

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Speaker 1: her statements two months ago, then it probably would have worked.

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Speaker 1: Now it's uh, I think it's too little, too late,

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Speaker 1: and uh, you know, China is working mightily to avoid

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Speaker 1: a crash in the Hong Kong markets. Um, but but

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Speaker 1: what's going to happen to the protests? Hard to say

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Speaker 1: a Cusan Yang, thank you so much writing here a

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Speaker 1: different view on China. We love that, particularly with their decades.

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Speaker 1: If we're in uh China. Thanks for listening to the

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Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,

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Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at

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Speaker 1: Tom Keane before the podcast. You can always catch us worldwide.

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Speaker 1: I'm Bloomberg Radio.