WEBVTT - Surveillance: Global Order Is Shifting, Gallo Says 0:00:09.840 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Ley. 0:00:13.960 --> 0:00:17.560 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 --> 0:00:28.520 Bloomberg dot Com, and of course, on the Bloomberg Let's 0:00:28.520 --> 0:00:31.319 bring It. Stephen Gallows Showers, Steam Capital Market's head of 0:00:31.320 --> 0:00:34.200 fex strategy. He joins us on the phone. Stephen, one 0:00:34.280 --> 0:00:37.640 line from you. These are dramatic times and the entire 0:00:37.720 --> 0:00:40.800 global order is shifting, and I haven't even touched upon 0:00:40.840 --> 0:00:43.640 the broader European political backdrop. Steve. We just want me 0:00:43.640 --> 0:00:47.519 through that what it means for foreign exchange. Oh well, 0:00:47.560 --> 0:00:49.839 I feel like I've been banging on this drum for 0:00:49.880 --> 0:00:54.040 a while. Now I'll repeat it again. The forces that 0:00:54.120 --> 0:00:57.160 we had been come had become accustomed to prior to 0:00:57.200 --> 0:01:00.640 the global financial crisis, and also in the immediate aftermath 0:01:00.720 --> 0:01:02.959 of the GFC two thousand and a two thousand and nine, 0:01:02.960 --> 0:01:06.440 when the set started quee those forces have been going 0:01:06.520 --> 0:01:10.480 into reverse in terms of US trade policies, in terms 0:01:10.480 --> 0:01:14.040 of the trend towards a smaller or in fact that 0:01:14.080 --> 0:01:17.280 the US will probably be a net exporter of petroleum 0:01:17.319 --> 0:01:20.640 petroleum products over the course of the next year or so, 0:01:21.440 --> 0:01:25.000 UH in terms of the structural problems that are are 0:01:25.040 --> 0:01:28.040 coming to the service in China, in terms of reserve 0:01:28.040 --> 0:01:32.880 accumulation by major central banks, the big net exporting countries 0:01:32.920 --> 0:01:37.080 of the world, Germany, China, that they're struggling. So things 0:01:37.160 --> 0:01:40.840 are shifting. And this is a dramatic about face for 0:01:40.880 --> 0:01:44.600 the global economy. And that's why the dollar is doing 0:01:44.640 --> 0:01:49.000 well almost mechanically by default, the dollar global did the 0:01:49.000 --> 0:01:53.760 world economy, global trade is dollar based UH and and 0:01:53.760 --> 0:01:56.520 and because it's dollar based, the initial at least the 0:01:56.560 --> 0:02:01.000 initial phase of this shift is destined to be are positive, 0:02:01.080 --> 0:02:05.360 even as you point out that the US manufacturing clearly 0:02:05.440 --> 0:02:07.400 is taking a hit now, though I would point out 0:02:07.400 --> 0:02:10.400 that that's only around a tenth of US GDP, so 0:02:10.440 --> 0:02:12.080 it's not as big of a problem in the U 0:02:12.160 --> 0:02:15.480 s that it is for for example, Germany. UM. But 0:02:15.480 --> 0:02:19.560 but it's it's it's a mechanical, almost a mechanical appreciation 0:02:19.639 --> 0:02:23.200 of the US dollar because things are are worse, so 0:02:23.320 --> 0:02:26.040 much worse elsewhere in the global economy. So Stephen, in 0:02:26.080 --> 0:02:28.720 the here and now, the shock absorber in foreign exchange 0:02:28.880 --> 0:02:30.840 is the US dollar. That's why we seek dollar strength. 0:02:30.840 --> 0:02:32.840 And you say that's a mechanical response to what is 0:02:32.840 --> 0:02:37.200 happening around the world. What UN depends a pivot away 0:02:37.360 --> 0:02:40.480 from that story, away from that mechanical response that feeds 0:02:40.480 --> 0:02:44.480 dollar strength. What UN depends that change. So you basically, 0:02:44.480 --> 0:02:46.440 I think what you're asking for is when does the 0:02:46.480 --> 0:02:49.240 inflection point come. I guess there are a number of 0:02:49.280 --> 0:02:51.440 things that could cause this. You you could have a 0:02:51.480 --> 0:02:54.800 reversal of the Trump trade policy, so Trump could lose 0:02:54.840 --> 0:02:58.440 the White House UH in twenty The U s could 0:02:58.480 --> 0:03:02.640 have a dramatic and severe recession which causes enough fed 0:03:02.760 --> 0:03:07.120 easing to to to cause a flow, huge flow back 0:03:07.120 --> 0:03:11.200 into emerging markets again despite their structural problems which have 0:03:11.320 --> 0:03:15.600 come to the surface. But I tend to think I'm 0:03:15.639 --> 0:03:18.600 not I'm not banking on a Trump win in or 0:03:18.639 --> 0:03:21.240 anything like that. And it's too early to tell, but 0:03:21.760 --> 0:03:24.320 I tend to think a lot of what has started 0:03:24.480 --> 0:03:28.119 is going to be very difficult to reverse because countries 0:03:28.160 --> 0:03:32.360 are being forced to turn more inwards. China is turning 0:03:32.360 --> 0:03:35.000 more inward, and and and you can be this in 0:03:35.040 --> 0:03:37.520 the data. You can see it in terms of what's 0:03:37.520 --> 0:03:41.040 happening to supply chains in the Southeast Asia region. Stephen go, 0:03:41.240 --> 0:03:43.320 I love the long term view. In the bigger picture, 0:03:43.360 --> 0:03:46.120 I'm just trying to play pay for school supplies. What's 0:03:46.160 --> 0:03:50.680 the trade right now, given this mechanical dollar movement, what's 0:03:50.680 --> 0:03:54.560 a trade that's more most efficacious to make some money? 0:03:55.280 --> 0:03:57.600 Well for the time being, as we approached the fom 0:03:57.640 --> 0:04:01.720 C rate decision for September, or the debate about whether 0:04:01.800 --> 0:04:04.000 or not they do twenty or fifty, or they're even 0:04:04.000 --> 0:04:06.240 more debblish than fifty, that's going to rate. So I 0:04:06.280 --> 0:04:08.280 don't think now at the time where I would be 0:04:08.320 --> 0:04:11.680 adding to my long positions in the dollar versus the 0:04:11.760 --> 0:04:15.560 major G ten currents or any currency, really i'd be waiting. 0:04:16.040 --> 0:04:18.080 We've also got the ECB in front of that, and 0:04:18.120 --> 0:04:21.200 they could disappoint as well. So there's a lot of 0:04:21.240 --> 0:04:23.479 policy noise coming over the next couple of weeks. But 0:04:23.560 --> 0:04:27.240 ultimately I wanted a cold long dollar versus G ten. 0:04:27.520 --> 0:04:30.080 But I think in terms of the end crosses, I 0:04:30.120 --> 0:04:32.600 still think we're probably going to see broader based the 0:04:32.720 --> 0:04:34.840 end strength versus a number of currencies over the next 0:04:34.880 --> 0:04:37.360 few months, and to our global audience, we look at 0:04:37.400 --> 0:04:41.159 yen is a dominant currency with its own unique characteristics. 0:04:41.720 --> 0:04:48.640 Identify your belief in yen and identify the domestic why 0:04:48.680 --> 0:04:53.000 of your belief from a Tokyo standpoint, why does yen 0:04:53.080 --> 0:04:56.960 do what Stephen Gallis thinks that will do well? Of course, 0:04:57.000 --> 0:04:58.919 you have the first on the on the first instance, 0:04:58.960 --> 0:05:01.880 again mechanical rally in the end when global rates are 0:05:01.960 --> 0:05:05.840 japanized or suppressed, right, so it's almost a mechanical reaction. 0:05:06.240 --> 0:05:09.200 And then of course you have the non non commercial 0:05:09.360 --> 0:05:12.039 or the speculative flow front running that move, getting long 0:05:12.120 --> 0:05:15.320 yen in anticipation of lower rates outside of Japan. But 0:05:15.360 --> 0:05:17.960 I think Japan, to a degree, because of its very 0:05:18.000 --> 0:05:21.680 strong external fundamentals, faces the same problem that Switzerland does. 0:05:22.200 --> 0:05:27.360 Japanese investors and Swiss investors do not routinely invest enough 0:05:27.440 --> 0:05:31.400 abroad to fully recycle the current account surplus, and that 0:05:31.480 --> 0:05:35.040 means their central banks are always going to be resisting 0:05:35.520 --> 0:05:41.719 strengthen their domestic currencies when global forces turn against risk assets, 0:05:41.800 --> 0:05:43.760 and we I think that. I think the problem is 0:05:43.800 --> 0:05:46.320 even more acute in Switzerland, which is why I don't 0:05:46.360 --> 0:05:49.240 believe the SNB when it tells me that the Swiss 0:05:49.240 --> 0:05:53.359 Frankie is overvalued. In fact, I think from the perspective 0:05:53.360 --> 0:05:57.000 of a Swiss investor, the Swiss Frank is undervalued because 0:05:57.040 --> 0:05:59.040 they want a stronger Swiss Frank so that they can 0:05:59.080 --> 0:06:01.280 go broad and buy more or foreign assets. They're too 0:06:01.320 --> 0:06:04.159 expensive at these levels. Why not just invest in the 0:06:04.160 --> 0:06:08.919 domestic economy, which is exactly what Japanese investors do. Um 0:06:08.960 --> 0:06:10.960 so so I think this is this is part of 0:06:11.000 --> 0:06:14.039 the issue here that these central banks faced. Um there, 0:06:14.120 --> 0:06:17.159 their domestic investors don't want to plow enough of their 0:06:17.240 --> 0:06:20.480 capital into foreign assets to allow the current current account 0:06:20.520 --> 0:06:23.120 surpluses to be offset. Stevin Yellow, thank you so much, 0:06:23.520 --> 0:06:27.160 cap Markets. As we get started on just a cacophony 0:06:27.279 --> 0:06:44.520 of new soil right now, it is important to identify 0:06:44.600 --> 0:06:49.039 who Steve saying is absolutely definitive on the reach of 0:06:49.120 --> 0:06:52.359 Hong Kong from the time of a colony, forward to 0:06:52.400 --> 0:06:56.040 the Great Transition and onto this modern age. He's at 0:06:56.160 --> 0:07:00.479 U l uh So as China Institute. He's saying, we 0:07:00.520 --> 0:07:03.520 are just thrilled that you could join us today. She saying, 0:07:03.560 --> 0:07:06.880 what do you take of this moment where a chief 0:07:06.920 --> 0:07:13.560 executive partially capitulates to protesters. Explained this moment in Steve 0:07:13.600 --> 0:07:19.080 sayings Hong Kong. Well, I think it's a very positive step. 0:07:19.240 --> 0:07:21.800 That's the Chief Executive in Hong Kong, Carry Lamb has 0:07:21.840 --> 0:07:26.600 finally with joined the two bills, which was the trigger 0:07:26.760 --> 0:07:31.320 for the summer of discontent in Hong Kong. But I'm 0:07:31.360 --> 0:07:35.679 afraid that it is truly too too late for most 0:07:35.680 --> 0:07:39.080 of the demonstrators in Hong Kong. So that is not 0:07:39.320 --> 0:07:42.880 going to put an end to the problems we have 0:07:42.960 --> 0:07:45.560 seen in Hong Kong. I think there will be more 0:07:45.880 --> 0:07:50.720 people coming out in the demonstrations in the a few 0:07:50.720 --> 0:07:54.440 weeks coming. How is she influenced in two thousand nineteen 0:07:54.520 --> 0:07:58.280 by Beijing. It's different than when you wrote a modern 0:07:58.360 --> 0:08:03.440 history of Hong Kong, isn't it. Yes, Now, at the 0:08:03.480 --> 0:08:07.760 beginning of this summer, in June and perhaps the beginning 0:08:07.920 --> 0:08:12.320 of July, it was clear that Carry Lamb, the Chief 0:08:12.360 --> 0:08:17.600 Executive in Hong Kong, was in charge of policies in 0:08:17.680 --> 0:08:23.720 Hong Kong. Sometimes in July it would appear that she 0:08:23.880 --> 0:08:27.520 no longer was fully in charge and that she was 0:08:27.600 --> 0:08:33.199 by then receiving instructions from Beijing. So the latest move 0:08:33.480 --> 0:08:37.880 she has made in terms of finally agreeing to withdraw 0:08:37.960 --> 0:08:43.120 the two bills would have been acting on instructions or 0:08:43.160 --> 0:08:48.040 at least approval from Beijing. This is not just what 0:08:48.120 --> 0:08:51.320 Carry Lamb is doing. This is the Communist Party of 0:08:51.480 --> 0:08:58.360 China applying um a soft approach at the moment after 0:08:58.480 --> 0:09:03.280 having used a hard line, repressive approach that has failed 0:09:03.320 --> 0:09:06.599 to achieve the results they want. So, Professor, on a 0:09:06.679 --> 0:09:08.960 daylight today, Carrie Lamb will be the full guy. But 0:09:09.000 --> 0:09:11.960 I just wonder, from your reading from your research, to 0:09:12.000 --> 0:09:16.280 what degree President ch Jing pingas overstepped in the last 0:09:16.280 --> 0:09:20.680 several months. I think we are talking about presidents she 0:09:21.000 --> 0:09:26.760 overstepping in the last six years or so. Explore that forest, Professor. 0:09:28.600 --> 0:09:32.240 There is an inherent tension in the arrangement for Hong 0:09:32.320 --> 0:09:37.040 Kong's to be kept as a special administrative regent in 0:09:37.360 --> 0:09:43.000 China under the formula called one Country, two systems. For 0:09:43.160 --> 0:09:46.440 people in Hong Kong, one country, two systems is there 0:09:46.480 --> 0:09:50.360 to protect their wage of life for fifty years from 0:09:51.840 --> 0:09:57.439 until twenty seven. For the Chinese Communist Party has always 0:09:57.520 --> 0:10:01.559 been a transitional arrangement and at some stage Hong Kong 0:10:01.559 --> 0:10:08.520 will be properly part of China, and therefore for about 0:10:08.559 --> 0:10:14.600 twenty years after nineteen nearly twenty years, not quite twenty um. 0:10:14.600 --> 0:10:18.920 Both sides allow for his degree of ambiguity. The Chinese 0:10:18.920 --> 0:10:22.280 do not push too far, and Hong Kong people accept 0:10:22.320 --> 0:10:24.920 that they really are not able to exercise the degree 0:10:24.960 --> 0:10:27.720 of autonomy that they would have they would have liked. 0:10:29.160 --> 0:10:32.840 After Sen being became leader of China, he started to 0:10:32.960 --> 0:10:37.720 push much more aggressively towards Hong Kong, requiring people in 0:10:37.800 --> 0:10:43.240 Hong Kong to demonstrate their support of the Chinese government 0:10:43.400 --> 0:10:47.400 and of China more generally. And that's when you started 0:10:47.520 --> 0:10:51.959 getting the push back from the younger generations in Hong Kong, 0:10:52.360 --> 0:10:57.000 the generation of Joshua Wang and Actnes Joe, and these 0:10:57.040 --> 0:11:00.800 are the people who became leaders of the movements in 0:11:00.920 --> 0:11:04.360 twenty fourteen to push back, and they start off a 0:11:04.520 --> 0:11:08.880 school children, school kids in high schools, refuse things to 0:11:09.000 --> 0:11:16.480 learn uh Chinese curriculum. This is the pushback that slowly 0:11:16.679 --> 0:11:21.800 generated a very widespread discontent in Hong Kong over the 0:11:21.880 --> 0:11:26.240 degree of autonomy as they have. And when the protest 0:11:26.280 --> 0:11:28.720 came up this summer, a lot of them feel that 0:11:29.040 --> 0:11:31.680 this is the last chance they have to come out 0:11:31.720 --> 0:11:34.360 and defend Hong Kong's where your life or they will 0:11:34.400 --> 0:11:36.960 lose it. So, Professor, this is one forum where we 0:11:37.000 --> 0:11:40.000 are seeing this pushback play out quite clearly and sometimes 0:11:40.080 --> 0:11:43.760 violently on the screens of our TVs and smartphones around 0:11:43.760 --> 0:11:46.600 the world. I just wonder whether the trade story is 0:11:46.640 --> 0:11:50.480 also a story of pushback against China and China trying 0:11:50.480 --> 0:11:53.080 to exert its economic power on the global stage in 0:11:53.120 --> 0:11:55.880 ways that are not favorable to develop world into the 0:11:55.920 --> 0:11:58.880 West and the way of living that some people have experienced. 0:11:58.880 --> 0:12:01.599 The professor talk to me about that, how the situation 0:12:01.600 --> 0:12:04.680 in Hong Kong has parallels to the blowback perhaps that 0:12:04.760 --> 0:12:09.520 the president of China is experiencing on the trade front. Well, 0:12:09.920 --> 0:12:13.840 the events in Hong Kong in this summer, I think 0:12:14.040 --> 0:12:19.119 was not really ties to the trade war. Um. It 0:12:19.200 --> 0:12:22.679 is tied to the approach that She Jimping has adopted 0:12:23.160 --> 0:12:28.400 in making China much more assertive, and in that assertiveness 0:12:28.400 --> 0:12:32.640 he's generated a change in the view of the U 0:12:32.720 --> 0:12:36.360 S establishments on how to deal with China, and the 0:12:36.440 --> 0:12:40.880 trade war is part of that pushback from the American establishment. 0:12:41.200 --> 0:12:43.480 So they are kind of in parallel and in that 0:12:43.600 --> 0:12:47.960 sense of link, but they are not directly related in 0:12:48.000 --> 0:12:51.560 a coursal way. Professor. One final question, what is the 0:12:51.640 --> 0:12:55.319 professor saying to do list for Donald Trump? What can 0:12:55.360 --> 0:12:59.000 the President of the United States do to advocate for 0:12:59.040 --> 0:13:03.319 the people of Hong Kong. On well, for the President 0:13:03.400 --> 0:13:07.040 of the United States, I think the really important issue 0:13:07.559 --> 0:13:12.400 is to make sure that the US Hong Kong Policy Act, 0:13:12.960 --> 0:13:18.440 which gives Hong Kong special advantages and special treatment separate 0:13:18.559 --> 0:13:22.880 from that being received by the POC the People's Refubrict 0:13:22.920 --> 0:13:28.080 of China, is being absolutely enforced to the latter. And 0:13:28.120 --> 0:13:33.000 in this spirit that Hong Kong must be maintaining is 0:13:33.520 --> 0:13:38.600 degree of autonomy UH guaranteed in the sin of British 0:13:38.800 --> 0:13:43.160 agreements of n for Hong Kong to continues to receive 0:13:43.840 --> 0:13:47.800 the advantages givens in the Hong Kong Policy Act, and 0:13:47.960 --> 0:13:52.360 we iterate that if this is being violated then the U. 0:13:52.440 --> 0:13:56.560 S Government will take it very very seriously. Indeed that 0:13:56.600 --> 0:14:00.720 may deter the Chinese government from overstepping them. Hong Kong 0:14:00.840 --> 0:14:03.199 ste saying thank you so much, University of London. So 0:14:03.320 --> 0:14:06.640 as of course his classic twenty years ago, the modern 0:14:06.720 --> 0:14:10.520 history of Hong Kong is just an absolute extraordinary. At 0:14:10.559 --> 0:14:26.480 the time when d Serby with us David Serby of 0:14:26.520 --> 0:14:31.320 Van Kora all sorts of work institutionally with explaining why 0:14:31.400 --> 0:14:34.000 you don't have to buy Amazon and Apple to move forward. 0:14:34.000 --> 0:14:37.280 There's a few other stocks out there's if you ever 0:14:37.320 --> 0:14:39.840 seen the skew to large cap David Serby like we've 0:14:39.840 --> 0:14:42.200 got right now. Is this typical or is this like 0:14:42.600 --> 0:14:48.400 never never before December was the last time we've seen 0:14:48.880 --> 0:14:52.600 this kind of skew of large caps trading at okay 0:14:52.760 --> 0:14:56.560 to earnings valuation in excessive small cap the same story 0:14:56.600 --> 0:14:58.120 and growth to value. So you do you go out 0:14:58.160 --> 0:15:00.840 eighteen months from December n nine and say it's gonna 0:15:00.840 --> 0:15:03.760 be ugly eighteen months from now, it wasn't. If you're 0:15:03.760 --> 0:15:07.360 a small cap value investor, you had positive returns in 0:15:07.400 --> 0:15:11.720 a market that was on its way to decline. I'm 0:15:11.760 --> 0:15:14.400 looking at a sharp ratio for mid caps right now. 0:15:14.440 --> 0:15:17.520 That's pretty cool, and that is risk and reward. Let's 0:15:17.560 --> 0:15:20.840 identify those two right now. What's the reward in mid 0:15:20.880 --> 0:15:24.320 cap and small cap versus the up up up for 0:15:24.440 --> 0:15:27.800 large cap right now? Particularly in a small cap space. 0:15:28.400 --> 0:15:31.840 I think there's two ingredients. Number one is the ability 0:15:31.880 --> 0:15:35.520 to find stocks where five or fewer Wall Street analysts 0:15:35.600 --> 0:15:38.920 follow the company compared to what stocks go up. Then 0:15:39.080 --> 0:15:42.680 if nobody's falling them, nobody knows they're there because they're 0:15:42.760 --> 0:15:45.800 under followed. You can do your homework on the company 0:15:45.840 --> 0:15:48.720 and identify value where the company is going up, where 0:15:48.720 --> 0:15:52.320 it's migrating from small to mid cap. You catch them 0:15:52.360 --> 0:15:55.160 early before they go into the Russell two thousand index. 0:15:55.200 --> 0:15:57.280 That's a great formula. And as you and I have 0:15:57.320 --> 0:16:00.880 talked about repeatedly, the Bloomberg spinoff, the index back to 0:16:00.960 --> 0:16:05.520 two thousand and two, it's compounded at fourteen percent versus 0:16:05.560 --> 0:16:08.400 the overall market at less than ten percent. You've talked 0:16:08.440 --> 0:16:10.200 about that a lot on this program for our listeners 0:16:10.200 --> 0:16:11.960 that might have missed it. Talked to us about what 0:16:12.040 --> 0:16:15.480 that actually is. It is It is when Jonathan, when 0:16:15.520 --> 0:16:19.720 a large company spins off a smaller company, they're typically 0:16:19.760 --> 0:16:23.120 doing it to unlock value to let the small company 0:16:23.280 --> 0:16:26.840 flourish on its loan that they don't have to siphon 0:16:26.920 --> 0:16:30.000 off their cash flow to the large camp beast. So 0:16:30.120 --> 0:16:35.000 as as an example, Sendance spun off Wyndham Hotels a 0:16:35.080 --> 0:16:38.120 number of years ago, Discover, which is migrated to a 0:16:38.160 --> 0:16:41.440 MidCap stock spun out of Dean Witter a number of 0:16:41.560 --> 0:16:44.160 years ago. We see spinoffs all the time. They're usually 0:16:44.160 --> 0:16:46.480 twenty to thirty a year. We try to find the 0:16:46.520 --> 0:16:50.320 fifteen best, and the spinoffs are a great formula for 0:16:50.400 --> 0:16:53.360 long term alpha generation. They haven't worked since April of 0:16:53.440 --> 0:16:56.720 this year, but the long term success story is I 0:16:56.760 --> 0:16:59.400 think is very validated. Let's talk about what's been happening 0:16:59.400 --> 0:17:01.480 over the last couple of months. Small camps on the 0:17:01.480 --> 0:17:04.080 performing launche caps, which is a curious story for a 0:17:04.119 --> 0:17:06.760 lot of people because the risk look international and you 0:17:06.760 --> 0:17:09.320 would think the multinationals will get hit more than inside 0:17:09.320 --> 0:17:11.760 of the small caps, which are exposed to way relatively 0:17:11.800 --> 0:17:13.800 better US economy compared to the rest of the world. 0:17:13.880 --> 0:17:16.960 What is the story there, David? For you, I think 0:17:17.359 --> 0:17:19.919 it's while you thought that small caps would hold up 0:17:19.920 --> 0:17:23.000 better because they had less China exposure and less trade sensitivity. 0:17:23.480 --> 0:17:26.399 Overriding that in the tug of war has been slower 0:17:26.440 --> 0:17:29.560 global global growth, slower US growth. We saw it with 0:17:29.560 --> 0:17:32.399 the I s M numbers yesterday. I think that's trump 0:17:32.560 --> 0:17:35.719 small cap in the near term. The greater uncertainty as 0:17:35.760 --> 0:17:40.080 as UH compelled people to flee to large cap certainty, 0:17:40.080 --> 0:17:43.840 particularly in a growth space. It's put small cap on hold. 0:17:44.119 --> 0:17:46.160 I mean the names. I mean Windom Hotel, I think 0:17:46.160 --> 0:17:48.720 a lot of her people know, people don't know d 0:17:48.840 --> 0:17:53.919 x C Technologies, Granite Point, UH Cars, dot Com, I 0:17:53.920 --> 0:17:57.000 mean all these names that And I'm as guilty as 0:17:57.040 --> 0:18:00.280 this as anybody the media doesn't cover. Is at the 0:18:00.359 --> 0:18:03.480 same old, same old decade or is there something new 0:18:03.600 --> 0:18:07.399 this time around with microcap, small cap and mid cap 0:18:07.640 --> 0:18:11.600 that the success story goes back to at least the twenties, 0:18:11.640 --> 0:18:14.840 if not longer that over the longer term, small caps 0:18:14.880 --> 0:18:17.639 will I'll perform anywhere from one to one and a 0:18:17.720 --> 0:18:21.800 half percentage points annualized and over a long term time period. 0:18:21.800 --> 0:18:23.199 I like to say that's what's going to get me 0:18:23.240 --> 0:18:26.320 to retirement. A little bit bigger scale of what happened 0:18:26.320 --> 0:18:31.320 with the autumn of two. They're massive underperformance over over 0:18:31.359 --> 0:18:36.320 the last eleven months. I think that's global growth uncertainty, 0:18:36.600 --> 0:18:40.800 US growth slowing at that time. What was the prospect 0:18:40.840 --> 0:18:43.760 of not higher but lower interest rates that took small 0:18:43.800 --> 0:18:46.719 caps down? David's Harvey, thank you so much. Within too 0:18:46.760 --> 0:19:05.040 short a time, mid cap small cap if you're in 0:19:05.119 --> 0:19:07.600 Asian studies and we've had the immense honor on this 0:19:07.680 --> 0:19:10.400 program to speak with people like Orville Shell of Berkeley 0:19:10.440 --> 0:19:13.840 and Jonathan Spends, the Giant of Yale. And another one 0:19:13.920 --> 0:19:17.160 is someone who framed New England Chinese studies. Her name 0:19:17.240 --> 0:19:20.080 is Ellen Widmer and she was a hero to so 0:19:20.119 --> 0:19:24.400 many back when nobody did Asia studies, nobody did China 0:19:24.520 --> 0:19:29.160 studies out of Wesleyan, uh and Colombia as someone who 0:19:29.160 --> 0:19:32.439 has lived the Chinese live and writes about it to 0:19:32.480 --> 0:19:37.040 this day. And Stevenson Yang joins us writing for Bloomberg 0:19:37.040 --> 0:19:40.200 Opinion as well. Well, how lonely was it doing China 0:19:40.320 --> 0:19:44.120 studies at Wesleyan a few years ago? Uh? Well, it's 0:19:44.240 --> 0:19:47.440 it's pretty terrifying to be placed alongside those names. And 0:19:47.480 --> 0:19:50.120 I would never place myself with them. Um, I didn't 0:19:50.160 --> 0:19:53.280 do Chinese studies. I just stumbled into China in about 0:19:54.119 --> 0:19:56.960 five because it was a better job than journalism. Well 0:19:56.960 --> 0:19:58.920 that's good, I mean, John and I are looking for 0:19:58.960 --> 0:20:02.040 that China I are looking for that is well, the 0:20:02.119 --> 0:20:06.800 China of How different is it now? Elizabeth Economy would say, 0:20:06.840 --> 0:20:11.440 there's a huge difference with this new regime. Well, uh, 0:20:11.480 --> 0:20:16.200 it's let's let's say the post eighty nine China was very, 0:20:16.320 --> 0:20:19.479 very different from the eighty five China eight five China was. 0:20:19.880 --> 0:20:23.159 Five to eighty nine was a very exciting period, a 0:20:23.160 --> 0:20:27.080 lot of opening up, a lot of chaos, really, people 0:20:27.119 --> 0:20:30.119 earning a lot more money than they had ever imagined before, 0:20:30.240 --> 0:20:33.760 people starting new new companies, all sorts of things. But 0:20:33.840 --> 0:20:37.280 after eighty nine things changed. What you've written about recently 0:20:37.520 --> 0:20:39.919 is the dollar dynamic, and we hear a lot about 0:20:39.920 --> 0:20:43.040 this from financial types with suits and ties on. Explained 0:20:43.080 --> 0:20:46.159 to us your take on how we can manage this 0:20:46.280 --> 0:20:51.280 relationship through how we controlled dollar flow internationally in dollar 0:20:51.359 --> 0:20:55.320 flow with China. Yeah, it's it's time for people to 0:20:55.440 --> 0:21:00.359 realize that the capital account is inextricably linked with current 0:21:00.359 --> 0:21:03.640 account and that we can't simply focus on trade flows 0:21:03.960 --> 0:21:07.080 to try to correct things. Actually, the capital account is 0:21:07.119 --> 0:21:09.240 a better way to address it, and the way to 0:21:09.280 --> 0:21:14.560 address it is to raise rates on US treasuries, raise 0:21:14.640 --> 0:21:18.359 long term US rates, which will reduce capital flow into 0:21:18.440 --> 0:21:22.879 China and increase capital flow outside of China. What's so 0:21:22.880 --> 0:21:25.560 important about this, John, is it's not just raizor rates 0:21:25.600 --> 0:21:30.000 for one reason. There's a set of reasons, including international 0:21:30.600 --> 0:21:34.040 in the efficacy of rates. So and you go through 0:21:34.080 --> 0:21:38.520 this very detailed piece on Bloomberg Opinion, which essentially lays 0:21:38.520 --> 0:21:42.160 out the following logic that if the trade war objective 0:21:42.200 --> 0:21:45.520 is to even the playing field for American firms, when 0:21:45.520 --> 0:21:47.800 you think about the Federal Reserve, the presidents should be 0:21:47.880 --> 0:21:50.560 ordering them not to cut interest rates. Just just paste 0:21:50.560 --> 0:21:52.760 that together for a lot of our listeners that might 0:21:52.760 --> 0:21:55.879 not be following the logic, just make that work. Well. 0:21:56.160 --> 0:21:59.520 For the last ten years, a little over ten years 0:21:59.520 --> 0:22:03.320 since the Great for the Global financial crisis, US interest 0:22:03.400 --> 0:22:06.520 rates have been closed to zero, and that has caused 0:22:07.000 --> 0:22:11.080 probably about two trillion dollars to flow into China. That 0:22:11.440 --> 0:22:15.080 free money, essentially has been what's fueled the Chinese investment 0:22:15.119 --> 0:22:18.879 boom and made them able to compete unfairly with US firms. 0:22:21.520 --> 0:22:23.760 Is that a little vague for you? Well know, I 0:22:23.800 --> 0:22:25.800 just think we should explore for the Federal Reserve more 0:22:25.880 --> 0:22:28.720 specifically here in the United States. You think it would 0:22:28.760 --> 0:22:32.520 be better than for the US central banks be raising rights. 0:22:33.920 --> 0:22:37.520 What damage would not do domestically in the US. That 0:22:37.560 --> 0:22:41.240 would do damage to the US public markets, for sure, 0:22:41.600 --> 0:22:44.160 but it would not do damage to the US consumer 0:22:44.400 --> 0:22:48.720 or the US average average person um. And it's time 0:22:48.760 --> 0:22:52.080 for public markets to come down, I mean within the 0:22:52.119 --> 0:22:55.120 public markets, and it's just very very quickly here. What 0:22:55.200 --> 0:22:57.399 do you look for in the Hong Kong debate? Is 0:22:57.400 --> 0:23:00.040 but a too mud was mourning or our morning and 0:23:00.119 --> 0:23:02.600 I'm calling what do you look forward to that is 0:23:02.840 --> 0:23:05.840 coming into a solution? That is a fascinating thing going 0:23:05.880 --> 0:23:09.000 on in Hong Kong. Unfortunately, if Carrie Lamb had made 0:23:09.000 --> 0:23:12.320 her statements two months ago, then it probably would have worked. 0:23:12.440 --> 0:23:15.440 Now it's uh, I think it's too little, too late, 0:23:15.960 --> 0:23:19.240 and uh, you know, China is working mightily to avoid 0:23:19.320 --> 0:23:23.159 a crash in the Hong Kong markets. Um, but but 0:23:23.320 --> 0:23:25.840 what's going to happen to the protests? Hard to say 0:23:26.000 --> 0:23:29.800 a Cusan Yang, thank you so much writing here a 0:23:29.800 --> 0:23:33.280 different view on China. We love that, particularly with their decades. 0:23:33.320 --> 0:23:37.720 If we're in uh China. Thanks for listening to the 0:23:37.720 --> 0:23:44.240 Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, 0:23:44.600 --> 0:23:48.800 or whichever podcast platform you prefer. I'm on Twitter at 0:23:48.880 --> 0:23:53.120 Tom Keane before the podcast. You can always catch us worldwide. 0:23:53.600 --> 0:24:02.080 I'm Bloomberg Radio.