Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Ley.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg Let's
Speaker 1: bring It. Stephen Gallows Showers, Steam Capital Market's head of
Speaker 1: fex strategy. He joins us on the phone. Stephen, one
Speaker 1: line from you. These are dramatic times and the entire
Speaker 1: global order is shifting, and I haven't even touched upon
Speaker 1: the broader European political backdrop. Steve. We just want me
Speaker 1: through that what it means for foreign exchange. Oh well,
Speaker 1: I feel like I've been banging on this drum for
Speaker 1: a while. Now I'll repeat it again. The forces that
Speaker 1: we had been come had become accustomed to prior to
Speaker 1: the global financial crisis, and also in the immediate aftermath
Speaker 1: of the GFC two thousand and a two thousand and nine,
Speaker 1: when the set started quee those forces have been going
Speaker 1: into reverse in terms of US trade policies, in terms
Speaker 1: of the trend towards a smaller or in fact that
Speaker 1: the US will probably be a net exporter of petroleum
Speaker 1: petroleum products over the course of the next year or so,
Speaker 1: UH in terms of the structural problems that are are
Speaker 1: coming to the service in China, in terms of reserve
Speaker 1: accumulation by major central banks, the big net exporting countries
Speaker 1: of the world, Germany, China, that they're struggling. So things
Speaker 1: are shifting. And this is a dramatic about face for
Speaker 1: the global economy. And that's why the dollar is doing
Speaker 1: well almost mechanically by default, the dollar global did the
Speaker 1: world economy, global trade is dollar based UH and and
Speaker 1: and because it's dollar based, the initial at least the
Speaker 1: initial phase of this shift is destined to be are positive,
Speaker 1: even as you point out that the US manufacturing clearly
Speaker 1: is taking a hit now, though I would point out
Speaker 1: that that's only around a tenth of US GDP, so
Speaker 1: it's not as big of a problem in the U
Speaker 1: s that it is for for example, Germany. UM. But
Speaker 1: but it's it's it's a mechanical, almost a mechanical appreciation
Speaker 1: of the US dollar because things are are worse, so
Speaker 1: much worse elsewhere in the global economy. So Stephen, in
Speaker 1: the here and now, the shock absorber in foreign exchange
Speaker 1: is the US dollar. That's why we seek dollar strength.
Speaker 1: And you say that's a mechanical response to what is
Speaker 1: happening around the world. What UN depends a pivot away
Speaker 1: from that story, away from that mechanical response that feeds
Speaker 1: dollar strength. What UN depends that change. So you basically,
Speaker 1: I think what you're asking for is when does the
Speaker 1: inflection point come. I guess there are a number of
Speaker 1: things that could cause this. You you could have a
Speaker 1: reversal of the Trump trade policy, so Trump could lose
Speaker 1: the White House UH in twenty The U s could
Speaker 1: have a dramatic and severe recession which causes enough fed
Speaker 1: easing to to to cause a flow, huge flow back
Speaker 1: into emerging markets again despite their structural problems which have
Speaker 1: come to the surface. But I tend to think I'm
Speaker 1: not I'm not banking on a Trump win in or
Speaker 1: anything like that. And it's too early to tell, but
Speaker 1: I tend to think a lot of what has started
Speaker 1: is going to be very difficult to reverse because countries
Speaker 1: are being forced to turn more inwards. China is turning
Speaker 1: more inward, and and and you can be this in
Speaker 1: the data. You can see it in terms of what's
Speaker 1: happening to supply chains in the Southeast Asia region. Stephen go,
Speaker 1: I love the long term view. In the bigger picture,
Speaker 1: I'm just trying to play pay for school supplies. What's
Speaker 1: the trade right now, given this mechanical dollar movement, what's
Speaker 1: a trade that's more most efficacious to make some money?
Speaker 1: Well for the time being, as we approached the fom
Speaker 1: C rate decision for September, or the debate about whether
Speaker 1: or not they do twenty or fifty, or they're even
Speaker 1: more debblish than fifty, that's going to rate. So I
Speaker 1: don't think now at the time where I would be
Speaker 1: adding to my long positions in the dollar versus the
Speaker 1: major G ten currents or any currency, really i'd be waiting.
Speaker 1: We've also got the ECB in front of that, and
Speaker 1: they could disappoint as well. So there's a lot of
Speaker 1: policy noise coming over the next couple of weeks. But
Speaker 1: ultimately I wanted a cold long dollar versus G ten.
Speaker 1: But I think in terms of the end crosses, I
Speaker 1: still think we're probably going to see broader based the
Speaker 1: end strength versus a number of currencies over the next
Speaker 1: few months, and to our global audience, we look at
Speaker 1: yen is a dominant currency with its own unique characteristics.
Speaker 1: Identify your belief in yen and identify the domestic why
Speaker 1: of your belief from a Tokyo standpoint, why does yen
Speaker 1: do what Stephen Gallis thinks that will do well? Of course,
Speaker 1: you have the first on the on the first instance,
Speaker 1: again mechanical rally in the end when global rates are
Speaker 1: japanized or suppressed, right, so it's almost a mechanical reaction.
Speaker 1: And then of course you have the non non commercial
Speaker 1: or the speculative flow front running that move, getting long
Speaker 1: yen in anticipation of lower rates outside of Japan. But
Speaker 1: I think Japan, to a degree, because of its very
Speaker 1: strong external fundamentals, faces the same problem that Switzerland does.
Speaker 1: Japanese investors and Swiss investors do not routinely invest enough
Speaker 1: abroad to fully recycle the current account surplus, and that
Speaker 1: means their central banks are always going to be resisting
Speaker 1: strengthen their domestic currencies when global forces turn against risk assets,
Speaker 1: and we I think that. I think the problem is
Speaker 1: even more acute in Switzerland, which is why I don't
Speaker 1: believe the SNB when it tells me that the Swiss
Speaker 1: Frankie is overvalued. In fact, I think from the perspective
Speaker 1: of a Swiss investor, the Swiss Frank is undervalued because
Speaker 1: they want a stronger Swiss Frank so that they can
Speaker 1: go broad and buy more or foreign assets. They're too
Speaker 1: expensive at these levels. Why not just invest in the
Speaker 1: domestic economy, which is exactly what Japanese investors do. Um
Speaker 1: so so I think this is this is part of
Speaker 1: the issue here that these central banks faced. Um there,
Speaker 1: their domestic investors don't want to plow enough of their
Speaker 1: capital into foreign assets to allow the current current account
Speaker 1: surpluses to be offset. Stevin Yellow, thank you so much,
Speaker 1: cap Markets. As we get started on just a cacophony
Speaker 1: of new soil right now, it is important to identify
Speaker 1: who Steve saying is absolutely definitive on the reach of
Speaker 1: Hong Kong from the time of a colony, forward to
Speaker 1: the Great Transition and onto this modern age. He's at
Speaker 1: U l uh So as China Institute. He's saying, we
Speaker 1: are just thrilled that you could join us today. She saying,
Speaker 1: what do you take of this moment where a chief
Speaker 1: executive partially capitulates to protesters. Explained this moment in Steve
Speaker 1: sayings Hong Kong. Well, I think it's a very positive step.
Speaker 1: That's the Chief Executive in Hong Kong, Carry Lamb has
Speaker 1: finally with joined the two bills, which was the trigger
Speaker 1: for the summer of discontent in Hong Kong. But I'm
Speaker 1: afraid that it is truly too too late for most
Speaker 1: of the demonstrators in Hong Kong. So that is not
Speaker 1: going to put an end to the problems we have
Speaker 1: seen in Hong Kong. I think there will be more
Speaker 1: people coming out in the demonstrations in the a few
Speaker 1: weeks coming. How is she influenced in two thousand nineteen
Speaker 1: by Beijing. It's different than when you wrote a modern
Speaker 1: history of Hong Kong, isn't it. Yes, Now, at the
Speaker 1: beginning of this summer, in June and perhaps the beginning
Speaker 1: of July, it was clear that Carry Lamb, the Chief
Speaker 1: Executive in Hong Kong, was in charge of policies in
Speaker 1: Hong Kong. Sometimes in July it would appear that she
Speaker 1: no longer was fully in charge and that she was
Speaker 1: by then receiving instructions from Beijing. So the latest move
Speaker 1: she has made in terms of finally agreeing to withdraw
Speaker 1: the two bills would have been acting on instructions or
Speaker 1: at least approval from Beijing. This is not just what
Speaker 1: Carry Lamb is doing. This is the Communist Party of
Speaker 1: China applying um a soft approach at the moment after
Speaker 1: having used a hard line, repressive approach that has failed
Speaker 1: to achieve the results they want. So, Professor, on a
Speaker 1: daylight today, Carrie Lamb will be the full guy. But
Speaker 1: I just wonder, from your reading from your research, to
Speaker 1: what degree President ch Jing pingas overstepped in the last
Speaker 1: several months. I think we are talking about presidents she
Speaker 1: overstepping in the last six years or so. Explore that forest, Professor.
Speaker 1: There is an inherent tension in the arrangement for Hong
Speaker 1: Kong's to be kept as a special administrative regent in
Speaker 1: China under the formula called one Country, two systems. For
Speaker 1: people in Hong Kong, one country, two systems is there
Speaker 1: to protect their wage of life for fifty years from
Speaker 1: until twenty seven. For the Chinese Communist Party has always
Speaker 1: been a transitional arrangement and at some stage Hong Kong
Speaker 1: will be properly part of China, and therefore for about
Speaker 1: twenty years after nineteen nearly twenty years, not quite twenty um.
Speaker 1: Both sides allow for his degree of ambiguity. The Chinese
Speaker 1: do not push too far, and Hong Kong people accept
Speaker 1: that they really are not able to exercise the degree
Speaker 1: of autonomy that they would have they would have liked.
Speaker 1: After Sen being became leader of China, he started to
Speaker 1: push much more aggressively towards Hong Kong, requiring people in
Speaker 1: Hong Kong to demonstrate their support of the Chinese government
Speaker 1: and of China more generally. And that's when you started
Speaker 1: getting the push back from the younger generations in Hong Kong,
Speaker 1: the generation of Joshua Wang and Actnes Joe, and these
Speaker 1: are the people who became leaders of the movements in
Speaker 1: twenty fourteen to push back, and they start off a
Speaker 1: school children, school kids in high schools, refuse things to
Speaker 1: learn uh Chinese curriculum. This is the pushback that slowly
Speaker 1: generated a very widespread discontent in Hong Kong over the
Speaker 1: degree of autonomy as they have. And when the protest
Speaker 1: came up this summer, a lot of them feel that
Speaker 1: this is the last chance they have to come out
Speaker 1: and defend Hong Kong's where your life or they will
Speaker 1: lose it. So, Professor, this is one forum where we
Speaker 1: are seeing this pushback play out quite clearly and sometimes
Speaker 1: violently on the screens of our TVs and smartphones around
Speaker 1: the world. I just wonder whether the trade story is
Speaker 1: also a story of pushback against China and China trying
Speaker 1: to exert its economic power on the global stage in
Speaker 1: ways that are not favorable to develop world into the
Speaker 1: West and the way of living that some people have experienced.
Speaker 1: The professor talk to me about that, how the situation
Speaker 1: in Hong Kong has parallels to the blowback perhaps that
Speaker 1: the president of China is experiencing on the trade front. Well,
Speaker 1: the events in Hong Kong in this summer, I think
Speaker 1: was not really ties to the trade war. Um. It
Speaker 1: is tied to the approach that She Jimping has adopted
Speaker 1: in making China much more assertive, and in that assertiveness
Speaker 1: he's generated a change in the view of the U
Speaker 1: S establishments on how to deal with China, and the
Speaker 1: trade war is part of that pushback from the American establishment.
Speaker 1: So they are kind of in parallel and in that
Speaker 1: sense of link, but they are not directly related in
Speaker 1: a coursal way. Professor. One final question, what is the
Speaker 1: professor saying to do list for Donald Trump? What can
Speaker 1: the President of the United States do to advocate for
Speaker 1: the people of Hong Kong. On well, for the President
Speaker 1: of the United States, I think the really important issue
Speaker 1: is to make sure that the US Hong Kong Policy Act,
Speaker 1: which gives Hong Kong special advantages and special treatment separate
Speaker 1: from that being received by the POC the People's Refubrict
Speaker 1: of China, is being absolutely enforced to the latter. And
Speaker 1: in this spirit that Hong Kong must be maintaining is
Speaker 1: degree of autonomy UH guaranteed in the sin of British
Speaker 1: agreements of n for Hong Kong to continues to receive
Speaker 1: the advantages givens in the Hong Kong Policy Act, and
Speaker 1: we iterate that if this is being violated then the U.
Speaker 1: S Government will take it very very seriously. Indeed that
Speaker 1: may deter the Chinese government from overstepping them. Hong Kong
Speaker 1: ste saying thank you so much, University of London. So
Speaker 1: as of course his classic twenty years ago, the modern
Speaker 1: history of Hong Kong is just an absolute extraordinary. At
Speaker 1: the time when d Serby with us David Serby of
Speaker 1: Van Kora all sorts of work institutionally with explaining why
Speaker 1: you don't have to buy Amazon and Apple to move forward.
Speaker 1: There's a few other stocks out there's if you ever
Speaker 1: seen the skew to large cap David Serby like we've
Speaker 1: got right now. Is this typical or is this like
Speaker 1: never never before December was the last time we've seen
Speaker 1: this kind of skew of large caps trading at okay
Speaker 1: to earnings valuation in excessive small cap the same story
Speaker 1: and growth to value. So you do you go out
Speaker 1: eighteen months from December n nine and say it's gonna
Speaker 1: be ugly eighteen months from now, it wasn't. If you're
Speaker 1: a small cap value investor, you had positive returns in
Speaker 1: a market that was on its way to decline. I'm
Speaker 1: looking at a sharp ratio for mid caps right now.
Speaker 1: That's pretty cool, and that is risk and reward. Let's
Speaker 1: identify those two right now. What's the reward in mid
Speaker 1: cap and small cap versus the up up up for
Speaker 1: large cap right now? Particularly in a small cap space.
Speaker 1: I think there's two ingredients. Number one is the ability
Speaker 1: to find stocks where five or fewer Wall Street analysts
Speaker 1: follow the company compared to what stocks go up. Then
Speaker 1: if nobody's falling them, nobody knows they're there because they're
Speaker 1: under followed. You can do your homework on the company
Speaker 1: and identify value where the company is going up, where
Speaker 1: it's migrating from small to mid cap. You catch them
Speaker 1: early before they go into the Russell two thousand index.
Speaker 1: That's a great formula. And as you and I have
Speaker 1: talked about repeatedly, the Bloomberg spinoff, the index back to
Speaker 1: two thousand and two, it's compounded at fourteen percent versus
Speaker 1: the overall market at less than ten percent. You've talked
Speaker 1: about that a lot on this program for our listeners
Speaker 1: that might have missed it. Talked to us about what
Speaker 1: that actually is. It is It is when Jonathan, when
Speaker 1: a large company spins off a smaller company, they're typically
Speaker 1: doing it to unlock value to let the small company
Speaker 1: flourish on its loan that they don't have to siphon
Speaker 1: off their cash flow to the large camp beast. So
Speaker 1: as as an example, Sendance spun off Wyndham Hotels a
Speaker 1: number of years ago, Discover, which is migrated to a
Speaker 1: MidCap stock spun out of Dean Witter a number of
Speaker 1: years ago. We see spinoffs all the time. They're usually
Speaker 1: twenty to thirty a year. We try to find the
Speaker 1: fifteen best, and the spinoffs are a great formula for
Speaker 1: long term alpha generation. They haven't worked since April of
Speaker 1: this year, but the long term success story is I
Speaker 1: think is very validated. Let's talk about what's been happening
Speaker 1: over the last couple of months. Small camps on the
Speaker 1: performing launche caps, which is a curious story for a
Speaker 1: lot of people because the risk look international and you
Speaker 1: would think the multinationals will get hit more than inside
Speaker 1: of the small caps, which are exposed to way relatively
Speaker 1: better US economy compared to the rest of the world.
Speaker 1: What is the story there, David? For you, I think
Speaker 1: it's while you thought that small caps would hold up
Speaker 1: better because they had less China exposure and less trade sensitivity.
Speaker 1: Overriding that in the tug of war has been slower
Speaker 1: global global growth, slower US growth. We saw it with
Speaker 1: the I s M numbers yesterday. I think that's trump
Speaker 1: small cap in the near term. The greater uncertainty as
Speaker 1: as UH compelled people to flee to large cap certainty,
Speaker 1: particularly in a growth space. It's put small cap on hold.
Speaker 1: I mean the names. I mean Windom Hotel, I think
Speaker 1: a lot of her people know, people don't know d
Speaker 1: x C Technologies, Granite Point, UH Cars, dot Com, I
Speaker 1: mean all these names that And I'm as guilty as
Speaker 1: this as anybody the media doesn't cover. Is at the
Speaker 1: same old, same old decade or is there something new
Speaker 1: this time around with microcap, small cap and mid cap
Speaker 1: that the success story goes back to at least the twenties,
Speaker 1: if not longer that over the longer term, small caps
Speaker 1: will I'll perform anywhere from one to one and a
Speaker 1: half percentage points annualized and over a long term time period.
Speaker 1: I like to say that's what's going to get me
Speaker 1: to retirement. A little bit bigger scale of what happened
Speaker 1: with the autumn of two. They're massive underperformance over over
Speaker 1: the last eleven months. I think that's global growth uncertainty,
Speaker 1: US growth slowing at that time. What was the prospect
Speaker 1: of not higher but lower interest rates that took small
Speaker 1: caps down? David's Harvey, thank you so much. Within too
Speaker 1: short a time, mid cap small cap if you're in
Speaker 1: Asian studies and we've had the immense honor on this
Speaker 1: program to speak with people like Orville Shell of Berkeley
Speaker 1: and Jonathan Spends, the Giant of Yale. And another one
Speaker 1: is someone who framed New England Chinese studies. Her name
Speaker 1: is Ellen Widmer and she was a hero to so
Speaker 1: many back when nobody did Asia studies, nobody did China
Speaker 1: studies out of Wesleyan, uh and Colombia as someone who
Speaker 1: has lived the Chinese live and writes about it to
Speaker 1: this day. And Stevenson Yang joins us writing for Bloomberg
Speaker 1: Opinion as well. Well, how lonely was it doing China
Speaker 1: studies at Wesleyan a few years ago? Uh? Well, it's
Speaker 1: it's pretty terrifying to be placed alongside those names. And
Speaker 1: I would never place myself with them. Um, I didn't
Speaker 1: do Chinese studies. I just stumbled into China in about
Speaker 1: five because it was a better job than journalism. Well
Speaker 1: that's good, I mean, John and I are looking for
Speaker 1: that China I are looking for that is well, the
Speaker 1: China of How different is it now? Elizabeth Economy would say,
Speaker 1: there's a huge difference with this new regime. Well, uh,
Speaker 1: it's let's let's say the post eighty nine China was very,
Speaker 1: very different from the eighty five China eight five China was.
Speaker 1: Five to eighty nine was a very exciting period, a
Speaker 1: lot of opening up, a lot of chaos, really, people
Speaker 1: earning a lot more money than they had ever imagined before,
Speaker 1: people starting new new companies, all sorts of things. But
Speaker 1: after eighty nine things changed. What you've written about recently
Speaker 1: is the dollar dynamic, and we hear a lot about
Speaker 1: this from financial types with suits and ties on. Explained
Speaker 1: to us your take on how we can manage this
Speaker 1: relationship through how we controlled dollar flow internationally in dollar
Speaker 1: flow with China. Yeah, it's it's time for people to
Speaker 1: realize that the capital account is inextricably linked with current
Speaker 1: account and that we can't simply focus on trade flows
Speaker 1: to try to correct things. Actually, the capital account is
Speaker 1: a better way to address it, and the way to
Speaker 1: address it is to raise rates on US treasuries, raise
Speaker 1: long term US rates, which will reduce capital flow into
Speaker 1: China and increase capital flow outside of China. What's so
Speaker 1: important about this, John, is it's not just raizor rates
Speaker 1: for one reason. There's a set of reasons, including international
Speaker 1: in the efficacy of rates. So and you go through
Speaker 1: this very detailed piece on Bloomberg Opinion, which essentially lays
Speaker 1: out the following logic that if the trade war objective
Speaker 1: is to even the playing field for American firms, when
Speaker 1: you think about the Federal Reserve, the presidents should be
Speaker 1: ordering them not to cut interest rates. Just just paste
Speaker 1: that together for a lot of our listeners that might
Speaker 1: not be following the logic, just make that work. Well.
Speaker 1: For the last ten years, a little over ten years
Speaker 1: since the Great for the Global financial crisis, US interest
Speaker 1: rates have been closed to zero, and that has caused
Speaker 1: probably about two trillion dollars to flow into China. That
Speaker 1: free money, essentially has been what's fueled the Chinese investment
Speaker 1: boom and made them able to compete unfairly with US firms.
Speaker 1: Is that a little vague for you? Well know, I
Speaker 1: just think we should explore for the Federal Reserve more
Speaker 1: specifically here in the United States. You think it would
Speaker 1: be better than for the US central banks be raising rights.
Speaker 1: What damage would not do domestically in the US. That
Speaker 1: would do damage to the US public markets, for sure,
Speaker 1: but it would not do damage to the US consumer
Speaker 1: or the US average average person um. And it's time
Speaker 1: for public markets to come down, I mean within the
Speaker 1: public markets, and it's just very very quickly here. What
Speaker 1: do you look for in the Hong Kong debate? Is
Speaker 1: but a too mud was mourning or our morning and
Speaker 1: I'm calling what do you look forward to that is
Speaker 1: coming into a solution? That is a fascinating thing going
Speaker 1: on in Hong Kong. Unfortunately, if Carrie Lamb had made
Speaker 1: her statements two months ago, then it probably would have worked.
Speaker 1: Now it's uh, I think it's too little, too late,
Speaker 1: and uh, you know, China is working mightily to avoid
Speaker 1: a crash in the Hong Kong markets. Um, but but
Speaker 1: what's going to happen to the protests? Hard to say
Speaker 1: a Cusan Yang, thank you so much writing here a
Speaker 1: different view on China. We love that, particularly with their decades.
Speaker 1: If we're in uh China. Thanks for listening to the
Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keane before the podcast. You can always catch us worldwide.
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