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Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.

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Speaker 1: Daily 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

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Speaker 1: reign with us with fx FS investments right now, they're

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Speaker 1: chief economists and of course with the heritage of looking

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Speaker 1: at foreign exchange, how do you fold laer the dollar

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Speaker 1: into our economy. Most of the unterviews would you say,

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Speaker 1: you know, the dollars were talking about, but it's not

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Speaker 1: that big a deal. I just don't buy that. So,

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Speaker 1: you know, I think the dollar has shifted from being

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Speaker 1: important for full GDP to analyzeing GDP growth to investors

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Speaker 1: because we've seen the dollar make you know, you and

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Speaker 1: I've been around through some huge dollar moves, but the

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Speaker 1: last couple of years, we've seen dollar up ten percent,

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Speaker 1: down ten percent, back up again, and that has an

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Speaker 1: impact on corporations, especially SMP five D enormous multinationals with

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Speaker 1: big international supply chains, and you see it having an

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Speaker 1: impact on earning statements. So to me, that's a more

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Speaker 1: um near term risk because when we think about trade, right,

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Speaker 1: that's the normal place that the dollar used to feed

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Speaker 1: through into the economy. We've got a bigger fish to

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Speaker 1: fry right now in analyzing trade than just looking at

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Speaker 1: what are those fish? Tariffs uncertainty, Uh, it's full on,

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Speaker 1: you know, it's a variety of other protectionist measures and

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Speaker 1: these unilateral trade agreements and and very lovely of Peterson

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Speaker 1: Institute about an hour go telling us very clearly that

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Speaker 1: we're gonna see tariffs on European automobiles. So that ruined

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Speaker 1: your taxicab act, right, well it might, Um, Laura, I

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Speaker 1: want to I want to find out have you ever

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Speaker 1: met a CEO that has made a decision based on

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Speaker 1: what currencies we're gonna do? No, that's you know, I

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Speaker 1: think there's a lot of hedging that happens. And you

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Speaker 1: know it goes on in the Treasury Department, right, I mean,

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Speaker 1: it doesn't go on at the board level. It does,

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Speaker 1: but we have seen if you look at the earning statements,

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Speaker 1: you see, um, you know you see it in the

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Speaker 1: earning statements. They measure the dollar, they measure the fact

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Speaker 1: that it's um, you know, weakened as a reason why

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Speaker 1: they've had particularly positive results. We saw that last year,

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Speaker 1: and you know the fact that it strengthens reduces their

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Speaker 1: ability to repatriate um. You know when it when it

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Speaker 1: when we see the opposite. So it's not that so

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Speaker 1: much that they're making future business decisions based on effects,

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Speaker 1: but it's the fact that quarter by quarter you see

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Speaker 1: dollar impact on the earning statements. Okay, but the reason

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Speaker 1: I was going there is that as an investor, if

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Speaker 1: you are trying to think strategically, as a chief executive

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Speaker 1: or someone running a major enterprise, those effects over time

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Speaker 1: will be diminished. But it just leads to uncertainty. The

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Speaker 1: more volatility we see in the FX market, you know,

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Speaker 1: the more it's the uncertainty that's creeping in through so

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Speaker 1: many different sectors of companies which rely not only on

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Speaker 1: international supply chains but international revenue chains. And when we

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Speaker 1: get trade piled on top of you know, larger volatility

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Speaker 1: in effects. And the volatility we're seeing right now is

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Speaker 1: not that significant. We've seen much higher volatility in the past.

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Speaker 1: But to the extent that volatility is hitting us from

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Speaker 1: a lot of different angles in matters, that adds up

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Speaker 1: the arch question for me. And you see this Antiffanies

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Speaker 1: up seven same store sales. Is does the new nominal

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Speaker 1: GDP and the new animal spirit and all these comp

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Speaker 1: numbers mean more investment? And I don't see. I get

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Speaker 1: the idea of CAPEX is up, but is it goosed?

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Speaker 1: Is it a boom economy investment? I don't think so.

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Speaker 1: I think that you you know, CAPEX is really what

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Speaker 1: we see now are CAPEX. When we see the numbers

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Speaker 1: of durable goods shipments, we see the numbers of GDP,

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Speaker 1: those often to reflect decisions that were made two years ago,

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Speaker 1: especially the big lumpy investments that we want to get

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Speaker 1: from companies that could really push our productivity ahead, you know,

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Speaker 1: for years to come. Outside of the energy sector, it's

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Speaker 1: it's been hard to find it. And when I think

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Speaker 1: right now the uncertainty we're seeing, I think it's gonna

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Speaker 1: we're gonna feel it, you know, four quarters from now,

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Speaker 1: eight quarters from now, when companies just aren't incentivized to

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Speaker 1: so we're going to see eighteen months from now, two

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Speaker 1: years from now, three years from now, greater investment. No,

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Speaker 1: I think the I think it's going to continue to

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Speaker 1: be challenged. I mean, you know, we have seen even

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Speaker 1: with the new accord between the United States and Mexico.

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Speaker 1: Maybe that is a blueprint for for for other trade agreements.

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Speaker 1: I feel like that was more of a rebranding than

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Speaker 1: a new than a reinvention. What is SNL going to

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Speaker 1: do with that this weekend? Mexico? You know, with that

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Speaker 1: phone call yesterday? You know, I don't know. It wasn't bad,

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Speaker 1: was it? You didn't It was interesting to me within

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Speaker 1: within the reporting I saw, including Katherine Ramplet the Washington

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Speaker 1: Post and David Fickling with a terrific Bloomberg opinion essay,

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Speaker 1: a really detailed essay. What I noted that the President

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Speaker 1: of Mexico four times in the conversation brought in Canada.

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Speaker 1: Well yeah, sure, I mean, well, you know NAFTA was

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Speaker 1: a tripartit agreement, right, But Lara, why why do you

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Speaker 1: believe that these agreements will not have a beneficial effect?

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Speaker 1: The question is so beneficial to investment, beneficial to growth,

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Speaker 1: and it's I don't know that they're going to have

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Speaker 1: a negative effect. I just we still don't know a

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Speaker 1: lot of details, and these are agreements that have to

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Speaker 1: be ratified by Congress, and we don't know if the

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Speaker 1: president is going to have the full weight of Congress

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Speaker 1: behind him. You know when that comes around, tariffs are unilateral,

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Speaker 1: that's a place where the president can act. La Ran,

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Speaker 1: thank you so much. Investments with US. UH today very

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Speaker 1: lovely with us with the Peterson Institute in Syracuse University. Mary,

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Speaker 1: I'm gonna give you an open question to get started.

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Speaker 1: What is the distinction today that you're thinking about after

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Speaker 1: what you observed yesterday on left? Well, I think we're

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Speaker 1: really interested in seeing more details, especially on the roll

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Speaker 1: of the origin. Uh. The agreement is quite complex. What

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Speaker 1: we had yesterday is sort of a broad outline. We

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Speaker 1: really need to think about the details because for businesses

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Speaker 1: operating across the three countries, it's going to be the

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Speaker 1: details that are going to determine how much they have

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Speaker 1: to change their business operations. Mary, what are rules of origin?

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Speaker 1: And when we talk about things such as requirements and

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Speaker 1: a separate rule for maybe for content, that's all kind

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Speaker 1: of jumbled and complicated. Can you kind of disentangle that

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Speaker 1: force and explain what that means? Show rules of origin

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Speaker 1: are usually in things that make people yawn. Uh. And

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Speaker 1: I think in some sense this administration is counting on

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Speaker 1: that because the headline news is that this good for workers,

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Speaker 1: But when one really digs in, uh, it's very unlikely

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Speaker 1: that this is going to produce good news for American workers.

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Speaker 1: And here's why. The rules of origin basically are a

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Speaker 1: way of determining which products will be able to enjoy

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Speaker 1: duty free status within the US market. So it limits

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Speaker 1: uh important content of goods that are going to be

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Speaker 1: traveling freely across the three countries. In the auto case,

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Speaker 1: it means that no more than of the content of

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Speaker 1: the automobile can be made outside North America. And that

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Speaker 1: while that sounds great the average person, great more jobs

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Speaker 1: for the US, what it really does drive up the

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Speaker 1: price of vehicles and limit our ability to export our

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Speaker 1: vehicles to the rest of the world. Okay, so that's

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Speaker 1: the content. What about the wage rule because that also

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Speaker 1: figures into the assembly line that makes the automobiles. Yes,

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Speaker 1: and the wage rule is really a way to get uh,

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Speaker 1: really an advantage for the United States over Mexico. So

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Speaker 1: this really is a strong arming of Mexico by the

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Speaker 1: United States. Came into play because Mexican wages are not

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Speaker 1: that high and by saying that a certain share of

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Speaker 1: late of the car has been made with labor that

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Speaker 1: that receives a sixteen dollar an hour wage means that

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Speaker 1: a larger share of the automobile may have to be

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Speaker 1: made within the United States in Canada. So this really

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Speaker 1: is a provision that will benefit the United States against Mexico. Okay,

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Speaker 1: you get we wrote writing that down, So I've got

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Speaker 1: those two specific David Fickling and Travine gets into the

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Speaker 1: complexity of this all. Do we usually see this complexity

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Speaker 1: in trade agreements? Mary? Or is this unique? Mr Trump

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Speaker 1: is doing trade? Oh? Well, we do see rules of origin.

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Speaker 1: These are particularly complex, and that is because I believe

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Speaker 1: Ambassador Lighthouser in particular really prefers what we think of

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Speaker 1: as managed trade or supply management. Unfortunately, that means that

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Speaker 1: we are replacing the decisions of business involved by government

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Speaker 1: bureaucrats as to how it's formulas competitive. I mean, the

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Speaker 1: bottom line is there's a lot of formulas dictated by

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Speaker 1: government that Marie Barra at General Motors has to memorize, right, right,

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Speaker 1: It's going to be a boom for consoles to figure

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Speaker 1: out how to get around them, because once you start

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Speaker 1: restricting the ability of companies to do with economically beneficial

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Speaker 1: they're going to try to find ways around it. So

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Speaker 1: what does Christipher Friedland do today? She's gonna wander down

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Speaker 1: to Washington. Let's be clear here, the President United States

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Speaker 1: does not have a lot of love and affection Minister

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Speaker 1: of Canada, Canadian Foreign Trade negotiate her. So what do

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Speaker 1: you expect to see from Canada? Why should they why

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Speaker 1: should they enjoy this Trump lateral party. Well, they have

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Speaker 1: different issues than than the Mexican Well, in particular, they

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Speaker 1: were very much against the sunset provision, which meant that

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Speaker 1: after five years this deal would go away unless it

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Speaker 1: was explicitly renewed. That was softened. This is a sixteen

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Speaker 1: year period. What after six years the agreement has to

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Speaker 1: be renewed, as opposed to automatically going away unless it

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Speaker 1: is renewed. So that has been softened. UH. The Canadians,

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Speaker 1: and I think rightly. So, we're concerned about the uncertainty

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Speaker 1: that that enters for UH investors as to whether, you know,

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Speaker 1: when they invested in North America, what would be the

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Speaker 1: rules operating you know, five years. Hence, so they were

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Speaker 1: against that. They may be able to accept this soft version. UM,

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Speaker 1: they're also concerned about their ability to UH basically complain

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Speaker 1: about US trade restrictions that take away some of the

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Speaker 1: benefits that they think they've agreed to. And people in

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Speaker 1: the past may said, well, that won't happen, but now

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Speaker 1: we're seeing that this happens all the time, which with

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Speaker 1: the Trump administration. Uh basically all many of our partners

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Speaker 1: have seen, uh them levies on steal and aluminum, on

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Speaker 1: washing machines, on others, things that washing machines was a

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Speaker 1: safe guards allowed under w t O. But nevertheless all

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Speaker 1: these things say, hey, at any moment, some of our

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Speaker 1: exports can be subject to terrorists that we thought were

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Speaker 1: already negotiated away. So this is a real concern for

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Speaker 1: the Canadians. Mary, does this really matter in the sense

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Speaker 1: that the growing market is China? There was an announcement today,

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Speaker 1: for example, that Nissan is going to be building the

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Speaker 1: first made for China electric automobile. This is a developing

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Speaker 1: market talking about China. The United States is a developed market.

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Speaker 1: Are we talk is this basically if you looked at

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Speaker 1: it five years hence that we're kind of discussing how

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Speaker 1: many angels fit on the head of a pin. Well,

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Speaker 1: I don't think so. I think there's two ways to

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Speaker 1: look at that. First, the American market remains very important.

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Speaker 1: Not only it is large, I mean that's growing is quickly,

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Speaker 1: although it is growing fairly healthy for a developed country

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Speaker 1: um in the scheme of things, UM. But it's also

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Speaker 1: a market where the competition in the past has been

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Speaker 1: urged nurse and quality demands are very high. So you

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Speaker 1: see developing countries UH in emerging markets having to reach

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Speaker 1: a certain level of competitiveness in competency before they can

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Speaker 1: even you know, really sell into the American European market.

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Speaker 1: So we're very important in that way. On the other hand,

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Speaker 1: what we're doing now is creating fortress America. We're creating

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Speaker 1: a lot of trade barriers for our companies to import

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Speaker 1: inputs that will keep them competitive in Asian markets. And

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Speaker 1: then we're inviting retaliation. If this administration moves ahead with

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Speaker 1: national security tariffs on important vehicles, we're going to see

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Speaker 1: more retaliation from our trading partners and that's going to

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Speaker 1: hurt our exporters. Trivic briefly, very lovely, thank you so

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Speaker 1: much for the Peterson Institute. She and Chad bound have

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Speaker 1: just him. I just think smart, smart work of cutting

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Speaker 1: through the many rhetorics. David Harrow joins us now from

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Speaker 1: Harrow Associates. David, before we get to investment, right now,

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Speaker 1: a brewer's update is in uh in in in order.

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Speaker 1: How are the brewers of Milwaukee doing when the brewers

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Speaker 1: are hanging in there, Tom, I mean they're they're, you know,

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Speaker 1: got a good shot at postseason play. I agree that

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Speaker 1: all the focuses on Red Sox, Yankees and maybe the Astros,

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Speaker 1: and you know a couple of times Cubs Cubs as well,

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Speaker 1: And there's all these teams like Milwaukee percolating underneath to

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Speaker 1: make it interesting as we go. Let's get to it.

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Speaker 1: David Harrow on international investment, do you have a normal

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Speaker 1: enthusiasm with all the e M crisis? Is it a

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Speaker 1: greater enthusiasm or are you looking at general motors now

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Speaker 1: levels are at greater enthusiasm. I mean it's been a

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Speaker 1: very volatile summer where you've had a stream price movements

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Speaker 1: in certain sectors, in particular overseas. You mentioned the emerging markets.

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Speaker 1: I would also mention what's happening in Europe, European financials,

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Speaker 1: European autos. Some industrials been very very weak on a

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Speaker 1: lot of these macro headlines and meanwhile the business conditions,

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Speaker 1: the underlying business conditions have been more than acceptable. So

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Speaker 1: this is what provides opportunity is when you get these

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Speaker 1: exaggerated price movements as a result of kind of macroeconomic disturbances.

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Speaker 1: So this is this is good for bottom up value

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Speaker 1: stock picker this summer. So you know, it's you've got

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Speaker 1: to be you're very busy. There's never rest, but you

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Speaker 1: know that's the nature of summers as of recent Within

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Speaker 1: that in the opportunity as a value of EU banking.

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Speaker 1: We had a Steam guest this morning talking up Bank

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Speaker 1: of Cent and there, but frame how inexpensive EU banking

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Speaker 1: is right now. I mean, if you look at what

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Speaker 1: I think is one of the highest qualities EU Bank,

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Speaker 1: b n P Perry Bob Banco National pre Um. If

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Speaker 1: you look at its where it trades on a price

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Speaker 1: to book value or a price to earnings and not

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Speaker 1: just current earnings, kind of normal earnings, it probably trades

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Speaker 1: at a good thirty five to discount to say a

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Speaker 1: JP Morgan. Now it's return on equity equity will probably

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Speaker 1: be a pointer or two lower and normalcy if if

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Speaker 1: JP Morgan is kind of mid teens. UH. Perhaps BNP

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Speaker 1: will be low double digits, but still I don't believe

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Speaker 1: that this valuation differential UH is UH is sustainable. And

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Speaker 1: this all happened, This really started to happen in February

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Speaker 1: when the Italian couldn't get their act together and from

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Speaker 1: a government, and you know, this really hit the European

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Speaker 1: financials and we've seen this happened so many times the

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Speaker 1: financial crisis. Him, I would know the dividend on BMP

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Speaker 1: Perry is you know this is not a type on

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Speaker 1: radio AD five eight zero percent. Yeah, but as David

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Speaker 1: just mentioned, uh, the actual capital appreciation not there. Hey, David,

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Speaker 1: you know I know that B ANDB PARRYBA is the

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Speaker 1: largest holding in your oak Mark International Fund. The fund

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Speaker 1: down a little bit, just less than eight percent so

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Speaker 1: far this year. I'm wondering whether you are thinking about

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Speaker 1: changing the geographic allocation in the fund. The top allocation

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Speaker 1: right now is to the United Kingdom nearly twenty three percent.

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Speaker 1: But you've got companies like Daimler, Alliance, Credit, Swiss, BMW, Glencore,

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Speaker 1: uh C, NH Industrial. Are you thinking about maybe shifting

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Speaker 1: to a more concentrated continent of Europe position Well, not necessarily.

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Speaker 1: What we do is position ourselves based down where we

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Speaker 1: find the underlying value of the companies themselves. And all

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Speaker 1: those companies that you listed and named exists in our

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Speaker 1: top position, and they made jockey around depending on what

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Speaker 1: happens any given day, week, or month. But basically, our

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Speaker 1: position sizes within the portfolio and our waitings within the

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Speaker 1: portfolio are a function of the discount those stocks are

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Speaker 1: trading that verse our measurement of their intrinsic value. And

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Speaker 1: what's happened is is our measurement of intrinsic value. And

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Speaker 1: most of these names has done nothing but gone up.

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Speaker 1: But meanwhile, because of these headlines, starting in spring and

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Speaker 1: in summer, the prices have been down and in some

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Speaker 1: cases very extreme downward movements in price, and especially in

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Speaker 1: those two sectors, the automotive sector of Europe and as

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Speaker 1: well as the financial sector of Europe. So as those

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Speaker 1: prices decline and that value gap open, we actually see

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Speaker 1: more opportunities. So our decision making is predicated on trying

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Speaker 1: to take advantage of that gap, that gap between intrinsic

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Speaker 1: value and price, knowing that in the short term, mr

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Speaker 1: market could be very finicky, very irrational, very volatile, and

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Speaker 1: even though it's painful, you mentioned, you know, a year

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Speaker 1: to data, our numbers haven't been so good. But this

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Speaker 1: actually provides us with the basis to outperform over the

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Speaker 1: medium and long term taking advantage of what I call

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Speaker 1: are these exaggerated and unnatural prices. Is in Tessa San Paolo,

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Speaker 1: the touring Italy based bank. Is that an example. This

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Speaker 1: is a perfect example. By the way you look at

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Speaker 1: that divided yield. Uh, you know you're probably pushing a

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Speaker 1: normal yield of our own seven or eight percent. Why

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Speaker 1: has this stock been so weak? Has it been because

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Speaker 1: of more loan losses? No, their loan losses in fact

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Speaker 1: are declining and they're actually picking up some lending growth.

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Speaker 1: The whole issue behind in Tessa is where it's domiciled.

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Speaker 1: It's domiciled in Italy, where Italy is having some instability,

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Speaker 1: political instability. Despite the fact that in Tessa's operating basis

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Speaker 1: is in northern Italy, which is very healthy, which is

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Speaker 1: showing some good growth. Uh, it's a very healthy balance sheet,

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Speaker 1: very healthy capital position. But because it's in Italy, it's

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Speaker 1: been extremely weak and US dollar terms, it's probably down

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Speaker 1: somewhere in the mid since early January, David Harrow with

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Speaker 1: us where Harris associates lts to talk about big elections

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Speaker 1: taking place. A lot of primaries today. Here to tell

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Speaker 1: us all about them is Greg Gerrow, our Bloomberg Government

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Speaker 1: Elections reporter, joining us from studios in Washington, d C.

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Speaker 1: Greg always a pleasure. Let's start with Arizona. What's going

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Speaker 1: on there and how important is this for the Democrats. Well,

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Speaker 1: Arizona is critical to the Democratic campaign, the underdog campaign

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Speaker 1: to win control of the Senate from the Republicans. Jeff

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Speaker 1: Flake is retiring and you have primaries today for his seat.

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Speaker 1: I think the race to watch is the Republican primary,

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Speaker 1: a three way primary that includes Congressman Martha McSally who's

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Speaker 1: up against Kelly Ward, who ran against John McCain in

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Speaker 1: the Republican primary, trying to run as a more conservative

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Speaker 1: alternative and more of a pro Trump cadidate than Martha McSally.

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Speaker 1: And then you have Joe R. Pio, the uh controversial

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Speaker 1: former Arizona sheriff who want to pardon from Donald Trump

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Speaker 1: bar peo and order, probably likely to split a lot

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Speaker 1: of the anti establishment votes. So I think McSally goes

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Speaker 1: on to win and will advance to the November election,

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Speaker 1: probably against one of our colleagues, Democratic Congresswoman Kirsten Cinema.

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Speaker 1: It's a state that Trump narrowly harried in and it

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Speaker 1: will be key to UH, key to the one of

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Speaker 1: the top seven or eight center races in November, and

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Speaker 1: just quickly. Any idea of who the Arizona governor will

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Speaker 1: select to fill the seat left vacant by the passing

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Speaker 1: of Senator John McCain, we don't know quite yet. The

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Speaker 1: governor is keeping his cards close to his vest. He

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Speaker 1: will appoint a Republican uh, because he is a Republican,

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Speaker 1: also because state lowe requires it. UM. There are several

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Speaker 1: names that have been speculated, including Cindy McCain, the late

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Speaker 1: senator's widow. I don't think that will happen. Republican leaders

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Speaker 1: are gonna want someone who will run in the special

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Speaker 1: election in because Arizona, as I mentioned, as competitive, and

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Speaker 1: they wanted the Republican leaders want a strong candidate to

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Speaker 1: defend that seat when it comes up again. Are these

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Speaker 1: primaries different than the ones months and months and months ago?

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Speaker 1: I mean, I think of the presidential primary, how they

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Speaker 1: change over time or is just the primaries of primary

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Speaker 1: primaries are primary, you know in this case here, you know,

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Speaker 1: congressional primary is a little odd and that they start

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Speaker 1: as early as in March, and states like Illinois and Texas.

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Speaker 1: And we're kind of getting near to the end with

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Speaker 1: Florida and Arizona, which traditionally vote late. After today, we'll

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Speaker 1: only have a handful of New England states mostly to

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Speaker 1: left to vote. But people are gonna be watching the

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Speaker 1: primary turnout very closely, especially in Florida, where you have

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Speaker 1: contested primaries in both parties for the governorship and the

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Speaker 1: Republican primary. President Trump is intervened to back a preferred

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Speaker 1: candidate for candidate there tell us about Florida, but specifically

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Speaker 1: about Donna Schalela. Yeah, Donna Schalela Um. She was President

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Speaker 1: Clinton's Bill Clinton's Health and Human Services Secretary, later the

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Speaker 1: president of the University of Miami. This is a Miami

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Speaker 1: area congressional district that Salela is seeking in today's primary.

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Speaker 1: She has several opponents in the Democratic primary, but because

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Speaker 1: of her name recognition and fundraising, she's likely to win,

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Speaker 1: perhaps with a plurality of the vote. This is a

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Speaker 1: district that is Hispanic majority it is anti Trump, but

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Speaker 1: it's held by a Republican, Eliana Ross Latenan who is retiring,

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Speaker 1: and it is a top target of Democrats seeking a

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Speaker 1: net game of twenty three seats to overturn the majority.

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Speaker 1: It's a must win for the Democrats. Well, we've got

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Speaker 1: you on overnight the news of courts saying to North

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Speaker 1: Carolina you're gerrymandering, which I believe tilster Republicans is just

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Speaker 1: not going to go even before the election. Translate that

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Speaker 1: for Yeah, So, a federal court last night issued an

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Speaker 1: opinion that was over three hundred pages that basically invalidated

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Speaker 1: a Republican drawn North Carolina congressional district map as an

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Speaker 1: unlawful partisan gerrymander. And but it's not clear yet if

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Speaker 1: that map will be used in the elections coming up

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Speaker 1: in just a little over two months. I suspect that

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Speaker 1: the Republicans defending the map will try and ask to

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Speaker 1: stay the ruling or block it until after the election,

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Speaker 1: noting how close we are. We've already had the primary

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Speaker 1: elections in North Carolina in the spring, so we have

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Speaker 1: to wait and see what the what the court is

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Speaker 1: going to do, what the Supreme Court might do because

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Speaker 1: it will certainly be appealed to that body. It rundown.

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Speaker 1: Gregg Gerald, thank you. Loved your work earlier this morning

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Speaker 1: as well. Mr gerro with Bloomberg Government and Washington really

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Speaker 1: encyclopedic on all this stuff. 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