Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.
Speaker 1: Daily we bring you insight from the best in economics, finance, investment,
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Speaker 1: reign with us with fx FS investments right now, they're
Speaker 1: chief economists and of course with the heritage of looking
Speaker 1: at foreign exchange, how do you fold laer the dollar
Speaker 1: into our economy. Most of the unterviews would you say,
Speaker 1: you know, the dollars were talking about, but it's not
Speaker 1: that big a deal. I just don't buy that. So,
Speaker 1: you know, I think the dollar has shifted from being
Speaker 1: important for full GDP to analyzeing GDP growth to investors
Speaker 1: because we've seen the dollar make you know, you and
Speaker 1: I've been around through some huge dollar moves, but the
Speaker 1: last couple of years, we've seen dollar up ten percent,
Speaker 1: down ten percent, back up again, and that has an
Speaker 1: impact on corporations, especially SMP five D enormous multinationals with
Speaker 1: big international supply chains, and you see it having an
Speaker 1: impact on earning statements. So to me, that's a more
Speaker 1: um near term risk because when we think about trade, right,
Speaker 1: that's the normal place that the dollar used to feed
Speaker 1: through into the economy. We've got a bigger fish to
Speaker 1: fry right now in analyzing trade than just looking at
Speaker 1: what are those fish? Tariffs uncertainty, Uh, it's full on,
Speaker 1: you know, it's a variety of other protectionist measures and
Speaker 1: these unilateral trade agreements and and very lovely of Peterson
Speaker 1: Institute about an hour go telling us very clearly that
Speaker 1: we're gonna see tariffs on European automobiles. So that ruined
Speaker 1: your taxicab act, right, well it might, Um, Laura, I
Speaker 1: want to I want to find out have you ever
Speaker 1: met a CEO that has made a decision based on
Speaker 1: what currencies we're gonna do? No, that's you know, I
Speaker 1: think there's a lot of hedging that happens. And you
Speaker 1: know it goes on in the Treasury Department, right, I mean,
Speaker 1: it doesn't go on at the board level. It does,
Speaker 1: but we have seen if you look at the earning statements,
Speaker 1: you see, um, you know you see it in the
Speaker 1: earning statements. They measure the dollar, they measure the fact
Speaker 1: that it's um, you know, weakened as a reason why
Speaker 1: they've had particularly positive results. We saw that last year,
Speaker 1: and you know the fact that it strengthens reduces their
Speaker 1: ability to repatriate um. You know when it when it
Speaker 1: when we see the opposite. So it's not that so
Speaker 1: much that they're making future business decisions based on effects,
Speaker 1: but it's the fact that quarter by quarter you see
Speaker 1: dollar impact on the earning statements. Okay, but the reason
Speaker 1: I was going there is that as an investor, if
Speaker 1: you are trying to think strategically, as a chief executive
Speaker 1: or someone running a major enterprise, those effects over time
Speaker 1: will be diminished. But it just leads to uncertainty. The
Speaker 1: more volatility we see in the FX market, you know,
Speaker 1: the more it's the uncertainty that's creeping in through so
Speaker 1: many different sectors of companies which rely not only on
Speaker 1: international supply chains but international revenue chains. And when we
Speaker 1: get trade piled on top of you know, larger volatility
Speaker 1: in effects. And the volatility we're seeing right now is
Speaker 1: not that significant. We've seen much higher volatility in the past.
Speaker 1: But to the extent that volatility is hitting us from
Speaker 1: a lot of different angles in matters, that adds up
Speaker 1: the arch question for me. And you see this Antiffanies
Speaker 1: up seven same store sales. Is does the new nominal
Speaker 1: GDP and the new animal spirit and all these comp
Speaker 1: numbers mean more investment? And I don't see. I get
Speaker 1: the idea of CAPEX is up, but is it goosed?
Speaker 1: Is it a boom economy investment? I don't think so.
Speaker 1: I think that you you know, CAPEX is really what
Speaker 1: we see now are CAPEX. When we see the numbers
Speaker 1: of durable goods shipments, we see the numbers of GDP,
Speaker 1: those often to reflect decisions that were made two years ago,
Speaker 1: especially the big lumpy investments that we want to get
Speaker 1: from companies that could really push our productivity ahead, you know,
Speaker 1: for years to come. Outside of the energy sector, it's
Speaker 1: it's been hard to find it. And when I think
Speaker 1: right now the uncertainty we're seeing, I think it's gonna
Speaker 1: we're gonna feel it, you know, four quarters from now,
Speaker 1: eight quarters from now, when companies just aren't incentivized to
Speaker 1: so we're going to see eighteen months from now, two
Speaker 1: years from now, three years from now, greater investment. No,
Speaker 1: I think the I think it's going to continue to
Speaker 1: be challenged. I mean, you know, we have seen even
Speaker 1: with the new accord between the United States and Mexico.
Speaker 1: Maybe that is a blueprint for for for other trade agreements.
Speaker 1: I feel like that was more of a rebranding than
Speaker 1: a new than a reinvention. What is SNL going to
Speaker 1: do with that this weekend? Mexico? You know, with that
Speaker 1: phone call yesterday? You know, I don't know. It wasn't bad,
Speaker 1: was it? You didn't It was interesting to me within
Speaker 1: within the reporting I saw, including Katherine Ramplet the Washington
Speaker 1: Post and David Fickling with a terrific Bloomberg opinion essay,
Speaker 1: a really detailed essay. What I noted that the President
Speaker 1: of Mexico four times in the conversation brought in Canada.
Speaker 1: Well yeah, sure, I mean, well, you know NAFTA was
Speaker 1: a tripartit agreement, right, But Lara, why why do you
Speaker 1: believe that these agreements will not have a beneficial effect?
Speaker 1: The question is so beneficial to investment, beneficial to growth,
Speaker 1: and it's I don't know that they're going to have
Speaker 1: a negative effect. I just we still don't know a
Speaker 1: lot of details, and these are agreements that have to
Speaker 1: be ratified by Congress, and we don't know if the
Speaker 1: president is going to have the full weight of Congress
Speaker 1: behind him. You know when that comes around, tariffs are unilateral,
Speaker 1: that's a place where the president can act. La Ran,
Speaker 1: thank you so much. Investments with US. UH today very
Speaker 1: lovely with us with the Peterson Institute in Syracuse University. Mary,
Speaker 1: I'm gonna give you an open question to get started.
Speaker 1: What is the distinction today that you're thinking about after
Speaker 1: what you observed yesterday on left? Well, I think we're
Speaker 1: really interested in seeing more details, especially on the roll
Speaker 1: of the origin. Uh. The agreement is quite complex. What
Speaker 1: we had yesterday is sort of a broad outline. We
Speaker 1: really need to think about the details because for businesses
Speaker 1: operating across the three countries, it's going to be the
Speaker 1: details that are going to determine how much they have
Speaker 1: to change their business operations. Mary, what are rules of origin?
Speaker 1: And when we talk about things such as requirements and
Speaker 1: a separate rule for maybe for content, that's all kind
Speaker 1: of jumbled and complicated. Can you kind of disentangle that
Speaker 1: force and explain what that means? Show rules of origin
Speaker 1: are usually in things that make people yawn. Uh. And
Speaker 1: I think in some sense this administration is counting on
Speaker 1: that because the headline news is that this good for workers,
Speaker 1: But when one really digs in, uh, it's very unlikely
Speaker 1: that this is going to produce good news for American workers.
Speaker 1: And here's why. The rules of origin basically are a
Speaker 1: way of determining which products will be able to enjoy
Speaker 1: duty free status within the US market. So it limits
Speaker 1: uh important content of goods that are going to be
Speaker 1: traveling freely across the three countries. In the auto case,
Speaker 1: it means that no more than of the content of
Speaker 1: the automobile can be made outside North America. And that
Speaker 1: while that sounds great the average person, great more jobs
Speaker 1: for the US, what it really does drive up the
Speaker 1: price of vehicles and limit our ability to export our
Speaker 1: vehicles to the rest of the world. Okay, so that's
Speaker 1: the content. What about the wage rule because that also
Speaker 1: figures into the assembly line that makes the automobiles. Yes,
Speaker 1: and the wage rule is really a way to get uh,
Speaker 1: really an advantage for the United States over Mexico. So
Speaker 1: this really is a strong arming of Mexico by the
Speaker 1: United States. Came into play because Mexican wages are not
Speaker 1: that high and by saying that a certain share of
Speaker 1: late of the car has been made with labor that
Speaker 1: that receives a sixteen dollar an hour wage means that
Speaker 1: a larger share of the automobile may have to be
Speaker 1: made within the United States in Canada. So this really
Speaker 1: is a provision that will benefit the United States against Mexico. Okay,
Speaker 1: you get we wrote writing that down, So I've got
Speaker 1: those two specific David Fickling and Travine gets into the
Speaker 1: complexity of this all. Do we usually see this complexity
Speaker 1: in trade agreements? Mary? Or is this unique? Mr Trump
Speaker 1: is doing trade? Oh? Well, we do see rules of origin.
Speaker 1: These are particularly complex, and that is because I believe
Speaker 1: Ambassador Lighthouser in particular really prefers what we think of
Speaker 1: as managed trade or supply management. Unfortunately, that means that
Speaker 1: we are replacing the decisions of business involved by government
Speaker 1: bureaucrats as to how it's formulas competitive. I mean, the
Speaker 1: bottom line is there's a lot of formulas dictated by
Speaker 1: government that Marie Barra at General Motors has to memorize, right, right,
Speaker 1: It's going to be a boom for consoles to figure
Speaker 1: out how to get around them, because once you start
Speaker 1: restricting the ability of companies to do with economically beneficial
Speaker 1: they're going to try to find ways around it. So
Speaker 1: what does Christipher Friedland do today? She's gonna wander down
Speaker 1: to Washington. Let's be clear here, the President United States
Speaker 1: does not have a lot of love and affection Minister
Speaker 1: of Canada, Canadian Foreign Trade negotiate her. So what do
Speaker 1: you expect to see from Canada? Why should they why
Speaker 1: should they enjoy this Trump lateral party. Well, they have
Speaker 1: different issues than than the Mexican Well, in particular, they
Speaker 1: were very much against the sunset provision, which meant that
Speaker 1: after five years this deal would go away unless it
Speaker 1: was explicitly renewed. That was softened. This is a sixteen
Speaker 1: year period. What after six years the agreement has to
Speaker 1: be renewed, as opposed to automatically going away unless it
Speaker 1: is renewed. So that has been softened. UH. The Canadians,
Speaker 1: and I think rightly. So, we're concerned about the uncertainty
Speaker 1: that that enters for UH investors as to whether, you know,
Speaker 1: when they invested in North America, what would be the
Speaker 1: rules operating you know, five years. Hence, so they were
Speaker 1: against that. They may be able to accept this soft version. UM,
Speaker 1: they're also concerned about their ability to UH basically complain
Speaker 1: about US trade restrictions that take away some of the
Speaker 1: benefits that they think they've agreed to. And people in
Speaker 1: the past may said, well, that won't happen, but now
Speaker 1: we're seeing that this happens all the time, which with
Speaker 1: the Trump administration. Uh basically all many of our partners
Speaker 1: have seen, uh them levies on steal and aluminum, on
Speaker 1: washing machines, on others, things that washing machines was a
Speaker 1: safe guards allowed under w t O. But nevertheless all
Speaker 1: these things say, hey, at any moment, some of our
Speaker 1: exports can be subject to terrorists that we thought were
Speaker 1: already negotiated away. So this is a real concern for
Speaker 1: the Canadians. Mary, does this really matter in the sense
Speaker 1: that the growing market is China? There was an announcement today,
Speaker 1: for example, that Nissan is going to be building the
Speaker 1: first made for China electric automobile. This is a developing
Speaker 1: market talking about China. The United States is a developed market.
Speaker 1: Are we talk is this basically if you looked at
Speaker 1: it five years hence that we're kind of discussing how
Speaker 1: many angels fit on the head of a pin. Well,
Speaker 1: I don't think so. I think there's two ways to
Speaker 1: look at that. First, the American market remains very important.
Speaker 1: Not only it is large, I mean that's growing is quickly,
Speaker 1: although it is growing fairly healthy for a developed country
Speaker 1: um in the scheme of things, UM. But it's also
Speaker 1: a market where the competition in the past has been
Speaker 1: urged nurse and quality demands are very high. So you
Speaker 1: see developing countries UH in emerging markets having to reach
Speaker 1: a certain level of competitiveness in competency before they can
Speaker 1: even you know, really sell into the American European market.
Speaker 1: So we're very important in that way. On the other hand,
Speaker 1: what we're doing now is creating fortress America. We're creating
Speaker 1: a lot of trade barriers for our companies to import
Speaker 1: inputs that will keep them competitive in Asian markets. And
Speaker 1: then we're inviting retaliation. If this administration moves ahead with
Speaker 1: national security tariffs on important vehicles, we're going to see
Speaker 1: more retaliation from our trading partners and that's going to
Speaker 1: hurt our exporters. Trivic briefly, very lovely, thank you so
Speaker 1: much for the Peterson Institute. She and Chad bound have
Speaker 1: just him. I just think smart, smart work of cutting
Speaker 1: through the many rhetorics. David Harrow joins us now from
Speaker 1: Harrow Associates. David, before we get to investment, right now,
Speaker 1: a brewer's update is in uh in in in order.
Speaker 1: How are the brewers of Milwaukee doing when the brewers
Speaker 1: are hanging in there, Tom, I mean they're they're, you know,
Speaker 1: got a good shot at postseason play. I agree that
Speaker 1: all the focuses on Red Sox, Yankees and maybe the Astros,
Speaker 1: and you know a couple of times Cubs Cubs as well,
Speaker 1: And there's all these teams like Milwaukee percolating underneath to
Speaker 1: make it interesting as we go. Let's get to it.
Speaker 1: David Harrow on international investment, do you have a normal
Speaker 1: enthusiasm with all the e M crisis? Is it a
Speaker 1: greater enthusiasm or are you looking at general motors now
Speaker 1: levels are at greater enthusiasm. I mean it's been a
Speaker 1: very volatile summer where you've had a stream price movements
Speaker 1: in certain sectors, in particular overseas. You mentioned the emerging markets.
Speaker 1: I would also mention what's happening in Europe, European financials,
Speaker 1: European autos. Some industrials been very very weak on a
Speaker 1: lot of these macro headlines and meanwhile the business conditions,
Speaker 1: the underlying business conditions have been more than acceptable. So
Speaker 1: this is what provides opportunity is when you get these
Speaker 1: exaggerated price movements as a result of kind of macroeconomic disturbances.
Speaker 1: So this is this is good for bottom up value
Speaker 1: stock picker this summer. So you know, it's you've got
Speaker 1: to be you're very busy. There's never rest, but you
Speaker 1: know that's the nature of summers as of recent Within
Speaker 1: that in the opportunity as a value of EU banking.
Speaker 1: We had a Steam guest this morning talking up Bank
Speaker 1: of Cent and there, but frame how inexpensive EU banking
Speaker 1: is right now. I mean, if you look at what
Speaker 1: I think is one of the highest qualities EU Bank,
Speaker 1: b n P Perry Bob Banco National pre Um. If
Speaker 1: you look at its where it trades on a price
Speaker 1: to book value or a price to earnings and not
Speaker 1: just current earnings, kind of normal earnings, it probably trades
Speaker 1: at a good thirty five to discount to say a
Speaker 1: JP Morgan. Now it's return on equity equity will probably
Speaker 1: be a pointer or two lower and normalcy if if
Speaker 1: JP Morgan is kind of mid teens. UH. Perhaps BNP
Speaker 1: will be low double digits, but still I don't believe
Speaker 1: that this valuation differential UH is UH is sustainable. And
Speaker 1: this all happened, This really started to happen in February
Speaker 1: when the Italian couldn't get their act together and from
Speaker 1: a government, and you know, this really hit the European
Speaker 1: financials and we've seen this happened so many times the
Speaker 1: financial crisis. Him, I would know the dividend on BMP
Speaker 1: Perry is you know this is not a type on
Speaker 1: radio AD five eight zero percent. Yeah, but as David
Speaker 1: just mentioned, uh, the actual capital appreciation not there. Hey, David,
Speaker 1: you know I know that B ANDB PARRYBA is the
Speaker 1: largest holding in your oak Mark International Fund. The fund
Speaker 1: down a little bit, just less than eight percent so
Speaker 1: far this year. I'm wondering whether you are thinking about
Speaker 1: changing the geographic allocation in the fund. The top allocation
Speaker 1: right now is to the United Kingdom nearly twenty three percent.
Speaker 1: But you've got companies like Daimler, Alliance, Credit, Swiss, BMW, Glencore,
Speaker 1: uh C, NH Industrial. Are you thinking about maybe shifting
Speaker 1: to a more concentrated continent of Europe position Well, not necessarily.
Speaker 1: What we do is position ourselves based down where we
Speaker 1: find the underlying value of the companies themselves. And all
Speaker 1: those companies that you listed and named exists in our
Speaker 1: top position, and they made jockey around depending on what
Speaker 1: happens any given day, week, or month. But basically, our
Speaker 1: position sizes within the portfolio and our waitings within the
Speaker 1: portfolio are a function of the discount those stocks are
Speaker 1: trading that verse our measurement of their intrinsic value. And
Speaker 1: what's happened is is our measurement of intrinsic value. And
Speaker 1: most of these names has done nothing but gone up.
Speaker 1: But meanwhile, because of these headlines, starting in spring and
Speaker 1: in summer, the prices have been down and in some
Speaker 1: cases very extreme downward movements in price, and especially in
Speaker 1: those two sectors, the automotive sector of Europe and as
Speaker 1: well as the financial sector of Europe. So as those
Speaker 1: prices decline and that value gap open, we actually see
Speaker 1: more opportunities. So our decision making is predicated on trying
Speaker 1: to take advantage of that gap, that gap between intrinsic
Speaker 1: value and price, knowing that in the short term, mr
Speaker 1: market could be very finicky, very irrational, very volatile, and
Speaker 1: even though it's painful, you mentioned, you know, a year
Speaker 1: to data, our numbers haven't been so good. But this
Speaker 1: actually provides us with the basis to outperform over the
Speaker 1: medium and long term taking advantage of what I call
Speaker 1: are these exaggerated and unnatural prices. Is in Tessa San Paolo,
Speaker 1: the touring Italy based bank. Is that an example. This
Speaker 1: is a perfect example. By the way you look at
Speaker 1: that divided yield. Uh, you know you're probably pushing a
Speaker 1: normal yield of our own seven or eight percent. Why
Speaker 1: has this stock been so weak? Has it been because
Speaker 1: of more loan losses? No, their loan losses in fact
Speaker 1: are declining and they're actually picking up some lending growth.
Speaker 1: The whole issue behind in Tessa is where it's domiciled.
Speaker 1: It's domiciled in Italy, where Italy is having some instability,
Speaker 1: political instability. Despite the fact that in Tessa's operating basis
Speaker 1: is in northern Italy, which is very healthy, which is
Speaker 1: showing some good growth. Uh, it's a very healthy balance sheet,
Speaker 1: very healthy capital position. But because it's in Italy, it's
Speaker 1: been extremely weak and US dollar terms, it's probably down
Speaker 1: somewhere in the mid since early January, David Harrow with
Speaker 1: us where Harris associates lts to talk about big elections
Speaker 1: taking place. A lot of primaries today. Here to tell
Speaker 1: us all about them is Greg Gerrow, our Bloomberg Government
Speaker 1: Elections reporter, joining us from studios in Washington, d C.
Speaker 1: Greg always a pleasure. Let's start with Arizona. What's going
Speaker 1: on there and how important is this for the Democrats. Well,
Speaker 1: Arizona is critical to the Democratic campaign, the underdog campaign
Speaker 1: to win control of the Senate from the Republicans. Jeff
Speaker 1: Flake is retiring and you have primaries today for his seat.
Speaker 1: I think the race to watch is the Republican primary,
Speaker 1: a three way primary that includes Congressman Martha McSally who's
Speaker 1: up against Kelly Ward, who ran against John McCain in
Speaker 1: the Republican primary, trying to run as a more conservative
Speaker 1: alternative and more of a pro Trump cadidate than Martha McSally.
Speaker 1: And then you have Joe R. Pio, the uh controversial
Speaker 1: former Arizona sheriff who want to pardon from Donald Trump
Speaker 1: bar peo and order, probably likely to split a lot
Speaker 1: of the anti establishment votes. So I think McSally goes
Speaker 1: on to win and will advance to the November election,
Speaker 1: probably against one of our colleagues, Democratic Congresswoman Kirsten Cinema.
Speaker 1: It's a state that Trump narrowly harried in and it
Speaker 1: will be key to UH, key to the one of
Speaker 1: the top seven or eight center races in November, and
Speaker 1: just quickly. Any idea of who the Arizona governor will
Speaker 1: select to fill the seat left vacant by the passing
Speaker 1: of Senator John McCain, we don't know quite yet. The
Speaker 1: governor is keeping his cards close to his vest. He
Speaker 1: will appoint a Republican uh, because he is a Republican,
Speaker 1: also because state lowe requires it. UM. There are several
Speaker 1: names that have been speculated, including Cindy McCain, the late
Speaker 1: senator's widow. I don't think that will happen. Republican leaders
Speaker 1: are gonna want someone who will run in the special
Speaker 1: election in because Arizona, as I mentioned, as competitive, and
Speaker 1: they wanted the Republican leaders want a strong candidate to
Speaker 1: defend that seat when it comes up again. Are these
Speaker 1: primaries different than the ones months and months and months ago?
Speaker 1: I mean, I think of the presidential primary, how they
Speaker 1: change over time or is just the primaries of primary
Speaker 1: primaries are primary, you know in this case here, you know,
Speaker 1: congressional primary is a little odd and that they start
Speaker 1: as early as in March, and states like Illinois and Texas.
Speaker 1: And we're kind of getting near to the end with
Speaker 1: Florida and Arizona, which traditionally vote late. After today, we'll
Speaker 1: only have a handful of New England states mostly to
Speaker 1: left to vote. But people are gonna be watching the
Speaker 1: primary turnout very closely, especially in Florida, where you have
Speaker 1: contested primaries in both parties for the governorship and the
Speaker 1: Republican primary. President Trump is intervened to back a preferred
Speaker 1: candidate for candidate there tell us about Florida, but specifically
Speaker 1: about Donna Schalela. Yeah, Donna Schalela Um. She was President
Speaker 1: Clinton's Bill Clinton's Health and Human Services Secretary, later the
Speaker 1: president of the University of Miami. This is a Miami
Speaker 1: area congressional district that Salela is seeking in today's primary.
Speaker 1: She has several opponents in the Democratic primary, but because
Speaker 1: of her name recognition and fundraising, she's likely to win,
Speaker 1: perhaps with a plurality of the vote. This is a
Speaker 1: district that is Hispanic majority it is anti Trump, but
Speaker 1: it's held by a Republican, Eliana Ross Latenan who is retiring,
Speaker 1: and it is a top target of Democrats seeking a
Speaker 1: net game of twenty three seats to overturn the majority.
Speaker 1: It's a must win for the Democrats. Well, we've got
Speaker 1: you on overnight the news of courts saying to North
Speaker 1: Carolina you're gerrymandering, which I believe tilster Republicans is just
Speaker 1: not going to go even before the election. Translate that
Speaker 1: for Yeah, So, a federal court last night issued an
Speaker 1: opinion that was over three hundred pages that basically invalidated
Speaker 1: a Republican drawn North Carolina congressional district map as an
Speaker 1: unlawful partisan gerrymander. And but it's not clear yet if
Speaker 1: that map will be used in the elections coming up
Speaker 1: in just a little over two months. I suspect that
Speaker 1: the Republicans defending the map will try and ask to
Speaker 1: stay the ruling or block it until after the election,
Speaker 1: noting how close we are. We've already had the primary
Speaker 1: elections in North Carolina in the spring, so we have
Speaker 1: to wait and see what the what the court is
Speaker 1: going to do, what the Supreme Court might do because
Speaker 1: it will certainly be appealed to that body. It rundown.
Speaker 1: Gregg Gerald, thank you. Loved your work earlier this morning
Speaker 1: as well. Mr gerro with Bloomberg Government and Washington really
Speaker 1: encyclopedic on all this stuff. 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.
Speaker 1: I'm Bloomberg Radio