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

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

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

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Speaker 1: Bloomberg dot com, and of course on the Bloomberg. Can

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Speaker 1: we talk about sausage making here so we can give

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Speaker 1: a vignette to our ginormous seven am audience. Can you

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Speaker 1: explain what you're talking about? We get so busy, John

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Speaker 1: and I and Johnny has three Bloomberg terminals. But there

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Speaker 1: I was on television this morning, and you know, I'm

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Speaker 1: frantically dealing with yields in the yields lower in Europe.

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Speaker 1: I don't even know who sits down next to me,

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Speaker 1: so of course look into the TV camera and go

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Speaker 1: and with this. Christopher Varone and dr was was was

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Speaker 1: sitting next to me, A confused. I was a little

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Speaker 1: bit confused. He leans over to me and says, you'd

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Speaker 1: never do that to own center. Let's bring in Chet

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Speaker 1: and I shall wait more. Instanley's chief economist and clubiz doctor.

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Speaker 1: Good morning to Chatting right to have you with us

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Speaker 1: on the program, my pleasure. Let's just talk about it.

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Speaker 1: The headlining you like this research piece, Policy dominates the cycle,

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Speaker 1: which trying to get a hands around the next policy

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Speaker 1: move from China. How do you frame that at the moment, Well,

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Speaker 1: we think China is right now already implementing quite a

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Speaker 1: sizeable fiscal stimulus that's about two billion dollars in size.

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Speaker 1: And if this straight tension thing escalates, we think they

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Speaker 1: will probably do additional fiscal stimulus, and this time the

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Speaker 1: fiscal stimulus will actually be more focused on public expenditure.

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Speaker 1: What we saw the last round was a mix of

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Speaker 1: tax cuts and public expenditure. But if pay tensions escalated,

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Speaker 1: they'll probably not do more tax cuts, They'll do more

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Speaker 1: physical stimulus in form of spending. Why more focused on

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Speaker 1: the public sector, because you know what had happened, and

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Speaker 1: a lot of people are ask me, you know, did

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Speaker 1: China always plan to extend this trade tensions for longer?

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Speaker 1: My immediate answer and first impression is no, because you

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Speaker 1: know they actually this time very much focused on the

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Speaker 1: private sector. Try to do these tax cuts, which supports

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Speaker 1: the private sector, but now these trade tensions, if it escalates,

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Speaker 1: it actually affects the confidence and so people will save

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Speaker 1: that tax cuts and not spent. And so if you

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Speaker 1: see the trade tensions are escalating and you want that

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Speaker 1: growth number to look up, they will actually have to

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Speaker 1: take control and do the traditional style more public expenditure.

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Speaker 1: So many people are trying to understand where the China

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Speaker 1: is pushing on a string at the moment. And I'm wondering,

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Speaker 1: if you control any kind of distinction between the debt

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Speaker 1: cycle and the public sector and the debt cycle in

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Speaker 1: the private sector, are we seeing two different tracks there,

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Speaker 1: two different things happening. Well, actually, you know in China's case, um,

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Speaker 1: you know, because there's so much of public sector in

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Speaker 1: every part of the economy. When you're looking at debt sustainably,

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Speaker 1: you just look at the overall debt to GDP and

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Speaker 1: they actually did have a control on that. In two

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Speaker 1: thousand and eighteen, total let to GDP decline by five

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Speaker 1: percentage points, corporate debt to GDP declined by eight percentage points,

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Speaker 1: So they were actually able to achieve some success towards that.

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Speaker 1: But I agree, if you do see trade tensions and

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Speaker 1: an around of stimulus, you will see some compromise and

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Speaker 1: debt to GDP will rise somewhat. In two thousand ninety

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Speaker 1: the Morgan Stanley Global call on slower GDP a tendency

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Speaker 1: to lower yields has been extraordinary, almost a synthesis of

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Speaker 1: what you and and Ellen Center and others have done there.

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Speaker 1: Bring that over to what everybody knows on the street

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Speaker 1: is your cautious equity call as well? Can you ever

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Speaker 1: more with the news flow the last two weeks, Lincoln

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Speaker 1: an equity market caution to I see a US two

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Speaker 1: year at two point one seven. Essentially the call from

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Speaker 1: the equity side and fixed income strategy side is that,

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Speaker 1: you know, even while we have some kind of stabilization

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Speaker 1: in global growth, the reality is with this trade tension

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Speaker 1: as the risk to the outlook askew to the downside,

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Speaker 1: and so what they think is that the market is

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Speaker 1: going to I saw this downside risk and that's why

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Speaker 1: they are cautious on the markets. They're cautious on the markets,

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Speaker 1: and you have to be cautious on a slowdown. Is

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Speaker 1: the FED aware of our quickly we're moving towards a

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Speaker 1: rate cut call? Well, I think as of now things

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Speaker 1: are fine, and I think the FED is in the

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Speaker 1: right place. I wouldn't say that they are actually behind

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Speaker 1: the curve and not observing this downside. I think they

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Speaker 1: will come through very quickly if you see these trade

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Speaker 1: tensions escalating for longer and it shows up in the

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Speaker 1: financial conditions UM index. So our view is that as

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Speaker 1: of now, it's fine, but the financial conditions tight and

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Speaker 1: the FED will come through very quickly. And we've got

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Speaker 1: to work out the external inter internal forces affecting some

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Speaker 1: of these economies. And I want to focus specifically on China.

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Speaker 1: It's been quite hard to draw distinction between what China

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Speaker 1: engineered themselves, the slowdown we have seen over the last year,

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Speaker 1: and the slowdown off the back of the trade dispute

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Speaker 1: between the United States. How do you draw that distinction

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Speaker 1: at the moment, Well, I actually have been different from

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Speaker 1: consensus as its consensus has been saying that china slowdown

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Speaker 1: was because they were doing tightening. So I don't think

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Speaker 1: it was policy driven slowdown which they enforced on themselves.

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Speaker 1: It was more really trade tensions that was the biggest

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Speaker 1: problem for China's growth outlook in the second half of

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Speaker 1: two thousand eighteen. Let me explain what I mean. So

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Speaker 1: if you see the credit growth, which is the most

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Speaker 1: important policy variable we watch, it was slowing already from

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Speaker 1: middle of two thousand and sixteen from your on your

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Speaker 1: number of sixteen percent to twelve and in those six

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Speaker 1: quarters until second first half of two thousand eighteen, its

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Speaker 1: GDP growth was fine six point seven six point eight

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Speaker 1: percent year on year. So the only time you saw

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Speaker 1: that slow down was in the second half one straight

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Speaker 1: tensions escalated. So we think the private sector confidence took

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Speaker 1: a serious not just only in China but everywhere in

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Speaker 1: the world, and so it was really trade tensions that

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Speaker 1: has caused the big story. This is really important because

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Speaker 1: China's credit impulse is just starting to inflect up again.

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Speaker 1: The provision of credit is a percentage of GDP just

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Speaker 1: starting to flex time and some people look at that

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Speaker 1: as a leading into cadfory economy. Are you saying it's

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Speaker 1: not this time around? Well, it is, but to the

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Speaker 1: extent to which you if you don't get trade tensions solved,

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Speaker 1: then that credit growth recovery will still not bring net

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Speaker 1: net recovery in China GDP growth. So, as I was

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Speaker 1: explaining to Tom earlier on the TV show, that there

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Speaker 1: are two forces at play here, policy stimulus and trade tensions.

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Speaker 1: Which one wins depends upon the duration of how long

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Speaker 1: the trade tension lasted. Trade tensions last for longer then

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Speaker 1: we think policies similars will increase, but even that will

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Speaker 1: not be enough to actually drive out And you went

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Speaker 1: right where John Williams was in our conversation with him, Zurich,

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Speaker 1: I think it was twenty four hours ago. Which is

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Speaker 1: a loss of business confidence? Is Morgan Stanley observing right now?

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Speaker 1: A lessening confidence which means less investment, less animal spirit

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Speaker 1: among business. Absolutely, that's exactly what is going on right

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Speaker 1: now in the capex numbers that we see. So for

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Speaker 1: for me, you saw that Germany today, John. And if

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Speaker 1: you cat another transparent indicator, which is you aggregate global

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Speaker 1: capital goods import from the trade data that you get,

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Speaker 1: and that's contracting on a year on your basis, in

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Speaker 1: the first three months of the calendar year, it's down

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Speaker 1: three percent. You're on your versus one percent growth plus

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Speaker 1: one negative three. What does that do to a leguard

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Speaker 1: like global GDP number? Do we go back to a

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Speaker 1: three handle on global GDP? We are expecting global road

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Speaker 1: to be three point two percent in the first quarter,

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Speaker 1: down from four percent. Let me translate that, folks, that's

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Speaker 1: low that's not three point two, is not three point eight?

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Speaker 1: Found a question for your channel, how they manage the

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Speaker 1: FECTS channel in China. We've seen some weakness come through.

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Speaker 1: Is that weakness engineered or largely out of their control?

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Speaker 1: I think it is more market oriented at this point

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Speaker 1: of time. I don't see a case for China to

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Speaker 1: actually use this as a tool as a you know,

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Speaker 1: point to discuss or debate on this trade at tension.

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Speaker 1: So we think it is pretty much market oriented. Look,

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Speaker 1: they don't run big kind of account surplus is now.

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Speaker 1: So when you get this sort of market declines, you

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Speaker 1: will see capital outflows, portfolio outflows, and that's going to

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Speaker 1: drive some cut and sea weakness. So we think it

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Speaker 1: is just that right now is the outlook on capital flows.

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Speaker 1: Thank you so much. He is with Stanley, head of

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Speaker 1: Global Economics, and thank you unto all your team who

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Speaker 1: are with this almost on a daily basis, it seems

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Speaker 1: Morgan Stanley with I will suggest as a summary and

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Speaker 1: more cautious call John. It's it's just exceptionally important to

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Speaker 1: understand that the Washington capital's lost. So we really don't

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Speaker 1: care what Appy Joseph Cohen thinks, and so we need

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Speaker 1: to have somebody here who understands we are destined for

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Speaker 1: Bruins Blues Stanley Cup final. Yeah, this is Glenn holl

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Speaker 1: And goal in a guy name or goes across the top,

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Speaker 1: and only our next guest understands the importance of Ruins victory.

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Speaker 1: Just just killed the Canes last night. It was such

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Speaker 1: a big game. Took a resk. It just just fantastic. Okay,

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Speaker 1: great player? Do you like that? Do you like my baseball?

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Speaker 1: Sort of like lipool? I'm joking, I'm so good at

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Speaker 1: one in you are honestly ice hockey in Boston. I

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Speaker 1: get it all right. I mean, as we can only

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Speaker 1: talk to one gentleman from Gorman, David Coston, Goman, Sex's

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Speaker 1: chief US equity strategist. Did you think we'd open a

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Speaker 1: conversation like that? David? Uh No? But nothing here surprises me?

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Speaker 1: Is that? Is that an insult in me? Or a tom?

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Speaker 1: I think it's a group effort, is that? David? Let's

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Speaker 1: talk about something I think is dominating the conversation, and

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Speaker 1: I know you and the team have been focused on

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Speaker 1: it too, input costs and how they're managed as the

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Speaker 1: year grows older. Just walk me through some of the

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Speaker 1: conclusions you've come to us some of the research. Even

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Speaker 1: the guys the team have been doing well. One of

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Speaker 1: the biggest topics in the investment community right now is

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Speaker 1: the rising input costs. Now, tariffs are the top of mind,

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Speaker 1: but there are other aspects of the cost structure of corporations,

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Speaker 1: one of which would be labor costs. Uh. And so

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Speaker 1: from a social point of view, that is a good thing.

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Speaker 1: People make me more money from a margin pressure. However,

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Speaker 1: that's the downward to squeeze on some margins. That's the

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Speaker 1: one particular aspect that we're focused on a lot. You

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Speaker 1: think the typical company, uh, something in the order of

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Speaker 1: fourteen percent of its sales are devoted to the cost

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Speaker 1: of labor. That's fully low. Did you think about healthcare costs,

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Speaker 1: medical benefits, their salary, their compensation, all that's about fourteen

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Speaker 1: percent of sales. And so there are some companies where

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Speaker 1: that's at the low end, maybe five percent, and there

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Speaker 1: are other companies where it's the high end. Something like

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Speaker 1: percent of the revenues are consumed by by labor. So

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Speaker 1: I would say that's a sort of front and center.

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Speaker 1: The tariffs are just a complicating factor or another attribute

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Speaker 1: of that. So as a investor, you want to think

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Speaker 1: about it those companies that are goods producing as compared

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Speaker 1: with service providing and if you have an option or

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Speaker 1: not option, but if you would want to tilt a

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Speaker 1: portfolio more towards companies that are services providing because they

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Speaker 1: have less exposure on the on the labor class side,

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Speaker 1: they have more stronger, less variable margins, they have better

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Speaker 1: balance sheets, and most importantly, they are not going to

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Speaker 1: be subject to tariffs. When I say not subject to,

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Speaker 1: they're much less affected by by tariffs, both the actual

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Speaker 1: tariffs as well as potential retaliatory terrorists in the part

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Speaker 1: of China. And when you separate it up that why

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Speaker 1: service providing US is good producing, do you also find

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Speaker 1: that the service providing companies are able to pass those

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Speaker 1: kosts on instead of absorbing it through the maunchion. It's

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Speaker 1: not what you're finding too. Yes, And if you want

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Speaker 1: to think about some of the companies that are in

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Speaker 1: the industry, the industries that are there are more representative

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Speaker 1: in the services categories you look at, software and services, media, entertainment, retailing,

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Speaker 1: banks would be examples of service providing companies and the

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Speaker 1: goods producing sides. You'll see that in pharma. You look

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Speaker 1: at the capital, goods, technology, energy, those will be on

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Speaker 1: the other side, and they have more UH downward pressure

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Speaker 1: on their in their business model simply because they're more

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Speaker 1: goods producing. If you look at that another way of

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Speaker 1: thinking about it, of the revenues of services companies are domestic,

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Speaker 1: whereas the goods providing and something like and so that's

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Speaker 1: non us, which is which is another challenge on the

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Speaker 1: tariff side. They cut their way out of this. I mean,

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Speaker 1: I have heard about margin compression since Nixon was president,

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Speaker 1: and you know maybe it was before that. That was

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Speaker 1: around the time Bobby the Bobby Or scored that great

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Speaker 1: goal you were faring to various Robert Or in his studio.

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Speaker 1: You can see where this is great. You're like going,

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Speaker 1: we got to get old Vetchkan back with having really

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Speaker 1: the perfect cast for you. It is thank you, um,

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Speaker 1: David Uh. We've been talking about margin compression for years.

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Speaker 1: It's finally here you claim what's different this time? What's

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Speaker 1: different now? And why can't an industrial shop in the

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Speaker 1: Midwest cut costs like they've always cut costs? Well, the

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Speaker 1: biggest issue is UH on positive point where three point

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Speaker 1: six unemployment rate the lower fifty years UH, which which

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Speaker 1: is a positive from a social social point of view,

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Speaker 1: but it does put upward pressure on wages vector on

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Speaker 1: wage growth high. My colleague is our chief economist at

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Speaker 1: Goldman Zax is also of the view and his forecast

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Speaker 1: would be that UH wage inflation is accelerating. And if

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Speaker 1: you look at the quarterly conference calls, right, we just

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Speaker 1: finished the quarterly conference calls in UH in the first

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Speaker 1: quarter results and companies were enumerating and discussing the labor

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Speaker 1: and this goes back to Chairman Paul I did the

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Speaker 1: chart John while we're on the break talking about Bruins,

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Speaker 1: No blues, Bruins were doing it. And if you take

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Speaker 1: trimmed mean like Cleveland mean. Yeah, I'm sorry, these are

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Speaker 1: higher inflation numbers than a lot of the stuff that's

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Speaker 1: being quoted. Can we talk about where consumer stiples fits

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Speaker 1: in here, because some of the big consumer staples companies

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Speaker 1: actually were quite successful passing through higher costs to the

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Speaker 1: end consumer, lifting prices and actually getting some revenue growth

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Speaker 1: as well. Where did they fit into old of this? UH?

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Speaker 1: The consumers stables area is certainly more exposed than a

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Speaker 1: lot of others in our view, in our research, and

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Speaker 1: so the preference would be h til portfolios more towards technology,

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Speaker 1: particularly software. And if you think about the fact of

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Speaker 1: the last fifty years, remember where the lowest unemployment rate

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Speaker 1: in fifty years. You think about over the last five decades,

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Speaker 1: only one year have you had negative growth in real

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Speaker 1: spending on software in this country one time in fifty years,

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Speaker 1: and that is that took place right after the two

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Speaker 1: thousand and one, right after the tech bubble collapse. Other

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Speaker 1: than that, real spending on software in this country has

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Speaker 1: increased for for five decades. And so that would be

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Speaker 1: an area very strong revenue story behind it, and they're

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Speaker 1: able to absorb, uh, the increased labor cause this is

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Speaker 1: one of those sencular growth stories. Is that essentially what

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Speaker 1: you sang well. Secondly growth stories. Also, if we're concerned

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Speaker 1: about the what impact triffs may have on the business

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Speaker 1: models of a number of companies in terms of their

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Speaker 1: their call structure, some companies are trying to diversify their

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Speaker 1: supply chains. That's one tactic to combat the potential risk

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Speaker 1: of tariffs. Also addressing the issue of higher input costs.

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Speaker 1: That's uh, that's the strategy we're focused on. Let's get

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Speaker 1: back to the index level just quickly as we round

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Speaker 1: out the interview, the work cous for narn ex recession

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Speaker 1: in the United States? Have we seen the worst? Was

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Speaker 1: Q one the worst? And can we avoid that? David, Well,

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Speaker 1: there were earnings recession. We're basically had positive two earnings

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Speaker 1: per share growth for the first quarter year of a year.

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Speaker 1: Expectation is you'll have modest growth this year, somewhere between

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Speaker 1: three and six percent positive earnings growth UH in two

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Speaker 1: thousand and nineteen. And that's reflective of the fact that

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Speaker 1: you're going to be somewhere between one hund and one

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Speaker 1: and seventy three dollars of earnings per share for the

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Speaker 1: SMP five hundred. That would lead us to an endex

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Speaker 1: level to end of the year around three thousand. How

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Speaker 1: does David Coustan define scale every C class officer, Now,

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Speaker 1: we have to find scale, scale this scale that this

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Speaker 1: is a roll up frenzy that we're going into. Well

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Speaker 1: scale us offer the prospect of better margins instead. The

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Speaker 1: big topic of on the investment community right now is

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Speaker 1: which companies or which industries are able to increase those

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Speaker 1: those margins. A lot of we talked about this morning.

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Speaker 1: So many companies are having downward pressure on their their margins.

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Speaker 1: David constant us. It was a surprise. It was very

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Speaker 1: happy with David just dropping bout a studio. I was

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Speaker 1: shooting a video there. What I was doing was shooting

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Speaker 1: Mr Costs just annoying. That's what coming. No, no, and

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Speaker 1: then I came over you and then with with the

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Speaker 1: video camera that we've got it. So the same thing

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Speaker 1: that using Game of Thrones, I went through you and

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Speaker 1: over you, just like Robert or going over Glenn Hall.

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Speaker 1: You know how you fail. It's very bruinsible when the

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Speaker 1: youngest is running around the apartment driving you crazy. That's

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Speaker 1: that's how I feel every morning, doing right. That's how

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Speaker 1: much fun it is. John joining us now as a

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Speaker 1: boomber Brexit editor. Emma Ross Thomas. Emma, So the timing

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Speaker 1: is awkward right for the Conservative Party, because so she

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Speaker 1: says she's going to bring this back to Parliament in

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Speaker 1: ju ahead of that, we have the European elections. How

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Speaker 1: will the Conservative do and how will Labor doink? The

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Speaker 1: timing actually is almost in her favor. She's she's one

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Speaker 1: of the good things about the European elections, if you like,

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Speaker 1: if you want to seek a silver lining, is that

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Speaker 1: the Tories are almost certainly going to get wiped out

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Speaker 1: by the Brexit Party, founded by Nigel Farage, the veteran

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Speaker 1: Brexit campaigner. He's polling about thirty the Tories, and some

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Speaker 1: polls are done at ten percent, coming into the fourth

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Speaker 1: or fifth place. So Jeremy Harten, the Foreigns actually said

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Speaker 1: yesterday that maybe if they get a real drubbing, that

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Speaker 1: that will send a message to his colleagues to just

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Speaker 1: jolly well deliver Brexits. That does seem to be the

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Speaker 1: sort of the main hope, if you like, is that

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Speaker 1: the message from those elections will be you've got to

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Speaker 1: get on with it, deliver Brexit, startling about something else.

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Speaker 1: Um and the certainly inside the Tory Party has a

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Speaker 1: view that the Brexit Party is the next essential threat

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Speaker 1: to the Tories if they don't deliver Brexit. If they

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Speaker 1: do the didn't Brexit, then they can they can live with.

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Speaker 1: But if the Brixit Party, which frankly it's just very

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Speaker 1: clear what you're voting for, which is brexit It, if

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Speaker 1: they win big in the European elections, does it not

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Speaker 1: give inputs to for example, a Conservative Party, you know,

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Speaker 1: possible leader that is that is pro Brexit to say, actually,

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Speaker 1: Theresa may move out of the way. We don't even

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Speaker 1: like this deal. We want something much stronger in our

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Speaker 1: divorce deal with the Yeah, I think it's very likely

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Speaker 1: that the next step, if you like, is certainly the

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Speaker 1: leadership race to reason mas deal. Probably I'm not gonna

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Speaker 1: put numbers on it, but it's not very likely that

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Speaker 1: it goes through. It's not very you know, people have

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Speaker 1: become increasingly entrenched over in their positions over the last

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Speaker 1: three years. Um. You know, I suppose that when I

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Speaker 1: say that about the European elections, that's kind of the

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Speaker 1: only hope if you like. Oh, of course that she

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Speaker 1: does actually offer the Labor Party what they want, which

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Speaker 1: is a customs union and also a confirmatory vote. Again,

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Speaker 1: very unlikely, and it would, you know, she would end

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Speaker 1: up being killed by her party. So looking ahead to

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Speaker 1: a leadership race, yes, probably Exeter is gonna is going

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Speaker 1: to win that race. But then he is stuck or

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Speaker 1: he or she is stuck with the same parliament, a

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Speaker 1: parliament that has voted repeatedly against No Deal, and so

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Speaker 1: you know, it's not too hard to imagine that beyond

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Speaker 1: that leadership race, you're then looking at a general election

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Speaker 1: if they are going to want to renegotiate that deal. Emma,

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Speaker 1: thank you so much. This morning, we'd like to have

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Speaker 1: a three hour discussion with the Laureate Michael Spence of

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Speaker 1: New York University. We can unfortunately not get you for

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Speaker 1: three hours, but we could fill it effortlessly. At well,

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Speaker 1: we might point out that we celebrate with Professor Spence

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Speaker 1: his new efforts as a special adviser to General Atlantic,

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Speaker 1: which is, I know, uh, an investment shop that is

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Speaker 1: always pushing the information in education envelope. Michael Spence, what

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Speaker 1: a day it was when you won the Nobel Prize

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Speaker 1: sharing it with the gentleman from Stanford and there's only

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Speaker 1: one George Akerloft. I think Professor Taylor would agree with

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Speaker 1: that statement. And a guy named Stiglets from Columbia as well,

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Speaker 1: and so much of Spence Stiglets Akerlof was what we

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Speaker 1: don't see out there? What are we not seeing right

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Speaker 1: now in the information flow of our brands spanking new

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Speaker 1: trade war Well, I think we're confused, tom uh and

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Speaker 1: we refused, confused mainly because we can't see what the

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Speaker 1: objective function of the current administration in the United States is.

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Speaker 1: And we have similar difficulties figuring out where where the

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Speaker 1: Chinese want to end up. So, for example, it's there's

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Speaker 1: a group in Washington that would like to decouple our economies.

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Speaker 1: There's a group that's concerned with national purity and defense

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Speaker 1: and related things, and they might be sympathetic to the

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Speaker 1: decoupling and a little insensitive to the economic costs of that.

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Speaker 1: And then there's another rather large group, bipartisan group, who thinks,

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Speaker 1: you know, that the thing hasn't been fair. We got

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Speaker 1: a level of playing field, and otherwise we can have

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Speaker 1: normal economic relationships. And what we can't see I don't

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Speaker 1: think it's possible to see now is sort of where

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Speaker 1: we're gonna end up on that spectrum. Let's fold in

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Speaker 1: Michael Spence with Jonathan Spence of Yale University, and of

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Speaker 1: course no relation, right, no relation, no relation with the

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Speaker 1: giant Jonathan Spencer, true scholar, our original scholars, some would

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Speaker 1: say on China, uh, if we fold in the two Spences,

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Speaker 1: the mystery is how did the Chinese respond? And do

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Speaker 1: they respond culturally and behaviorally or rationally and economically, which

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Speaker 1: will it be. That's part of the uncertainty. That is

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Speaker 1: part of what we don't know. So we think we

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Speaker 1: we Jonathan and others who spend a lot of time

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Speaker 1: in China think they're as as is true in every country. Groups.

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Speaker 1: So there's a group that want the state to be

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Speaker 1: a major part of the economy and that creates clashes

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Speaker 1: with interactions with our system. Um. There's a group that

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Speaker 1: that wants reform and would be quite happy with some

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Speaker 1: of the things that are being proposed and bandied about

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Speaker 1: in the trade. And it's not clear you know, how

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Speaker 1: that balance is going to come out. I mean it's

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Speaker 1: pretty what. One thing is pretty clear is the old

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Speaker 1: assumption that they would evolve and become more like a

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Speaker 1: Western economy in terms of governance, the role of the

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Speaker 1: state and so on. That's not going to happen, at

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Speaker 1: least not in the near future. Um. But there are

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Speaker 1: great uncertainties. There's the I sometimes say the Chinese have

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Speaker 1: gravitated from correct behavior, which was what the atic corruption

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Speaker 1: campaign was about to correct. Thought, there's more uh willingness

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Speaker 1: to intervene and prevent people from expressing diverse views on things.

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Speaker 1: So Professor from your perspective, what do you think as

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Speaker 1: a reasonable deal at the end of the day, given

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Speaker 1: you're not your understanding of the limitations on the Chinese

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Speaker 1: government and what they can do, and given certainly our

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Speaker 1: political limitations here, well, I think a reasonable deal is

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Speaker 1: to pick off the stuff that's relatively easy. The Chinese,

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Speaker 1: in order to achieve economic performance, do not need to

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Speaker 1: have theft of intellectual property. They don't need significant degrees

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Speaker 1: of protection, and I don't think they need for the

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Speaker 1: most part um to protect state owned enterprises and other

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00:23:38,920 --> 00:23:42,080
Speaker 1: parts of that as apparatus. So I think that, you know,

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Speaker 1: if we can get over this, you know, you get

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Speaker 1: to lower your tariffs and we get to keep ours

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00:23:46,320 --> 00:23:48,239
Speaker 1: or the right to keep ours kind of back and

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00:23:48,320 --> 00:23:51,680
Speaker 1: forth that we're seeing now, I think there's a reasonable

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00:23:51,720 --> 00:23:56,480
Speaker 1: deal in that area. Now, what what all insightful commentators

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00:23:56,480 --> 00:23:59,440
Speaker 1: say is that's not the whole story. That we'll still

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Speaker 1: have friction and surround the way technology moves around the

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00:24:03,480 --> 00:24:05,919
Speaker 1: world and between the two countries and so on. But

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00:24:05,920 --> 00:24:08,640
Speaker 1: but there is a deal to be struck that's mutually

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Speaker 1: beneficial in that area. So it's interesting. The one of

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Speaker 1: the issues seems to be UM enforcement that has always

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Speaker 1: been a major issue here are is there any room

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Speaker 1: for breakthrough and actually getting real enforcement of whatever is

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00:24:23,160 --> 00:24:28,080
Speaker 1: agreed to? Well, for the enforcement issue comes from a

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00:24:28,119 --> 00:24:32,080
Speaker 1: long history of China agreeing to terms uh and then

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00:24:32,119 --> 00:24:35,240
Speaker 1: sort of ignoring them when it was inconvenient. Going back

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00:24:35,280 --> 00:24:37,399
Speaker 1: to the w t o A session, I think the

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00:24:37,520 --> 00:24:40,359
Speaker 1: Chinese realized that's not a long run productive way to

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00:24:40,400 --> 00:24:45,399
Speaker 1: interact anymore. Um So, I my best guess is the

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00:24:45,440 --> 00:24:47,520
Speaker 1: way this is going to go is there aren't really

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00:24:47,680 --> 00:24:52,159
Speaker 1: hugely reliable enforcement mechanisms, but both sides are going to

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00:24:52,280 --> 00:24:55,359
Speaker 1: reserve the right to react to misbehavior on the On

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00:24:55,400 --> 00:24:57,880
Speaker 1: the other side, I've got to rip up the script

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00:24:58,320 --> 00:25:00,679
Speaker 1: and and go somewhere where I think it's surprising we

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00:25:00,680 --> 00:25:02,840
Speaker 1: would go. Many of you may not know if you're

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00:25:02,840 --> 00:25:06,359
Speaker 1: just joining us, Michael Spence with us the laureate of

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00:25:06,520 --> 00:25:09,560
Speaker 1: New York University and a nodding acquaintance without to get

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00:25:09,560 --> 00:25:13,200
Speaker 1: from Palo Alta to the airport a few years ago.

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00:25:13,800 --> 00:25:21,080
Speaker 1: It's Stanford. You arguably invented modern graduate school, thought provoking

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00:25:22,000 --> 00:25:26,640
Speaker 1: academics out at Strand Stanford a million years ago. I

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00:25:26,640 --> 00:25:30,080
Speaker 1: I would be honored to know your thoughts on people

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Speaker 1: spending a jillion dollars to get their kids a fake sailor,

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00:25:35,800 --> 00:25:39,880
Speaker 1: or fake tennis player, or a fake whatever into these

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00:25:39,920 --> 00:25:44,080
Speaker 1: elite schools. How did you respond when you saw what

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00:25:44,200 --> 00:25:47,520
Speaker 1: parents would do to get their kids on the undergraduate

469
00:25:47,680 --> 00:25:52,920
Speaker 1: gravy train of many of our our most spensy and institutions.

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Speaker 1: My response was, I suspect the same one that most

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Speaker 1: Americans had, which is completely inappropriate behavior. What do we

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00:26:00,800 --> 00:26:03,200
Speaker 1: do with athletics at these schools? I mean, the heart

473
00:26:03,200 --> 00:26:06,840
Speaker 1: of the matter is athletics was the vehicle the catalyst

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00:26:06,960 --> 00:26:11,440
Speaker 1: for this, this behavioral function of desperate parents, Well, it

475
00:26:11,480 --> 00:26:14,080
Speaker 1: was certainly the vehicle for it for it. So so

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Speaker 1: you think of it as a vulnerability and the admissions

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Speaker 1: in the integrity of the admissions process to UM and

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00:26:20,200 --> 00:26:23,800
Speaker 1: I think that the the universities and colleges in the

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00:26:23,920 --> 00:26:28,040
Speaker 1: United States, a vast group of very great institutions, will

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00:26:28,200 --> 00:26:31,200
Speaker 1: move to close those vulnerables. Stanford moved immediately, I mean,

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00:26:31,520 --> 00:26:34,399
Speaker 1: you know, full disclosure for Stanford, they moved at light speed. No,

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00:26:34,560 --> 00:26:37,600
Speaker 1: that's true, but they But the secondary effort needs to

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Speaker 1: be to introduce a sort of monitoring and control system

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Speaker 1: so it doesn't happen again. They did, They did move

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00:26:45,320 --> 00:26:48,479
Speaker 1: right away. Can we also have an understanding, Professor Spence,

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Speaker 1: that there's a select number of a jillion schools out

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00:26:51,359 --> 00:26:57,320
Speaker 1: there that can provide exquisite educations away from the thirties

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00:26:57,320 --> 00:27:01,560
Speaker 1: select schools. Yeah, that's my view of American My grandfather

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00:27:01,680 --> 00:27:04,480
Speaker 1: called it Harvard on the brain. You know, that's what

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00:27:04,680 --> 00:27:07,480
Speaker 1: you know if my kid doesn't go to Harvard, you know,

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00:27:07,560 --> 00:27:09,840
Speaker 1: I mean Gates and Balmer where you're we're in your

492
00:27:09,880 --> 00:27:12,440
Speaker 1: graduate class. They didn't even show up to class, did

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00:27:12,440 --> 00:27:16,480
Speaker 1: they Not very much? But they did rather well in

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00:27:16,520 --> 00:27:18,960
Speaker 1: the course. That's a that's a that's at the tale,

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00:27:19,000 --> 00:27:21,600
Speaker 1: the right tale of the distribution that the brain. How

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00:27:21,640 --> 00:27:24,120
Speaker 1: do we get ourselves away from this pressure to send

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00:27:24,119 --> 00:27:28,320
Speaker 1: a kiss to seven schools that you know are deemed correct? Yeah, no,

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00:27:28,480 --> 00:27:32,479
Speaker 1: I I think this is very important. Um. My answer

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00:27:32,520 --> 00:27:35,199
Speaker 1: to that is I view the great strength of American

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00:27:35,280 --> 00:27:38,639
Speaker 1: higher education as the as the size of the really

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00:27:38,680 --> 00:27:41,760
Speaker 1: top flight institutions that I don't mean the thirty, I

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00:27:41,760 --> 00:27:45,119
Speaker 1: mean the three D five hundred, and they are state

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00:27:45,160 --> 00:27:48,199
Speaker 1: schools as well as colleges, teaching colleges and so on.

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00:27:48,720 --> 00:27:50,480
Speaker 1: I think part of the answer is we just keep

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00:27:50,520 --> 00:27:55,080
Speaker 1: repeating it and and tell and telling stories. I mean,

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00:27:55,160 --> 00:27:58,800
Speaker 1: there's lots of successful people, you know who who didn't

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00:27:58,840 --> 00:28:02,920
Speaker 1: go to Harvard and Galel in Stanford and etcetera. Uh

508
00:28:03,160 --> 00:28:05,680
Speaker 1: and and so I think we've just got to get

509
00:28:05,680 --> 00:28:08,240
Speaker 1: the message. I like your effort is saying keep telling it.

510
00:28:08,320 --> 00:28:11,480
Speaker 1: In a major shot at the Jonathan Cole of Columbia University,

511
00:28:11,520 --> 00:28:15,440
Speaker 1: who was just truly definitive on this, Michael Spence, thank

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00:28:15,440 --> 00:28:18,480
Speaker 1: you so much. Laurd of New York University. Uh there

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00:28:18,560 --> 00:28:20,520
Speaker 1: on trade wars, and we'd like to get your back

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00:28:20,520 --> 00:28:23,080
Speaker 1: in to finish up the three hour conversation at some point.

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Speaker 1: I'd thanks for listening to the Bloomberg Surveillance podcast. Subscribe

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00:28:28,560 --> 00:28:33,359
Speaker 1: and listen to interviews on Apple Podcasts, SoundCloud, or whichever

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00:28:33,560 --> 00:28:37,480
Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keane

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00:28:38,040 --> 00:28:41,720
Speaker 1: before the podcast. You can always catch us worldwide. I'm

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Speaker 1: Bloomberg Radio