WEBVTT - Surveillance: Possible Outcomes of Trade Talks With Spence 0:00:09.840 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jailey. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:30.200 Bloomberg dot com, and of course on the Bloomberg. Can 0:00:30.280 --> 0:00:32.879 we talk about sausage making here so we can give 0:00:32.920 --> 0:00:37.040 a vignette to our ginormous seven am audience. Can you 0:00:37.080 --> 0:00:40.080 explain what you're talking about? We get so busy, John 0:00:40.120 --> 0:00:42.599 and I and Johnny has three Bloomberg terminals. But there 0:00:42.640 --> 0:00:45.640 I was on television this morning, and you know, I'm 0:00:45.680 --> 0:00:48.800 frantically dealing with yields in the yields lower in Europe. 0:00:49.080 --> 0:00:50.839 I don't even know who sits down next to me, 0:00:51.120 --> 0:00:53.320 so of course look into the TV camera and go 0:00:53.600 --> 0:00:58.160 and with this. Christopher Varone and dr was was was 0:00:58.200 --> 0:01:00.760 sitting next to me, A confused. I was a little 0:01:00.800 --> 0:01:02.960 bit confused. He leans over to me and says, you'd 0:01:02.960 --> 0:01:05.319 never do that to own center. Let's bring in Chet 0:01:05.400 --> 0:01:09.759 and I shall wait more. Instanley's chief economist and clubiz doctor. 0:01:10.040 --> 0:01:11.680 Good morning to Chatting right to have you with us 0:01:11.680 --> 0:01:13.959 on the program, my pleasure. Let's just talk about it. 0:01:13.959 --> 0:01:18.040 The headlining you like this research piece, Policy dominates the cycle, 0:01:18.360 --> 0:01:20.640 which trying to get a hands around the next policy 0:01:20.720 --> 0:01:24.920 move from China. How do you frame that at the moment, Well, 0:01:24.959 --> 0:01:28.160 we think China is right now already implementing quite a 0:01:28.240 --> 0:01:32.400 sizeable fiscal stimulus that's about two billion dollars in size. 0:01:32.959 --> 0:01:35.640 And if this straight tension thing escalates, we think they 0:01:35.640 --> 0:01:39.360 will probably do additional fiscal stimulus, and this time the 0:01:39.400 --> 0:01:42.959 fiscal stimulus will actually be more focused on public expenditure. 0:01:43.160 --> 0:01:46.039 What we saw the last round was a mix of 0:01:46.120 --> 0:01:50.160 tax cuts and public expenditure. But if pay tensions escalated, 0:01:50.200 --> 0:01:52.480 they'll probably not do more tax cuts, They'll do more 0:01:52.480 --> 0:01:55.720 physical stimulus in form of spending. Why more focused on 0:01:55.760 --> 0:01:59.040 the public sector, because you know what had happened, and 0:01:59.120 --> 0:02:01.040 a lot of people are ask me, you know, did 0:02:01.120 --> 0:02:04.920 China always plan to extend this trade tensions for longer? 0:02:05.520 --> 0:02:08.680 My immediate answer and first impression is no, because you 0:02:08.680 --> 0:02:11.920 know they actually this time very much focused on the 0:02:11.919 --> 0:02:15.200 private sector. Try to do these tax cuts, which supports 0:02:15.200 --> 0:02:18.520 the private sector, but now these trade tensions, if it escalates, 0:02:18.560 --> 0:02:21.760 it actually affects the confidence and so people will save 0:02:21.840 --> 0:02:23.880 that tax cuts and not spent. And so if you 0:02:23.919 --> 0:02:26.280 see the trade tensions are escalating and you want that 0:02:26.320 --> 0:02:28.880 growth number to look up, they will actually have to 0:02:28.919 --> 0:02:32.359 take control and do the traditional style more public expenditure. 0:02:32.400 --> 0:02:34.119 So many people are trying to understand where the China 0:02:34.200 --> 0:02:36.360 is pushing on a string at the moment. And I'm wondering, 0:02:36.400 --> 0:02:38.880 if you control any kind of distinction between the debt 0:02:38.919 --> 0:02:41.360 cycle and the public sector and the debt cycle in 0:02:41.360 --> 0:02:44.079 the private sector, are we seeing two different tracks there, 0:02:44.120 --> 0:02:48.240 two different things happening. Well, actually, you know in China's case, um, 0:02:48.280 --> 0:02:50.400 you know, because there's so much of public sector in 0:02:50.480 --> 0:02:53.399 every part of the economy. When you're looking at debt sustainably, 0:02:53.440 --> 0:02:55.680 you just look at the overall debt to GDP and 0:02:55.680 --> 0:02:57.840 they actually did have a control on that. In two 0:02:57.880 --> 0:03:00.320 thousand and eighteen, total let to GDP decline by five 0:03:00.360 --> 0:03:03.960 percentage points, corporate debt to GDP declined by eight percentage points, 0:03:03.960 --> 0:03:06.680 So they were actually able to achieve some success towards that. 0:03:07.200 --> 0:03:09.480 But I agree, if you do see trade tensions and 0:03:09.560 --> 0:03:12.600 an around of stimulus, you will see some compromise and 0:03:12.639 --> 0:03:15.200 debt to GDP will rise somewhat. In two thousand ninety 0:03:15.480 --> 0:03:20.360 the Morgan Stanley Global call on slower GDP a tendency 0:03:20.400 --> 0:03:24.160 to lower yields has been extraordinary, almost a synthesis of 0:03:24.200 --> 0:03:27.280 what you and and Ellen Center and others have done there. 0:03:27.560 --> 0:03:30.080 Bring that over to what everybody knows on the street 0:03:30.520 --> 0:03:34.280 is your cautious equity call as well? Can you ever 0:03:34.400 --> 0:03:37.200 more with the news flow the last two weeks, Lincoln 0:03:37.640 --> 0:03:41.280 an equity market caution to I see a US two 0:03:41.320 --> 0:03:45.200 year at two point one seven. Essentially the call from 0:03:45.240 --> 0:03:49.000 the equity side and fixed income strategy side is that, 0:03:49.040 --> 0:03:52.080 you know, even while we have some kind of stabilization 0:03:52.120 --> 0:03:55.400 in global growth, the reality is with this trade tension 0:03:55.400 --> 0:03:57.800 as the risk to the outlook askew to the downside, 0:03:57.840 --> 0:03:59.520 and so what they think is that the market is 0:03:59.560 --> 0:04:02.400 going to I saw this downside risk and that's why 0:04:02.400 --> 0:04:05.560 they are cautious on the markets. They're cautious on the markets, 0:04:05.840 --> 0:04:08.800 and you have to be cautious on a slowdown. Is 0:04:08.840 --> 0:04:12.040 the FED aware of our quickly we're moving towards a 0:04:12.160 --> 0:04:16.159 rate cut call? Well, I think as of now things 0:04:16.160 --> 0:04:17.719 are fine, and I think the FED is in the 0:04:17.839 --> 0:04:20.039 right place. I wouldn't say that they are actually behind 0:04:20.080 --> 0:04:23.560 the curve and not observing this downside. I think they 0:04:23.600 --> 0:04:27.200 will come through very quickly if you see these trade 0:04:27.240 --> 0:04:30.960 tensions escalating for longer and it shows up in the 0:04:30.960 --> 0:04:34.320 financial conditions UM index. So our view is that as 0:04:34.360 --> 0:04:36.720 of now, it's fine, but the financial conditions tight and 0:04:36.760 --> 0:04:38.680 the FED will come through very quickly. And we've got 0:04:38.680 --> 0:04:41.919 to work out the external inter internal forces affecting some 0:04:41.920 --> 0:04:44.279 of these economies. And I want to focus specifically on China. 0:04:44.520 --> 0:04:47.520 It's been quite hard to draw distinction between what China 0:04:47.600 --> 0:04:50.560 engineered themselves, the slowdown we have seen over the last year, 0:04:50.800 --> 0:04:53.159 and the slowdown off the back of the trade dispute 0:04:53.160 --> 0:04:55.800 between the United States. How do you draw that distinction 0:04:55.800 --> 0:04:59.400 at the moment, Well, I actually have been different from 0:04:59.440 --> 0:05:02.560 consensus as its consensus has been saying that china slowdown 0:05:02.600 --> 0:05:04.720 was because they were doing tightening. So I don't think 0:05:04.760 --> 0:05:09.320 it was policy driven slowdown which they enforced on themselves. 0:05:09.760 --> 0:05:13.560 It was more really trade tensions that was the biggest 0:05:13.600 --> 0:05:16.479 problem for China's growth outlook in the second half of 0:05:16.480 --> 0:05:19.480 two thousand eighteen. Let me explain what I mean. So 0:05:19.560 --> 0:05:21.719 if you see the credit growth, which is the most 0:05:21.760 --> 0:05:25.080 important policy variable we watch, it was slowing already from 0:05:25.160 --> 0:05:27.560 middle of two thousand and sixteen from your on your 0:05:27.640 --> 0:05:31.640 number of sixteen percent to twelve and in those six 0:05:31.680 --> 0:05:34.840 quarters until second first half of two thousand eighteen, its 0:05:34.880 --> 0:05:37.200 GDP growth was fine six point seven six point eight 0:05:37.200 --> 0:05:39.960 percent year on year. So the only time you saw 0:05:40.040 --> 0:05:43.000 that slow down was in the second half one straight 0:05:43.080 --> 0:05:46.720 tensions escalated. So we think the private sector confidence took 0:05:46.720 --> 0:05:49.240 a serious not just only in China but everywhere in 0:05:49.240 --> 0:05:51.800 the world, and so it was really trade tensions that 0:05:51.880 --> 0:05:54.640 has caused the big story. This is really important because 0:05:54.720 --> 0:05:57.279 China's credit impulse is just starting to inflect up again. 0:05:57.520 --> 0:05:59.480 The provision of credit is a percentage of GDP just 0:05:59.520 --> 0:06:01.600 starting to flex time and some people look at that 0:06:01.640 --> 0:06:04.160 as a leading into cadfory economy. Are you saying it's 0:06:04.200 --> 0:06:07.159 not this time around? Well, it is, but to the 0:06:07.200 --> 0:06:10.320 extent to which you if you don't get trade tensions solved, 0:06:10.400 --> 0:06:12.920 then that credit growth recovery will still not bring net 0:06:13.000 --> 0:06:15.720 net recovery in China GDP growth. So, as I was 0:06:15.760 --> 0:06:18.520 explaining to Tom earlier on the TV show, that there 0:06:18.520 --> 0:06:22.360 are two forces at play here, policy stimulus and trade tensions. 0:06:22.400 --> 0:06:25.640 Which one wins depends upon the duration of how long 0:06:25.680 --> 0:06:28.680 the trade tension lasted. Trade tensions last for longer then 0:06:28.720 --> 0:06:31.320 we think policies similars will increase, but even that will 0:06:31.320 --> 0:06:33.880 not be enough to actually drive out And you went 0:06:33.960 --> 0:06:37.200 right where John Williams was in our conversation with him, Zurich, 0:06:37.240 --> 0:06:39.920 I think it was twenty four hours ago. Which is 0:06:39.960 --> 0:06:44.400 a loss of business confidence? Is Morgan Stanley observing right now? 0:06:45.000 --> 0:06:50.000 A lessening confidence which means less investment, less animal spirit 0:06:50.040 --> 0:06:53.760 among business. Absolutely, that's exactly what is going on right 0:06:53.800 --> 0:06:56.560 now in the capex numbers that we see. So for 0:06:56.560 --> 0:06:59.800 for me, you saw that Germany today, John. And if 0:06:59.800 --> 0:07:03.120 you cat another transparent indicator, which is you aggregate global 0:07:03.200 --> 0:07:05.760 capital goods import from the trade data that you get, 0:07:06.200 --> 0:07:08.479 and that's contracting on a year on your basis, in 0:07:08.520 --> 0:07:10.720 the first three months of the calendar year, it's down 0:07:10.760 --> 0:07:15.360 three percent. You're on your versus one percent growth plus 0:07:15.720 --> 0:07:19.560 one negative three. What does that do to a leguard 0:07:19.720 --> 0:07:22.560 like global GDP number? Do we go back to a 0:07:22.600 --> 0:07:26.120 three handle on global GDP? We are expecting global road 0:07:26.160 --> 0:07:28.440 to be three point two percent in the first quarter, 0:07:28.680 --> 0:07:32.000 down from four percent. Let me translate that, folks, that's 0:07:32.080 --> 0:07:35.080 low that's not three point two, is not three point eight? 0:07:35.240 --> 0:07:37.600 Found a question for your channel, how they manage the 0:07:37.680 --> 0:07:41.440 FECTS channel in China. We've seen some weakness come through. 0:07:41.520 --> 0:07:44.360 Is that weakness engineered or largely out of their control? 0:07:45.120 --> 0:07:47.040 I think it is more market oriented at this point 0:07:47.040 --> 0:07:49.360 of time. I don't see a case for China to 0:07:49.400 --> 0:07:52.320 actually use this as a tool as a you know, 0:07:52.440 --> 0:07:55.000 point to discuss or debate on this trade at tension. 0:07:55.080 --> 0:07:57.360 So we think it is pretty much market oriented. Look, 0:07:57.360 --> 0:07:59.480 they don't run big kind of account surplus is now. 0:07:59.800 --> 0:08:02.480 So when you get this sort of market declines, you 0:08:02.520 --> 0:08:04.960 will see capital outflows, portfolio outflows, and that's going to 0:08:05.240 --> 0:08:07.280 drive some cut and sea weakness. So we think it 0:08:07.440 --> 0:08:10.560 is just that right now is the outlook on capital flows. 0:08:11.520 --> 0:08:14.480 Thank you so much. He is with Stanley, head of 0:08:14.480 --> 0:08:17.720 Global Economics, and thank you unto all your team who 0:08:17.720 --> 0:08:20.560 are with this almost on a daily basis, it seems 0:08:20.600 --> 0:08:23.760 Morgan Stanley with I will suggest as a summary and 0:08:23.760 --> 0:08:40.920 more cautious call John. It's it's just exceptionally important to 0:08:41.040 --> 0:08:45.080 understand that the Washington capital's lost. So we really don't 0:08:45.080 --> 0:08:47.920 care what Appy Joseph Cohen thinks, and so we need 0:08:47.960 --> 0:08:52.520 to have somebody here who understands we are destined for 0:08:52.640 --> 0:08:58.040 Bruins Blues Stanley Cup final. Yeah, this is Glenn holl 0:08:58.080 --> 0:09:01.240 And goal in a guy name or goes across the top, 0:09:01.520 --> 0:09:06.360 and only our next guest understands the importance of Ruins victory. 0:09:07.080 --> 0:09:09.960 Just just killed the Canes last night. It was such 0:09:09.960 --> 0:09:17.559 a big game. Took a resk. It just just fantastic. Okay, 0:09:18.240 --> 0:09:22.560 great player? Do you like that? Do you like my baseball? 0:09:22.800 --> 0:09:27.880 Sort of like lipool? I'm joking, I'm so good at 0:09:27.920 --> 0:09:30.760 one in you are honestly ice hockey in Boston. I 0:09:30.880 --> 0:09:32.360 get it all right. I mean, as we can only 0:09:32.360 --> 0:09:35.480 talk to one gentleman from Gorman, David Coston, Goman, Sex's 0:09:35.520 --> 0:09:37.760 chief US equity strategist. Did you think we'd open a 0:09:37.800 --> 0:09:41.920 conversation like that? David? Uh No? But nothing here surprises me? 0:09:42.600 --> 0:09:44.680 Is that? Is that an insult in me? Or a tom? 0:09:44.800 --> 0:09:47.719 I think it's a group effort, is that? David? Let's 0:09:47.760 --> 0:09:50.360 talk about something I think is dominating the conversation, and 0:09:50.400 --> 0:09:52.120 I know you and the team have been focused on 0:09:52.160 --> 0:09:56.160 it too, input costs and how they're managed as the 0:09:56.240 --> 0:09:58.720 year grows older. Just walk me through some of the 0:09:58.720 --> 0:10:01.120 conclusions you've come to us some of the research. Even 0:10:01.160 --> 0:10:03.679 the guys the team have been doing well. One of 0:10:03.720 --> 0:10:07.440 the biggest topics in the investment community right now is 0:10:07.480 --> 0:10:10.800 the rising input costs. Now, tariffs are the top of mind, 0:10:11.200 --> 0:10:14.200 but there are other aspects of the cost structure of corporations, 0:10:14.240 --> 0:10:16.720 one of which would be labor costs. Uh. And so 0:10:16.760 --> 0:10:18.920 from a social point of view, that is a good thing. 0:10:18.960 --> 0:10:21.840 People make me more money from a margin pressure. However, 0:10:21.880 --> 0:10:24.559 that's the downward to squeeze on some margins. That's the 0:10:24.600 --> 0:10:27.240 one particular aspect that we're focused on a lot. You 0:10:27.320 --> 0:10:29.960 think the typical company, uh, something in the order of 0:10:30.000 --> 0:10:33.520 fourteen percent of its sales are devoted to the cost 0:10:33.559 --> 0:10:36.400 of labor. That's fully low. Did you think about healthcare costs, 0:10:36.760 --> 0:10:40.320 medical benefits, their salary, their compensation, all that's about fourteen 0:10:40.320 --> 0:10:42.360 percent of sales. And so there are some companies where 0:10:42.400 --> 0:10:44.520 that's at the low end, maybe five percent, and there 0:10:44.520 --> 0:10:46.160 are other companies where it's the high end. Something like 0:10:47.160 --> 0:10:50.040 percent of the revenues are consumed by by labor. So 0:10:50.080 --> 0:10:52.080 I would say that's a sort of front and center. 0:10:52.480 --> 0:10:56.360 The tariffs are just a complicating factor or another attribute 0:10:56.559 --> 0:10:58.959 of that. So as a investor, you want to think 0:10:58.960 --> 0:11:02.720 about it those companies that are goods producing as compared 0:11:02.760 --> 0:11:05.040 with service providing and if you have an option or 0:11:05.080 --> 0:11:07.160 not option, but if you would want to tilt a 0:11:07.200 --> 0:11:10.800 portfolio more towards companies that are services providing because they 0:11:10.840 --> 0:11:14.040 have less exposure on the on the labor class side, 0:11:14.080 --> 0:11:17.360 they have more stronger, less variable margins, they have better 0:11:17.400 --> 0:11:20.160 balance sheets, and most importantly, they are not going to 0:11:20.200 --> 0:11:22.320 be subject to tariffs. When I say not subject to, 0:11:22.520 --> 0:11:26.280 they're much less affected by by tariffs, both the actual 0:11:26.280 --> 0:11:28.800 tariffs as well as potential retaliatory terrorists in the part 0:11:28.840 --> 0:11:30.480 of China. And when you separate it up that why 0:11:30.600 --> 0:11:33.120 service providing US is good producing, do you also find 0:11:33.400 --> 0:11:36.280 that the service providing companies are able to pass those 0:11:36.360 --> 0:11:39.200 kosts on instead of absorbing it through the maunchion. It's 0:11:39.200 --> 0:11:41.079 not what you're finding too. Yes, And if you want 0:11:41.080 --> 0:11:42.600 to think about some of the companies that are in 0:11:42.600 --> 0:11:46.319 the industry, the industries that are there are more representative 0:11:46.320 --> 0:11:50.439 in the services categories you look at, software and services, media, entertainment, retailing, 0:11:50.480 --> 0:11:54.000 banks would be examples of service providing companies and the 0:11:54.000 --> 0:11:56.560 goods producing sides. You'll see that in pharma. You look 0:11:56.559 --> 0:11:59.000 at the capital, goods, technology, energy, those will be on 0:11:59.080 --> 0:12:02.520 the other side, and they have more UH downward pressure 0:12:02.679 --> 0:12:05.360 on their in their business model simply because they're more 0:12:05.400 --> 0:12:07.400 goods producing. If you look at that another way of 0:12:07.400 --> 0:12:11.880 thinking about it, of the revenues of services companies are domestic, 0:12:12.559 --> 0:12:15.520 whereas the goods providing and something like and so that's 0:12:16.559 --> 0:12:18.640 non us, which is which is another challenge on the 0:12:18.640 --> 0:12:21.600 tariff side. They cut their way out of this. I mean, 0:12:21.720 --> 0:12:25.440 I have heard about margin compression since Nixon was president, 0:12:25.520 --> 0:12:27.760 and you know maybe it was before that. That was 0:12:27.760 --> 0:12:30.480 around the time Bobby the Bobby Or scored that great 0:12:30.520 --> 0:12:34.800 goal you were faring to various Robert Or in his studio. 0:12:34.800 --> 0:12:38.560 You can see where this is great. You're like going, 0:12:38.600 --> 0:12:40.560 we got to get old Vetchkan back with having really 0:12:40.559 --> 0:12:43.120 the perfect cast for you. It is thank you, um, 0:12:43.280 --> 0:12:47.000 David Uh. We've been talking about margin compression for years. 0:12:47.080 --> 0:12:50.400 It's finally here you claim what's different this time? What's 0:12:50.400 --> 0:12:53.840 different now? And why can't an industrial shop in the 0:12:53.880 --> 0:12:57.240 Midwest cut costs like they've always cut costs? Well, the 0:12:57.240 --> 0:13:00.360 biggest issue is UH on positive point where three point 0:13:00.400 --> 0:13:04.480 six unemployment rate the lower fifty years UH, which which 0:13:04.640 --> 0:13:07.560 is a positive from a social social point of view, 0:13:07.640 --> 0:13:13.679 but it does put upward pressure on wages vector on 0:13:13.800 --> 0:13:17.080 wage growth high. My colleague is our chief economist at 0:13:17.160 --> 0:13:19.920 Goldman Zax is also of the view and his forecast 0:13:20.000 --> 0:13:23.400 would be that UH wage inflation is accelerating. And if 0:13:23.400 --> 0:13:25.240 you look at the quarterly conference calls, right, we just 0:13:25.320 --> 0:13:27.600 finished the quarterly conference calls in UH in the first 0:13:27.640 --> 0:13:32.040 quarter results and companies were enumerating and discussing the labor 0:13:32.240 --> 0:13:33.839 and this goes back to Chairman Paul I did the 0:13:33.920 --> 0:13:36.680 chart John while we're on the break talking about Bruins, 0:13:37.120 --> 0:13:39.760 No blues, Bruins were doing it. And if you take 0:13:40.080 --> 0:13:43.760 trimmed mean like Cleveland mean. Yeah, I'm sorry, these are 0:13:43.840 --> 0:13:46.480 higher inflation numbers than a lot of the stuff that's 0:13:46.480 --> 0:13:49.320 being quoted. Can we talk about where consumer stiples fits 0:13:49.360 --> 0:13:52.120 in here, because some of the big consumer staples companies 0:13:52.160 --> 0:13:56.360 actually were quite successful passing through higher costs to the 0:13:56.440 --> 0:13:59.640 end consumer, lifting prices and actually getting some revenue growth 0:13:59.640 --> 0:14:02.960 as well. Where did they fit into old of this? UH? 0:14:03.120 --> 0:14:07.080 The consumers stables area is certainly more exposed than a 0:14:07.120 --> 0:14:09.480 lot of others in our view, in our research, and 0:14:09.559 --> 0:14:13.079 so the preference would be h til portfolios more towards technology, 0:14:13.080 --> 0:14:16.040 particularly software. And if you think about the fact of 0:14:16.120 --> 0:14:19.000 the last fifty years, remember where the lowest unemployment rate 0:14:19.000 --> 0:14:21.960 in fifty years. You think about over the last five decades, 0:14:22.120 --> 0:14:26.080 only one year have you had negative growth in real 0:14:26.120 --> 0:14:29.720 spending on software in this country one time in fifty years, 0:14:29.960 --> 0:14:32.920 and that is that took place right after the two 0:14:32.920 --> 0:14:35.560 thousand and one, right after the tech bubble collapse. Other 0:14:35.600 --> 0:14:38.880 than that, real spending on software in this country has 0:14:38.920 --> 0:14:41.320 increased for for five decades. And so that would be 0:14:41.360 --> 0:14:45.080 an area very strong revenue story behind it, and they're 0:14:45.080 --> 0:14:48.080 able to absorb, uh, the increased labor cause this is 0:14:48.080 --> 0:14:50.880 one of those sencular growth stories. Is that essentially what 0:14:50.880 --> 0:14:53.840 you sang well. Secondly growth stories. Also, if we're concerned 0:14:53.840 --> 0:14:57.240 about the what impact triffs may have on the business 0:14:57.280 --> 0:14:59.400 models of a number of companies in terms of their 0:14:59.560 --> 0:15:02.120 their call structure, some companies are trying to diversify their 0:15:02.120 --> 0:15:06.320 supply chains. That's one tactic to combat the potential risk 0:15:06.360 --> 0:15:09.280 of tariffs. Also addressing the issue of higher input costs. 0:15:09.640 --> 0:15:12.400 That's uh, that's the strategy we're focused on. Let's get 0:15:12.400 --> 0:15:14.240 back to the index level just quickly as we round 0:15:14.280 --> 0:15:16.880 out the interview, the work cous for narn ex recession 0:15:17.240 --> 0:15:19.560 in the United States? Have we seen the worst? Was 0:15:19.680 --> 0:15:22.400 Q one the worst? And can we avoid that? David, Well, 0:15:22.440 --> 0:15:25.840 there were earnings recession. We're basically had positive two earnings 0:15:25.840 --> 0:15:28.080 per share growth for the first quarter year of a year. 0:15:28.560 --> 0:15:31.360 Expectation is you'll have modest growth this year, somewhere between 0:15:31.400 --> 0:15:34.320 three and six percent positive earnings growth UH in two 0:15:34.400 --> 0:15:37.200 thousand and nineteen. And that's reflective of the fact that 0:15:37.480 --> 0:15:40.200 you're going to be somewhere between one hund and one 0:15:40.560 --> 0:15:42.200 and seventy three dollars of earnings per share for the 0:15:42.240 --> 0:15:45.400 SMP five hundred. That would lead us to an endex 0:15:45.520 --> 0:15:47.400 level to end of the year around three thousand. How 0:15:47.480 --> 0:15:51.920 does David Coustan define scale every C class officer, Now, 0:15:52.200 --> 0:15:56.280 we have to find scale, scale this scale that this 0:15:56.400 --> 0:15:59.240 is a roll up frenzy that we're going into. Well 0:15:59.320 --> 0:16:03.040 scale us offer the prospect of better margins instead. The 0:16:03.080 --> 0:16:07.280 big topic of on the investment community right now is 0:16:07.400 --> 0:16:10.440 which companies or which industries are able to increase those 0:16:10.680 --> 0:16:13.040 those margins. A lot of we talked about this morning. 0:16:13.080 --> 0:16:16.360 So many companies are having downward pressure on their their margins. 0:16:16.440 --> 0:16:19.480 David constant us. It was a surprise. It was very 0:16:19.520 --> 0:16:21.440 happy with David just dropping bout a studio. I was 0:16:21.480 --> 0:16:23.480 shooting a video there. What I was doing was shooting 0:16:23.680 --> 0:16:26.640 Mr Costs just annoying. That's what coming. No, no, and 0:16:26.680 --> 0:16:28.920 then I came over you and then with with the 0:16:29.040 --> 0:16:30.840 video camera that we've got it. So the same thing 0:16:30.840 --> 0:16:33.520 that using Game of Thrones, I went through you and 0:16:33.720 --> 0:16:37.120 over you, just like Robert or going over Glenn Hall. 0:16:37.240 --> 0:16:39.360 You know how you fail. It's very bruinsible when the 0:16:39.400 --> 0:16:42.720 youngest is running around the apartment driving you crazy. That's 0:16:42.960 --> 0:16:46.720 that's how I feel every morning, doing right. That's how 0:16:46.800 --> 0:17:00.720 much fun it is. John joining us now as a 0:17:00.720 --> 0:17:04.560 boomber Brexit editor. Emma Ross Thomas. Emma, So the timing 0:17:04.640 --> 0:17:07.399 is awkward right for the Conservative Party, because so she 0:17:07.480 --> 0:17:09.760 says she's going to bring this back to Parliament in 0:17:09.840 --> 0:17:12.879 ju ahead of that, we have the European elections. How 0:17:12.880 --> 0:17:16.040 will the Conservative do and how will Labor doink? The 0:17:16.080 --> 0:17:18.560 timing actually is almost in her favor. She's she's one 0:17:18.560 --> 0:17:21.159 of the good things about the European elections, if you like, 0:17:21.280 --> 0:17:23.320 if you want to seek a silver lining, is that 0:17:23.359 --> 0:17:25.800 the Tories are almost certainly going to get wiped out 0:17:26.240 --> 0:17:29.800 by the Brexit Party, founded by Nigel Farage, the veteran 0:17:29.920 --> 0:17:33.480 Brexit campaigner. He's polling about thirty the Tories, and some 0:17:33.640 --> 0:17:36.480 polls are done at ten percent, coming into the fourth 0:17:36.560 --> 0:17:39.280 or fifth place. So Jeremy Harten, the Foreigns actually said 0:17:39.320 --> 0:17:41.360 yesterday that maybe if they get a real drubbing, that 0:17:41.359 --> 0:17:43.919 that will send a message to his colleagues to just 0:17:44.200 --> 0:17:47.200 jolly well deliver Brexits. That does seem to be the 0:17:48.040 --> 0:17:50.480 sort of the main hope, if you like, is that 0:17:51.720 --> 0:17:53.520 the message from those elections will be you've got to 0:17:53.520 --> 0:17:55.640 get on with it, deliver Brexit, startling about something else. 0:17:56.080 --> 0:17:59.720 Um and the certainly inside the Tory Party has a 0:17:59.800 --> 0:18:02.560 view that the Brexit Party is the next essential threat 0:18:02.560 --> 0:18:04.800 to the Tories if they don't deliver Brexit. If they 0:18:04.800 --> 0:18:06.359 do the didn't Brexit, then they can they can live with. 0:18:06.400 --> 0:18:09.400 But if the Brixit Party, which frankly it's just very 0:18:09.400 --> 0:18:11.920 clear what you're voting for, which is brexit It, if 0:18:11.960 --> 0:18:14.280 they win big in the European elections, does it not 0:18:14.320 --> 0:18:17.639 give inputs to for example, a Conservative Party, you know, 0:18:17.760 --> 0:18:20.840 possible leader that is that is pro Brexit to say, actually, 0:18:20.840 --> 0:18:22.960 Theresa may move out of the way. We don't even 0:18:22.960 --> 0:18:25.160 like this deal. We want something much stronger in our 0:18:25.160 --> 0:18:27.480 divorce deal with the Yeah, I think it's very likely 0:18:27.560 --> 0:18:30.000 that the next step, if you like, is certainly the 0:18:30.320 --> 0:18:33.040 leadership race to reason mas deal. Probably I'm not gonna 0:18:33.040 --> 0:18:34.800 put numbers on it, but it's not very likely that 0:18:34.840 --> 0:18:36.439 it goes through. It's not very you know, people have 0:18:36.440 --> 0:18:39.320 become increasingly entrenched over in their positions over the last 0:18:39.400 --> 0:18:43.560 three years. Um. You know, I suppose that when I 0:18:43.640 --> 0:18:45.159 say that about the European elections, that's kind of the 0:18:45.200 --> 0:18:47.480 only hope if you like. Oh, of course that she 0:18:47.640 --> 0:18:50.359 does actually offer the Labor Party what they want, which 0:18:50.440 --> 0:18:53.119 is a customs union and also a confirmatory vote. Again, 0:18:53.320 --> 0:18:55.320 very unlikely, and it would, you know, she would end 0:18:55.359 --> 0:18:57.840 up being killed by her party. So looking ahead to 0:18:57.840 --> 0:19:01.320 a leadership race, yes, probably Exeter is gonna is going 0:19:01.359 --> 0:19:04.879 to win that race. But then he is stuck or 0:19:04.920 --> 0:19:07.920 he or she is stuck with the same parliament, a 0:19:08.000 --> 0:19:12.120 parliament that has voted repeatedly against No Deal, and so 0:19:12.240 --> 0:19:15.000 you know, it's not too hard to imagine that beyond 0:19:15.080 --> 0:19:17.119 that leadership race, you're then looking at a general election 0:19:17.160 --> 0:19:19.760 if they are going to want to renegotiate that deal. Emma, 0:19:19.800 --> 0:19:36.280 thank you so much. This morning, we'd like to have 0:19:36.359 --> 0:19:38.840 a three hour discussion with the Laureate Michael Spence of 0:19:38.840 --> 0:19:42.199 New York University. We can unfortunately not get you for 0:19:42.240 --> 0:19:45.920 three hours, but we could fill it effortlessly. At well, 0:19:46.000 --> 0:19:49.480 we might point out that we celebrate with Professor Spence 0:19:49.960 --> 0:19:54.000 his new efforts as a special adviser to General Atlantic, 0:19:54.119 --> 0:19:57.199 which is, I know, uh, an investment shop that is 0:19:57.359 --> 0:20:03.280 always pushing the information in education envelope. Michael Spence, what 0:20:03.320 --> 0:20:06.440 a day it was when you won the Nobel Prize 0:20:06.440 --> 0:20:09.840 sharing it with the gentleman from Stanford and there's only 0:20:09.880 --> 0:20:12.679 one George Akerloft. I think Professor Taylor would agree with 0:20:12.720 --> 0:20:16.640 that statement. And a guy named Stiglets from Columbia as well, 0:20:16.760 --> 0:20:20.160 and so much of Spence Stiglets Akerlof was what we 0:20:20.280 --> 0:20:25.240 don't see out there? What are we not seeing right 0:20:25.240 --> 0:20:29.920 now in the information flow of our brands spanking new 0:20:29.960 --> 0:20:36.240 trade war Well, I think we're confused, tom uh and 0:20:36.280 --> 0:20:41.480 we refused, confused mainly because we can't see what the 0:20:41.520 --> 0:20:46.479 objective function of the current administration in the United States is. 0:20:46.800 --> 0:20:50.000 And we have similar difficulties figuring out where where the 0:20:50.080 --> 0:20:53.960 Chinese want to end up. So, for example, it's there's 0:20:54.000 --> 0:20:57.320 a group in Washington that would like to decouple our economies. 0:20:57.560 --> 0:21:01.360 There's a group that's concerned with national purity and defense 0:21:01.400 --> 0:21:03.800 and related things, and they might be sympathetic to the 0:21:03.880 --> 0:21:07.320 decoupling and a little insensitive to the economic costs of that. 0:21:07.840 --> 0:21:11.440 And then there's another rather large group, bipartisan group, who thinks, 0:21:11.680 --> 0:21:14.679 you know, that the thing hasn't been fair. We got 0:21:14.720 --> 0:21:17.439 a level of playing field, and otherwise we can have 0:21:17.560 --> 0:21:21.360 normal economic relationships. And what we can't see I don't 0:21:21.359 --> 0:21:23.960 think it's possible to see now is sort of where 0:21:23.960 --> 0:21:26.639 we're gonna end up on that spectrum. Let's fold in 0:21:26.880 --> 0:21:30.600 Michael Spence with Jonathan Spence of Yale University, and of 0:21:30.640 --> 0:21:34.240 course no relation, right, no relation, no relation with the 0:21:34.359 --> 0:21:38.240 giant Jonathan Spencer, true scholar, our original scholars, some would 0:21:38.240 --> 0:21:42.680 say on China, uh, if we fold in the two Spences, 0:21:42.800 --> 0:21:46.360