Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jailey.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot com, and of course on the Bloomberg. Can
Speaker 1: we talk about sausage making here so we can give
Speaker 1: a vignette to our ginormous seven am audience. Can you
Speaker 1: explain what you're talking about? We get so busy, John
Speaker 1: and I and Johnny has three Bloomberg terminals. But there
Speaker 1: I was on television this morning, and you know, I'm
Speaker 1: frantically dealing with yields in the yields lower in Europe.
Speaker 1: I don't even know who sits down next to me,
Speaker 1: so of course look into the TV camera and go
Speaker 1: and with this. Christopher Varone and dr was was was
Speaker 1: sitting next to me, A confused. I was a little
Speaker 1: bit confused. He leans over to me and says, you'd
Speaker 1: never do that to own center. Let's bring in Chet
Speaker 1: and I shall wait more. Instanley's chief economist and clubiz doctor.
Speaker 1: Good morning to Chatting right to have you with us
Speaker 1: on the program, my pleasure. Let's just talk about it.
Speaker 1: The headlining you like this research piece, Policy dominates the cycle,
Speaker 1: which trying to get a hands around the next policy
Speaker 1: move from China. How do you frame that at the moment, Well,
Speaker 1: we think China is right now already implementing quite a
Speaker 1: sizeable fiscal stimulus that's about two billion dollars in size.
Speaker 1: And if this straight tension thing escalates, we think they
Speaker 1: will probably do additional fiscal stimulus, and this time the
Speaker 1: fiscal stimulus will actually be more focused on public expenditure.
Speaker 1: What we saw the last round was a mix of
Speaker 1: tax cuts and public expenditure. But if pay tensions escalated,
Speaker 1: they'll probably not do more tax cuts, They'll do more
Speaker 1: physical stimulus in form of spending. Why more focused on
Speaker 1: the public sector, because you know what had happened, and
Speaker 1: a lot of people are ask me, you know, did
Speaker 1: China always plan to extend this trade tensions for longer?
Speaker 1: My immediate answer and first impression is no, because you
Speaker 1: know they actually this time very much focused on the
Speaker 1: private sector. Try to do these tax cuts, which supports
Speaker 1: the private sector, but now these trade tensions, if it escalates,
Speaker 1: it actually affects the confidence and so people will save
Speaker 1: that tax cuts and not spent. And so if you
Speaker 1: see the trade tensions are escalating and you want that
Speaker 1: growth number to look up, they will actually have to
Speaker 1: take control and do the traditional style more public expenditure.
Speaker 1: So many people are trying to understand where the China
Speaker 1: is pushing on a string at the moment. And I'm wondering,
Speaker 1: if you control any kind of distinction between the debt
Speaker 1: cycle and the public sector and the debt cycle in
Speaker 1: the private sector, are we seeing two different tracks there,
Speaker 1: two different things happening. Well, actually, you know in China's case, um,
Speaker 1: you know, because there's so much of public sector in
Speaker 1: every part of the economy. When you're looking at debt sustainably,
Speaker 1: you just look at the overall debt to GDP and
Speaker 1: they actually did have a control on that. In two
Speaker 1: thousand and eighteen, total let to GDP decline by five
Speaker 1: percentage points, corporate debt to GDP declined by eight percentage points,
Speaker 1: So they were actually able to achieve some success towards that.
Speaker 1: But I agree, if you do see trade tensions and
Speaker 1: an around of stimulus, you will see some compromise and
Speaker 1: debt to GDP will rise somewhat. In two thousand ninety
Speaker 1: the Morgan Stanley Global call on slower GDP a tendency
Speaker 1: to lower yields has been extraordinary, almost a synthesis of
Speaker 1: what you and and Ellen Center and others have done there.
Speaker 1: Bring that over to what everybody knows on the street
Speaker 1: is your cautious equity call as well? Can you ever
Speaker 1: more with the news flow the last two weeks, Lincoln
Speaker 1: an equity market caution to I see a US two
Speaker 1: year at two point one seven. Essentially the call from
Speaker 1: the equity side and fixed income strategy side is that,
Speaker 1: you know, even while we have some kind of stabilization
Speaker 1: in global growth, the reality is with this trade tension
Speaker 1: as the risk to the outlook askew to the downside,
Speaker 1: and so what they think is that the market is
Speaker 1: going to I saw this downside risk and that's why
Speaker 1: they are cautious on the markets. They're cautious on the markets,
Speaker 1: and you have to be cautious on a slowdown. Is
Speaker 1: the FED aware of our quickly we're moving towards a
Speaker 1: rate cut call? Well, I think as of now things
Speaker 1: are fine, and I think the FED is in the
Speaker 1: right place. I wouldn't say that they are actually behind
Speaker 1: the curve and not observing this downside. I think they
Speaker 1: will come through very quickly if you see these trade
Speaker 1: tensions escalating for longer and it shows up in the
Speaker 1: financial conditions UM index. So our view is that as
Speaker 1: of now, it's fine, but the financial conditions tight and
Speaker 1: the FED will come through very quickly. And we've got
Speaker 1: to work out the external inter internal forces affecting some
Speaker 1: of these economies. And I want to focus specifically on China.
Speaker 1: It's been quite hard to draw distinction between what China
Speaker 1: engineered themselves, the slowdown we have seen over the last year,
Speaker 1: and the slowdown off the back of the trade dispute
Speaker 1: between the United States. How do you draw that distinction
Speaker 1: at the moment, Well, I actually have been different from
Speaker 1: consensus as its consensus has been saying that china slowdown
Speaker 1: was because they were doing tightening. So I don't think
Speaker 1: it was policy driven slowdown which they enforced on themselves.
Speaker 1: It was more really trade tensions that was the biggest
Speaker 1: problem for China's growth outlook in the second half of
Speaker 1: two thousand eighteen. Let me explain what I mean. So
Speaker 1: if you see the credit growth, which is the most
Speaker 1: important policy variable we watch, it was slowing already from
Speaker 1: middle of two thousand and sixteen from your on your
Speaker 1: number of sixteen percent to twelve and in those six
Speaker 1: quarters until second first half of two thousand eighteen, its
Speaker 1: GDP growth was fine six point seven six point eight
Speaker 1: percent year on year. So the only time you saw
Speaker 1: that slow down was in the second half one straight
Speaker 1: tensions escalated. So we think the private sector confidence took
Speaker 1: a serious not just only in China but everywhere in
Speaker 1: the world, and so it was really trade tensions that
Speaker 1: has caused the big story. This is really important because
Speaker 1: China's credit impulse is just starting to inflect up again.
Speaker 1: The provision of credit is a percentage of GDP just
Speaker 1: starting to flex time and some people look at that
Speaker 1: as a leading into cadfory economy. Are you saying it's
Speaker 1: not this time around? Well, it is, but to the
Speaker 1: extent to which you if you don't get trade tensions solved,
Speaker 1: then that credit growth recovery will still not bring net
Speaker 1: net recovery in China GDP growth. So, as I was
Speaker 1: explaining to Tom earlier on the TV show, that there
Speaker 1: are two forces at play here, policy stimulus and trade tensions.
Speaker 1: Which one wins depends upon the duration of how long
Speaker 1: the trade tension lasted. Trade tensions last for longer then
Speaker 1: we think policies similars will increase, but even that will
Speaker 1: not be enough to actually drive out And you went
Speaker 1: right where John Williams was in our conversation with him, Zurich,
Speaker 1: I think it was twenty four hours ago. Which is
Speaker 1: a loss of business confidence? Is Morgan Stanley observing right now?
Speaker 1: A lessening confidence which means less investment, less animal spirit
Speaker 1: among business. Absolutely, that's exactly what is going on right
Speaker 1: now in the capex numbers that we see. So for
Speaker 1: for me, you saw that Germany today, John. And if
Speaker 1: you cat another transparent indicator, which is you aggregate global
Speaker 1: capital goods import from the trade data that you get,
Speaker 1: and that's contracting on a year on your basis, in
Speaker 1: the first three months of the calendar year, it's down
Speaker 1: three percent. You're on your versus one percent growth plus
Speaker 1: one negative three. What does that do to a leguard
Speaker 1: like global GDP number? Do we go back to a
Speaker 1: three handle on global GDP? We are expecting global road
Speaker 1: to be three point two percent in the first quarter,
Speaker 1: down from four percent. Let me translate that, folks, that's
Speaker 1: low that's not three point two, is not three point eight?
Speaker 1: Found a question for your channel, how they manage the
Speaker 1: FECTS channel in China. We've seen some weakness come through.
Speaker 1: Is that weakness engineered or largely out of their control?
Speaker 1: I think it is more market oriented at this point
Speaker 1: of time. I don't see a case for China to
Speaker 1: actually use this as a tool as a you know,
Speaker 1: point to discuss or debate on this trade at tension.
Speaker 1: So we think it is pretty much market oriented. Look,
Speaker 1: they don't run big kind of account surplus is now.
Speaker 1: So when you get this sort of market declines, you
Speaker 1: will see capital outflows, portfolio outflows, and that's going to
Speaker 1: drive some cut and sea weakness. So we think it
Speaker 1: is just that right now is the outlook on capital flows.
Speaker 1: Thank you so much. He is with Stanley, head of
Speaker 1: Global Economics, and thank you unto all your team who
Speaker 1: are with this almost on a daily basis, it seems
Speaker 1: Morgan Stanley with I will suggest as a summary and
Speaker 1: more cautious call John. It's it's just exceptionally important to
Speaker 1: understand that the Washington capital's lost. So we really don't
Speaker 1: care what Appy Joseph Cohen thinks, and so we need
Speaker 1: to have somebody here who understands we are destined for
Speaker 1: Bruins Blues Stanley Cup final. Yeah, this is Glenn holl
Speaker 1: And goal in a guy name or goes across the top,
Speaker 1: and only our next guest understands the importance of Ruins victory.
Speaker 1: Just just killed the Canes last night. It was such
Speaker 1: a big game. Took a resk. It just just fantastic. Okay,
Speaker 1: great player? Do you like that? Do you like my baseball?
Speaker 1: Sort of like lipool? I'm joking, I'm so good at
Speaker 1: one in you are honestly ice hockey in Boston. I
Speaker 1: get it all right. I mean, as we can only
Speaker 1: talk to one gentleman from Gorman, David Coston, Goman, Sex's
Speaker 1: chief US equity strategist. Did you think we'd open a
Speaker 1: conversation like that? David? Uh No? But nothing here surprises me?
Speaker 1: Is that? Is that an insult in me? Or a tom?
Speaker 1: I think it's a group effort, is that? David? Let's
Speaker 1: talk about something I think is dominating the conversation, and
Speaker 1: I know you and the team have been focused on
Speaker 1: it too, input costs and how they're managed as the
Speaker 1: year grows older. Just walk me through some of the
Speaker 1: conclusions you've come to us some of the research. Even
Speaker 1: the guys the team have been doing well. One of
Speaker 1: the biggest topics in the investment community right now is
Speaker 1: the rising input costs. Now, tariffs are the top of mind,
Speaker 1: but there are other aspects of the cost structure of corporations,
Speaker 1: one of which would be labor costs. Uh. And so
Speaker 1: from a social point of view, that is a good thing.
Speaker 1: People make me more money from a margin pressure. However,
Speaker 1: that's the downward to squeeze on some margins. That's the
Speaker 1: one particular aspect that we're focused on a lot. You
Speaker 1: think the typical company, uh, something in the order of
Speaker 1: fourteen percent of its sales are devoted to the cost
Speaker 1: of labor. That's fully low. Did you think about healthcare costs,
Speaker 1: medical benefits, their salary, their compensation, all that's about fourteen
Speaker 1: percent of sales. And so there are some companies where
Speaker 1: that's at the low end, maybe five percent, and there
Speaker 1: are other companies where it's the high end. Something like
Speaker 1: percent of the revenues are consumed by by labor. So
Speaker 1: I would say that's a sort of front and center.
Speaker 1: The tariffs are just a complicating factor or another attribute
Speaker 1: of that. So as a investor, you want to think
Speaker 1: about it those companies that are goods producing as compared
Speaker 1: with service providing and if you have an option or
Speaker 1: not option, but if you would want to tilt a
Speaker 1: portfolio more towards companies that are services providing because they
Speaker 1: have less exposure on the on the labor class side,
Speaker 1: they have more stronger, less variable margins, they have better
Speaker 1: balance sheets, and most importantly, they are not going to
Speaker 1: be subject to tariffs. When I say not subject to,
Speaker 1: they're much less affected by by tariffs, both the actual
Speaker 1: tariffs as well as potential retaliatory terrorists in the part
Speaker 1: of China. And when you separate it up that why
Speaker 1: service providing US is good producing, do you also find
Speaker 1: that the service providing companies are able to pass those
Speaker 1: kosts on instead of absorbing it through the maunchion. It's
Speaker 1: not what you're finding too. Yes, And if you want
Speaker 1: to think about some of the companies that are in
Speaker 1: the industry, the industries that are there are more representative
Speaker 1: in the services categories you look at, software and services, media, entertainment, retailing,
Speaker 1: banks would be examples of service providing companies and the
Speaker 1: goods producing sides. You'll see that in pharma. You look
Speaker 1: at the capital, goods, technology, energy, those will be on
Speaker 1: the other side, and they have more UH downward pressure
Speaker 1: on their in their business model simply because they're more
Speaker 1: goods producing. If you look at that another way of
Speaker 1: thinking about it, of the revenues of services companies are domestic,
Speaker 1: whereas the goods providing and something like and so that's
Speaker 1: non us, which is which is another challenge on the
Speaker 1: tariff side. They cut their way out of this. I mean,
Speaker 1: I have heard about margin compression since Nixon was president,
Speaker 1: and you know maybe it was before that. That was
Speaker 1: around the time Bobby the Bobby Or scored that great
Speaker 1: goal you were faring to various Robert Or in his studio.
Speaker 1: You can see where this is great. You're like going,
Speaker 1: we got to get old Vetchkan back with having really
Speaker 1: the perfect cast for you. It is thank you, um,
Speaker 1: David Uh. We've been talking about margin compression for years.
Speaker 1: It's finally here you claim what's different this time? What's
Speaker 1: different now? And why can't an industrial shop in the
Speaker 1: Midwest cut costs like they've always cut costs? Well, the
Speaker 1: biggest issue is UH on positive point where three point
Speaker 1: six unemployment rate the lower fifty years UH, which which
Speaker 1: is a positive from a social social point of view,
Speaker 1: but it does put upward pressure on wages vector on
Speaker 1: wage growth high. My colleague is our chief economist at
Speaker 1: Goldman Zax is also of the view and his forecast
Speaker 1: would be that UH wage inflation is accelerating. And if
Speaker 1: you look at the quarterly conference calls, right, we just
Speaker 1: finished the quarterly conference calls in UH in the first
Speaker 1: quarter results and companies were enumerating and discussing the labor
Speaker 1: and this goes back to Chairman Paul I did the
Speaker 1: chart John while we're on the break talking about Bruins,
Speaker 1: No blues, Bruins were doing it. And if you take
Speaker 1: trimmed mean like Cleveland mean. Yeah, I'm sorry, these are
Speaker 1: higher inflation numbers than a lot of the stuff that's
Speaker 1: being quoted. Can we talk about where consumer stiples fits
Speaker 1: in here, because some of the big consumer staples companies
Speaker 1: actually were quite successful passing through higher costs to the
Speaker 1: end consumer, lifting prices and actually getting some revenue growth
Speaker 1: as well. Where did they fit into old of this? UH?
Speaker 1: The consumers stables area is certainly more exposed than a
Speaker 1: lot of others in our view, in our research, and
Speaker 1: so the preference would be h til portfolios more towards technology,
Speaker 1: particularly software. And if you think about the fact of
Speaker 1: the last fifty years, remember where the lowest unemployment rate
Speaker 1: in fifty years. You think about over the last five decades,
Speaker 1: only one year have you had negative growth in real
Speaker 1: spending on software in this country one time in fifty years,
Speaker 1: and that is that took place right after the two
Speaker 1: thousand and one, right after the tech bubble collapse. Other
Speaker 1: than that, real spending on software in this country has
Speaker 1: increased for for five decades. And so that would be
Speaker 1: an area very strong revenue story behind it, and they're
Speaker 1: able to absorb, uh, the increased labor cause this is
Speaker 1: one of those sencular growth stories. Is that essentially what
Speaker 1: you sang well. Secondly growth stories. Also, if we're concerned
Speaker 1: about the what impact triffs may have on the business
Speaker 1: models of a number of companies in terms of their
Speaker 1: their call structure, some companies are trying to diversify their
Speaker 1: supply chains. That's one tactic to combat the potential risk
Speaker 1: of tariffs. Also addressing the issue of higher input costs.
Speaker 1: That's uh, that's the strategy we're focused on. Let's get
Speaker 1: back to the index level just quickly as we round
Speaker 1: out the interview, the work cous for narn ex recession
Speaker 1: in the United States? Have we seen the worst? Was
Speaker 1: Q one the worst? And can we avoid that? David, Well,
Speaker 1: there were earnings recession. We're basically had positive two earnings
Speaker 1: per share growth for the first quarter year of a year.
Speaker 1: Expectation is you'll have modest growth this year, somewhere between
Speaker 1: three and six percent positive earnings growth UH in two
Speaker 1: thousand and nineteen. And that's reflective of the fact that
Speaker 1: you're going to be somewhere between one hund and one
Speaker 1: and seventy three dollars of earnings per share for the
Speaker 1: SMP five hundred. That would lead us to an endex
Speaker 1: level to end of the year around three thousand. How
Speaker 1: does David Coustan define scale every C class officer, Now,
Speaker 1: we have to find scale, scale this scale that this
Speaker 1: is a roll up frenzy that we're going into. Well
Speaker 1: scale us offer the prospect of better margins instead. The
Speaker 1: big topic of on the investment community right now is
Speaker 1: which companies or which industries are able to increase those
Speaker 1: those margins. A lot of we talked about this morning.
Speaker 1: So many companies are having downward pressure on their their margins.
Speaker 1: David constant us. It was a surprise. It was very
Speaker 1: happy with David just dropping bout a studio. I was
Speaker 1: shooting a video there. What I was doing was shooting
Speaker 1: Mr Costs just annoying. That's what coming. No, no, and
Speaker 1: then I came over you and then with with the
Speaker 1: video camera that we've got it. So the same thing
Speaker 1: that using Game of Thrones, I went through you and
Speaker 1: over you, just like Robert or going over Glenn Hall.
Speaker 1: You know how you fail. It's very bruinsible when the
Speaker 1: youngest is running around the apartment driving you crazy. That's
Speaker 1: that's how I feel every morning, doing right. That's how
Speaker 1: much fun it is. John joining us now as a
Speaker 1: boomber Brexit editor. Emma Ross Thomas. Emma, So the timing
Speaker 1: is awkward right for the Conservative Party, because so she
Speaker 1: says she's going to bring this back to Parliament in
Speaker 1: ju ahead of that, we have the European elections. How
Speaker 1: will the Conservative do and how will Labor doink? The
Speaker 1: timing actually is almost in her favor. She's she's one
Speaker 1: of the good things about the European elections, if you like,
Speaker 1: if you want to seek a silver lining, is that
Speaker 1: the Tories are almost certainly going to get wiped out
Speaker 1: by the Brexit Party, founded by Nigel Farage, the veteran
Speaker 1: Brexit campaigner. He's polling about thirty the Tories, and some
Speaker 1: polls are done at ten percent, coming into the fourth
Speaker 1: or fifth place. So Jeremy Harten, the Foreigns actually said
Speaker 1: yesterday that maybe if they get a real drubbing, that
Speaker 1: that will send a message to his colleagues to just
Speaker 1: jolly well deliver Brexits. That does seem to be the
Speaker 1: sort of the main hope, if you like, is that
Speaker 1: the message from those elections will be you've got to
Speaker 1: get on with it, deliver Brexit, startling about something else.
Speaker 1: Um and the certainly inside the Tory Party has a
Speaker 1: view that the Brexit Party is the next essential threat
Speaker 1: to the Tories if they don't deliver Brexit. If they
Speaker 1: do the didn't Brexit, then they can they can live with.
Speaker 1: But if the Brixit Party, which frankly it's just very
Speaker 1: clear what you're voting for, which is brexit It, if
Speaker 1: they win big in the European elections, does it not
Speaker 1: give inputs to for example, a Conservative Party, you know,
Speaker 1: possible leader that is that is pro Brexit to say, actually,
Speaker 1: Theresa may move out of the way. We don't even
Speaker 1: like this deal. We want something much stronger in our
Speaker 1: divorce deal with the Yeah, I think it's very likely
Speaker 1: that the next step, if you like, is certainly the
Speaker 1: leadership race to reason mas deal. Probably I'm not gonna
Speaker 1: put numbers on it, but it's not very likely that
Speaker 1: it goes through. It's not very you know, people have
Speaker 1: become increasingly entrenched over in their positions over the last
Speaker 1: three years. Um. You know, I suppose that when I
Speaker 1: say that about the European elections, that's kind of the
Speaker 1: only hope if you like. Oh, of course that she
Speaker 1: does actually offer the Labor Party what they want, which
Speaker 1: is a customs union and also a confirmatory vote. Again,
Speaker 1: very unlikely, and it would, you know, she would end
Speaker 1: up being killed by her party. So looking ahead to
Speaker 1: a leadership race, yes, probably Exeter is gonna is going
Speaker 1: to win that race. But then he is stuck or
Speaker 1: he or she is stuck with the same parliament, a
Speaker 1: parliament that has voted repeatedly against No Deal, and so
Speaker 1: you know, it's not too hard to imagine that beyond
Speaker 1: that leadership race, you're then looking at a general election
Speaker 1: if they are going to want to renegotiate that deal. Emma,
Speaker 1: thank you so much. This morning, we'd like to have
Speaker 1: a three hour discussion with the Laureate Michael Spence of
Speaker 1: New York University. We can unfortunately not get you for
Speaker 1: three hours, but we could fill it effortlessly. At well,
Speaker 1: we might point out that we celebrate with Professor Spence
Speaker 1: his new efforts as a special adviser to General Atlantic,
Speaker 1: which is, I know, uh, an investment shop that is
Speaker 1: always pushing the information in education envelope. Michael Spence, what
Speaker 1: a day it was when you won the Nobel Prize
Speaker 1: sharing it with the gentleman from Stanford and there's only
Speaker 1: one George Akerloft. I think Professor Taylor would agree with
Speaker 1: that statement. And a guy named Stiglets from Columbia as well,
Speaker 1: and so much of Spence Stiglets Akerlof was what we
Speaker 1: don't see out there? What are we not seeing right
Speaker 1: now in the information flow of our brands spanking new
Speaker 1: trade war Well, I think we're confused, tom uh and
Speaker 1: we refused, confused mainly because we can't see what the
Speaker 1: objective function of the current administration in the United States is.
Speaker 1: And we have similar difficulties figuring out where where the
Speaker 1: Chinese want to end up. So, for example, it's there's
Speaker 1: a group in Washington that would like to decouple our economies.
Speaker 1: There's a group that's concerned with national purity and defense
Speaker 1: and related things, and they might be sympathetic to the
Speaker 1: decoupling and a little insensitive to the economic costs of that.
Speaker 1: And then there's another rather large group, bipartisan group, who thinks,
Speaker 1: you know, that the thing hasn't been fair. We got
Speaker 1: a level of playing field, and otherwise we can have
Speaker 1: normal economic relationships. And what we can't see I don't
Speaker 1: think it's possible to see now is sort of where
Speaker 1: we're gonna end up on that spectrum. Let's fold in
Speaker 1: Michael Spence with Jonathan Spence of Yale University, and of
Speaker 1: course no relation, right, no relation, no relation with the
Speaker 1: giant Jonathan Spencer, true scholar, our original scholars, some would
Speaker 1: say on China, uh, if we fold in the two Spences,
Speaker 1: the mystery is how did the Chinese respond? And do
Speaker 1: they respond culturally and behaviorally or rationally and economically, which
Speaker 1: will it be. That's part of the uncertainty. That is
Speaker 1: part of what we don't know. So we think we
Speaker 1: we Jonathan and others who spend a lot of time
Speaker 1: in China think they're as as is true in every country. Groups.
Speaker 1: So there's a group that want the state to be
Speaker 1: a major part of the economy and that creates clashes
Speaker 1: with interactions with our system. Um. There's a group that
Speaker 1: that wants reform and would be quite happy with some
Speaker 1: of the things that are being proposed and bandied about
Speaker 1: in the trade. And it's not clear you know, how
Speaker 1: that balance is going to come out. I mean it's
Speaker 1: pretty what. One thing is pretty clear is the old
Speaker 1: assumption that they would evolve and become more like a
Speaker 1: Western economy in terms of governance, the role of the
Speaker 1: state and so on. That's not going to happen, at
Speaker 1: least not in the near future. Um. But there are
Speaker 1: great uncertainties. There's the I sometimes say the Chinese have
Speaker 1: gravitated from correct behavior, which was what the atic corruption
Speaker 1: campaign was about to correct. Thought, there's more uh willingness
Speaker 1: to intervene and prevent people from expressing diverse views on things.
Speaker 1: So Professor from your perspective, what do you think as
Speaker 1: a reasonable deal at the end of the day, given
Speaker 1: you're not your understanding of the limitations on the Chinese
Speaker 1: government and what they can do, and given certainly our
Speaker 1: political limitations here, well, I think a reasonable deal is
Speaker 1: to pick off the stuff that's relatively easy. The Chinese,
Speaker 1: in order to achieve economic performance, do not need to
Speaker 1: have theft of intellectual property. They don't need significant degrees
Speaker 1: of protection, and I don't think they need for the
Speaker 1: most part um to protect state owned enterprises and other
Speaker 1: parts of that as apparatus. So I think that, you know,
Speaker 1: if we can get over this, you know, you get
Speaker 1: to lower your tariffs and we get to keep ours
Speaker 1: or the right to keep ours kind of back and
Speaker 1: forth that we're seeing now, I think there's a reasonable
Speaker 1: deal in that area. Now, what what all insightful commentators
Speaker 1: say is that's not the whole story. That we'll still
Speaker 1: have friction and surround the way technology moves around the
Speaker 1: world and between the two countries and so on. But
Speaker 1: but there is a deal to be struck that's mutually
Speaker 1: beneficial in that area. So it's interesting. The one of
Speaker 1: the issues seems to be UM enforcement that has always
Speaker 1: been a major issue here are is there any room
Speaker 1: for breakthrough and actually getting real enforcement of whatever is
Speaker 1: agreed to? Well, for the enforcement issue comes from a
Speaker 1: long history of China agreeing to terms uh and then
Speaker 1: sort of ignoring them when it was inconvenient. Going back
Speaker 1: to the w t o A session, I think the
Speaker 1: Chinese realized that's not a long run productive way to
Speaker 1: interact anymore. Um So, I my best guess is the
Speaker 1: way this is going to go is there aren't really
Speaker 1: hugely reliable enforcement mechanisms, but both sides are going to
Speaker 1: reserve the right to react to misbehavior on the On
Speaker 1: the other side, I've got to rip up the script
Speaker 1: and and go somewhere where I think it's surprising we
Speaker 1: would go. Many of you may not know if you're
Speaker 1: just joining us, Michael Spence with us the laureate of
Speaker 1: New York University and a nodding acquaintance without to get
Speaker 1: from Palo Alta to the airport a few years ago.
Speaker 1: It's Stanford. You arguably invented modern graduate school, thought provoking
Speaker 1: academics out at Strand Stanford a million years ago. I
Speaker 1: I would be honored to know your thoughts on people
Speaker 1: spending a jillion dollars to get their kids a fake sailor,
Speaker 1: or fake tennis player, or a fake whatever into these
Speaker 1: elite schools. How did you respond when you saw what
Speaker 1: parents would do to get their kids on the undergraduate
Speaker 1: gravy train of many of our our most spensy and institutions.
Speaker 1: My response was, I suspect the same one that most
Speaker 1: Americans had, which is completely inappropriate behavior. What do we
Speaker 1: do with athletics at these schools? I mean, the heart
Speaker 1: of the matter is athletics was the vehicle the catalyst
Speaker 1: for this, this behavioral function of desperate parents, Well, it
Speaker 1: was certainly the vehicle for it for it. So so
Speaker 1: you think of it as a vulnerability and the admissions
Speaker 1: in the integrity of the admissions process to UM and
Speaker 1: I think that the the universities and colleges in the
Speaker 1: United States, a vast group of very great institutions, will
Speaker 1: move to close those vulnerables. Stanford moved immediately, I mean,
Speaker 1: you know, full disclosure for Stanford, they moved at light speed. No,
Speaker 1: that's true, but they But the secondary effort needs to
Speaker 1: be to introduce a sort of monitoring and control system
Speaker 1: so it doesn't happen again. They did, They did move
Speaker 1: right away. Can we also have an understanding, Professor Spence,
Speaker 1: that there's a select number of a jillion schools out
Speaker 1: there that can provide exquisite educations away from the thirties
Speaker 1: select schools. Yeah, that's my view of American My grandfather
Speaker 1: called it Harvard on the brain. You know, that's what
Speaker 1: you know if my kid doesn't go to Harvard, you know,
Speaker 1: I mean Gates and Balmer where you're we're in your
Speaker 1: graduate class. They didn't even show up to class, did
Speaker 1: they Not very much? But they did rather well in
Speaker 1: the course. That's a that's a that's at the tale,
Speaker 1: the right tale of the distribution that the brain. How
Speaker 1: do we get ourselves away from this pressure to send
Speaker 1: a kiss to seven schools that you know are deemed correct? Yeah, no,
Speaker 1: I I think this is very important. Um. My answer
Speaker 1: to that is I view the great strength of American
Speaker 1: higher education as the as the size of the really
Speaker 1: top flight institutions that I don't mean the thirty, I
Speaker 1: mean the three D five hundred, and they are state
Speaker 1: schools as well as colleges, teaching colleges and so on.
Speaker 1: I think part of the answer is we just keep
Speaker 1: repeating it and and tell and telling stories. I mean,
Speaker 1: there's lots of successful people, you know who who didn't
Speaker 1: go to Harvard and Galel in Stanford and etcetera. Uh
Speaker 1: and and so I think we've just got to get
Speaker 1: the message. I like your effort is saying keep telling it.
Speaker 1: In a major shot at the Jonathan Cole of Columbia University,
Speaker 1: who was just truly definitive on this, Michael Spence, thank
Speaker 1: you so much. Laurd of New York University. Uh there
Speaker 1: on trade wars, and we'd like to get your back
Speaker 1: in to finish up the three hour conversation at some point.
Speaker 1: I'd thanks for listening to the Bloomberg Surveillance podcast. Subscribe
Speaker 1: and listen to interviews on Apple Podcasts, SoundCloud, or whichever
Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keane
Speaker 1: before the podcast. You can always catch us worldwide. I'm
Speaker 1: Bloomberg Radio