WEBVTT - P&L: The Bloomberg Pessimist's Guide to 2017 0:00:04.760 --> 0:00:08.080 Welcome to the Bloomberg pm L podcast. I'm pim Fox. 0:00:08.119 --> 0:00:11.200 Along with my co host Lisa Abramowitz. Each day we 0:00:11.280 --> 0:00:14.480 bring you the most important, noteworthy, and useful interviews for 0:00:14.520 --> 0:00:16.880 you and your money, whether at the grocery store or 0:00:16.920 --> 0:00:20.680 the trading floor. Find the Bloomberg p L Podcast on iTunes, 0:00:20.840 --> 0:00:29.680 SoundCloud and at Bloomberg dot com. Well, how to greet 0:00:29.680 --> 0:00:33.000 the year two thousand seventeen by being a pessimist. One 0:00:33.000 --> 0:00:34.800 of the things you probably would do is you would 0:00:34.840 --> 0:00:38.040 call up our next guest, John fra Her. He is 0:00:38.240 --> 0:00:41.960 executive editor for the International Government division of Bloomberg News. 0:00:41.960 --> 0:00:45.320 He's a pest Well clearly now he is a pessimist 0:00:45.320 --> 0:00:50.520 because he is responsible for our Pessimists Guy to seventeen. John, 0:00:51.159 --> 0:00:53.720 all right, tell us, when you know, do we take cover, 0:00:53.800 --> 0:00:56.360 should we build a shelter? What what's going to happen? 0:00:56.400 --> 0:00:58.360 But part of the exercise of the pessimist guy does 0:00:58.400 --> 0:01:00.800 not necessarily a series of predict is. What what we're 0:01:00.840 --> 0:01:04.440 trying to do is encourage readers to think outside the box. 0:01:04.680 --> 0:01:06.480 I just can I interrupt you for one second, though, 0:01:07.160 --> 0:01:10.800 last year's guide to the Pessimistic Guide pretty much entirely 0:01:10.880 --> 0:01:13.479 came true, right, I mean the base case of Trump 0:01:13.520 --> 0:01:16.240 becoming president. So this time last year, it definitely did 0:01:16.280 --> 0:01:18.280 pay to be a presimist, yes, because we we put 0:01:18.360 --> 0:01:20.399 in front of readers the idea that breggs that could 0:01:20.400 --> 0:01:23.360 actually happen. And actually the most controversial I think that 0:01:23.400 --> 0:01:25.920 we had last year, the one that caused most internal 0:01:25.959 --> 0:01:28.520 debates and arguments as we were debating it, was should 0:01:28.560 --> 0:01:31.199 we put in front of readers the possibility of Donald 0:01:31.200 --> 0:01:33.400 Trump winning the winning the White House? And it was 0:01:33.400 --> 0:01:35.280 actually the last thing that we put in because there 0:01:35.400 --> 0:01:37.440 was so much heated debate about it. We were told, 0:01:37.480 --> 0:01:39.720 this is a joke, it's going to be over by February. 0:01:39.760 --> 0:01:43.320 It's going to make us look stupid. But sometimes outlandish 0:01:43.400 --> 0:01:45.560 things do happen. As the last the last filve months 0:01:45.600 --> 0:01:48.480 is taught, did you make the correlation between Donald Trump 0:01:48.600 --> 0:01:51.760 being elected president and the doubt being up more than 0:01:51.800 --> 0:01:53.680 ten percent and the S and P up more than 0:01:53.720 --> 0:01:55.520 seven and a half percent. I think that bit we 0:01:55.560 --> 0:01:58.040 sort of wed. We we didn't quite factor that in, 0:01:58.120 --> 0:02:00.040 but again it goes to show you that all of 0:02:00.160 --> 0:02:03.440 these events have have unintended consequences, and what we're encouraging 0:02:03.480 --> 0:02:06.320 people to do is keep an open mind not only 0:02:06.320 --> 0:02:08.440 about the events that can happen, but how markets will 0:02:08.480 --> 0:02:10.400 react to it as well. Okay, so John, here we 0:02:10.480 --> 0:02:12.560 have our crystal ball. You can look into it. What's 0:02:12.560 --> 0:02:14.800 going to happen next year? If you're a pessimist, if 0:02:14.840 --> 0:02:17.799 you're if you're a pessimist. Um Well, one of the things, 0:02:17.919 --> 0:02:20.080 one of the sort of the threads that runs through 0:02:20.400 --> 0:02:22.840 at the coverage, for example, is this idea of of 0:02:22.840 --> 0:02:26.239 of America puming back from from the rest of the world. 0:02:26.760 --> 0:02:29.560 Um And one of the things that we've thought about 0:02:29.600 --> 0:02:32.040 is what if on the morning of Donald Trump's inauguration 0:02:32.120 --> 0:02:36.800 he decides to label China a currency manipulator over Twitter. Now, 0:02:37.000 --> 0:02:39.679 it actually nearly happened last Friday night about believe it 0:02:39.760 --> 0:02:42.440 or not again, which causing another sort of range of 0:02:42.560 --> 0:02:45.440 you know, huge debate with me and my co my 0:02:45.440 --> 0:02:48.519 my sort of fellow pessimists. I got one email on 0:02:48.560 --> 0:02:50.320 Friday night saying we need to get this thing published 0:02:50.320 --> 0:02:53.080 now because this could happen. So that's one thing to 0:02:53.080 --> 0:02:56.079 think about Trump starting a trade war with China. But 0:02:56.120 --> 0:02:57.720 then the flip side of that, and I think it 0:02:57.840 --> 0:03:00.560 really important to see that Donald Trump may well be 0:03:00.639 --> 0:03:03.120 thinking about and certainly people in Washington are thinking about it. 0:03:03.200 --> 0:03:05.640 Is this North Korea angle, right, So there are people 0:03:05.639 --> 0:03:08.320 in South Korea who say the whole notion of North 0:03:08.400 --> 0:03:10.519 Korea building a missile that could hit the West coast 0:03:10.720 --> 0:03:13.480 on which you could fit and miniaturized nuclear device is 0:03:13.480 --> 0:03:16.280 not that outlandish at all, which then raises the question 0:03:16.360 --> 0:03:18.760 for Donald Trump. Okay, fine, you want to go hard 0:03:18.840 --> 0:03:21.920 on China on trade, but if you're really genuinely worried 0:03:21.960 --> 0:03:24.960 about North Korea, you need Beijing on board. You need 0:03:25.000 --> 0:03:27.800 Beijing to help you deal with this, with this rogue regime. 0:03:28.040 --> 0:03:31.720 So again one of the things that worked in the past. Well, 0:03:31.880 --> 0:03:34.800 it's very difficult. I mean, China is sort of access 0:03:34.800 --> 0:03:38.680 North Korea's protector, and certainly they are very reluctant to 0:03:38.720 --> 0:03:41.000 be seen to be how thin America out on the 0:03:41.040 --> 0:03:43.120 North Korea issue. But it just goes to show you 0:03:43.160 --> 0:03:45.120 how all of these issues that are interrelated. If you 0:03:45.160 --> 0:03:47.640 do want to go hard on China trade, you also 0:03:47.640 --> 0:03:49.200 need to think the back of your mind that you 0:03:49.280 --> 0:03:52.160 might need China to help you out with North Korean's well, 0:03:52.200 --> 0:03:55.320 and talking about China if there were a trade war, 0:03:56.040 --> 0:03:59.200 I believe in this Pessimists Guide, you talked about a 0:03:59.200 --> 0:04:01.880 potential recession and in China that could result from this. Right, 0:04:02.120 --> 0:04:03.840 that's right, And you have to remember all at the 0:04:03.880 --> 0:04:06.320 same time that this is happening, there's a big leadership 0:04:06.720 --> 0:04:09.520 reshuffle happening in China this this time next year, so 0:04:09.560 --> 0:04:12.080 that the Standing Committee, which sort of sits on the 0:04:12.160 --> 0:04:15.080 very apex of Chinese power, is all going to be reshuffled, 0:04:15.280 --> 0:04:17.559 and Ping and as Prime Minister will stay, but everyone 0:04:17.560 --> 0:04:20.200 else will probably get rotated out. And of course Chinese 0:04:20.240 --> 0:04:22.240 politics is very opaque, but you can bet that there's 0:04:22.240 --> 0:04:23.800 going to be a lot of people in Beijing are 0:04:23.839 --> 0:04:26.400 going to be focusing on the succession to see when 0:04:26.440 --> 0:04:28.919 perhaps they should be spending more time on keeping the 0:04:28.920 --> 0:04:31.479 economy going. And they will also be dealing with the 0:04:31.560 --> 0:04:34.160 US President, who you know is going to be on 0:04:34.640 --> 0:04:37.039 orthodox at the very least. Well, we're going to speak 0:04:37.279 --> 0:04:39.560 later on in the program with Arthur Kroeber. He is 0:04:39.600 --> 0:04:43.640 a founding partner at the Gave Call Dragon Nomics, also 0:04:43.680 --> 0:04:47.280 a fellow at the Brookings Chingao Center for Public Policy. 0:04:47.279 --> 0:04:49.240 He'll be talking about China later on in the program. 0:04:49.360 --> 0:04:51.799 Can we just go to Germany for a moment, what's 0:04:51.960 --> 0:04:55.240 what's the prognosis, what's the pessimist So the pestim scenario there, 0:04:55.240 --> 0:04:57.279 I mean Angela Merkel of course is on is on, 0:04:57.520 --> 0:04:59.920 is on the back back foot big time in Jerem 0:05:00.000 --> 0:05:02.520 and she's facing her own populist insurgency there. She's got 0:05:02.520 --> 0:05:05.720 her own elections in September next year. So one of 0:05:05.760 --> 0:05:07.880 the scenarios we put out there is that she loses. 0:05:07.920 --> 0:05:09.880 She loses that election. Now we're not saying that the 0:05:09.880 --> 0:05:12.000 populace will come to power, but she could be so 0:05:12.480 --> 0:05:15.760 her authority could could be so heavily dented by this 0:05:15.880 --> 0:05:19.040 election that she's forced to stand down. Angel America has 0:05:19.040 --> 0:05:21.120 been the glue that's kept Europe together eatly for the 0:05:21.200 --> 0:05:23.960 last decade, whether it's Greece or whether it's the refugee crisis, 0:05:24.279 --> 0:05:27.479 So that in and of itself, her leaving would be 0:05:27.520 --> 0:05:30.640 a hugely destabilizing event for event for Europe. And then 0:05:30.720 --> 0:05:34.400 turning back to the US, how about sort of social 0:05:34.440 --> 0:05:38.760 backdrop in the United States with Donald Trump as the president? 0:05:38.960 --> 0:05:41.400 I mean, could there be a sort of radical movement 0:05:41.440 --> 0:05:43.040 that evolves and what would the effect to be there? 0:05:43.120 --> 0:05:44.960 So we are we have looked at that we could 0:05:45.040 --> 0:05:47.120 you could see a sort of a coalition of the 0:05:47.200 --> 0:05:50.599 left or the center left in the streets. Also, we 0:05:50.640 --> 0:05:55.160 talked about, for example, Californian billionaire liberal Californian billionaires deciding 0:05:55.200 --> 0:05:58.080 to group together to sort of form a resistance movement 0:05:58.080 --> 0:06:01.920 if you like. That's then entire group is Californian billionaires, 0:06:02.680 --> 0:06:05.039 billionaire And then what happens in Congress? Yes, so, I 0:06:05.080 --> 0:06:07.320 mean there is I'm just curious when they found that group, 0:06:07.720 --> 0:06:10.880 are they going to be subject to the same kinds 0:06:10.880 --> 0:06:14.279 of conditions at a foreign state would be subject to 0:06:14.320 --> 0:06:16.880 if they want government contracts for any of their products 0:06:16.960 --> 0:06:18.840 or services. That's a very good question. But I mean 0:06:18.880 --> 0:06:22.720 it's called calex it, right, calex is this idea that 0:06:22.760 --> 0:06:26.320 sort of been brewing, brewing since the election. Um. But 0:06:26.440 --> 0:06:27.800 one of the things to think about as well is 0:06:27.839 --> 0:06:30.560 if you did get if you did get broad social 0:06:30.640 --> 0:06:35.520 unrest or deep unhappiness with Trump's domestic agenda, what would 0:06:35.560 --> 0:06:37.480 that do to unity and Congress when he tries to 0:06:37.480 --> 0:06:40.799 get a fiscal fiscal stimulus through. So something it's worth 0:06:40.920 --> 0:06:44.040 connecting those dots together. And I'm not saying this this 0:06:44.080 --> 0:06:46.679 pessimist guide, will you know it is predicting the future, 0:06:46.680 --> 0:06:48.640 although it has it has a pretty good track record 0:06:48.640 --> 0:06:51.360 at this point. But it's encouraging leaders to think about 0:06:51.400 --> 0:06:54.920 all of these differentencies and how they could link together. Putin, 0:06:56.279 --> 0:07:00.360 Vladimir Putin and President elect Donald Trump new best friends forever. 0:07:00.520 --> 0:07:02.679 What's going to happen here? I think it's pretty interesting, actually, 0:07:02.720 --> 0:07:05.400 I mean, if you look at that's certainly the narrative 0:07:05.440 --> 0:07:07.680 has been the narrative through the campaign. But who then 0:07:07.680 --> 0:07:09.480 would have thought that Donald Trump would have packed his 0:07:09.600 --> 0:07:15.080 cabinet with with former Goldman Sachs employees. So in theory, 0:07:15.320 --> 0:07:16.960 you know, Donald Trump has had he wants a better 0:07:17.040 --> 0:07:21.000 relationship with Putin, but you know, Putin himself is a 0:07:21.160 --> 0:07:24.520 very hard to predict guy who will only act in 0:07:24.720 --> 0:07:27.440 Russia's self interest, So that romance, it could be a 0:07:27.440 --> 0:07:30.400 short lived one. But one thing to think about is 0:07:30.400 --> 0:07:34.160 that if if Trump does carry through on his pledge 0:07:34.200 --> 0:07:37.360 to sort of really question how much Europe spends on defense, 0:07:37.640 --> 0:07:40.320 he could he could he could basically give Angela Merkel 0:07:40.480 --> 0:07:42.920 and European leads a very difficult choice to make. Do 0:07:43.040 --> 0:07:47.000 we decide to ramp up spending on defense good for 0:07:47.040 --> 0:07:51.560 defense companies um or without America support. Do we have 0:07:51.640 --> 0:07:54.000 to learn to do deals with the Vladimir Putin in 0:07:54.040 --> 0:07:56.680 Eastern Europe? Do we have to accept the fact that 0:07:56.760 --> 0:07:59.440 Vladimir Putin is serious about the fact that Ukrainis is 0:07:59.480 --> 0:08:02.800 in his of influence? Is Vladimir? Do we have to 0:08:02.840 --> 0:08:05.000 recognize the fact that history of influence doesn't he go 0:08:05.200 --> 0:08:07.360 right up to name of naval's borders. Those can be 0:08:07.480 --> 0:08:22.840 very difficult decisions fans of Americans to make. This is 0:08:22.880 --> 0:08:25.960 the segment that I have been waiting for. This is 0:08:26.000 --> 0:08:28.200 a question that we have been talking about a lot. 0:08:28.800 --> 0:08:32.760 With all of the populist uprisings that we've seen around 0:08:32.880 --> 0:08:37.240 the world, What does this potential civil unrest and in 0:08:37.280 --> 0:08:40.840 some places actual what effect does it have on markets? 0:08:40.840 --> 0:08:44.560 With us to answer that question is Irene Finelle Hanigman, Magic, 0:08:44.600 --> 0:08:48.280 Professor of International Affairs at Columbia University, and Nick Kolas, 0:08:48.360 --> 0:08:52.439 chief market strategist at converge x UM. Nick, I want 0:08:52.440 --> 0:08:55.640 to start with you. So far, we saw a bit 0:08:55.640 --> 0:08:58.040 of a reaction. We saw three month reaction, three week 0:08:58.040 --> 0:09:01.360 reaction at Brexit, we saw three day reaction to Trump, 0:09:01.400 --> 0:09:06.280 and we saw a three minute reaction to Italy's referendum vote. 0:09:06.679 --> 0:09:09.439 Do markets does not care. You know, as you look 0:09:09.440 --> 0:09:11.960 at the data back to the nineteen twenties and look 0:09:12.000 --> 0:09:14.680 at the whole cadence of history from the Great Depression 0:09:14.679 --> 0:09:17.240 to now, I think the data shows us that the 0:09:17.280 --> 0:09:21.160 markets anticipates a lot of this change long before it 0:09:21.200 --> 0:09:23.760 actually occurs. So if you look at the Great Depression, 0:09:24.120 --> 0:09:27.080 the SMP five hundred and its predecessors were down seventy 0:09:27.640 --> 0:09:30.760 from night to nineteen thirty two, and then we had 0:09:30.760 --> 0:09:33.920 this very long wave of social unrest afterwards, culminating in 0:09:33.960 --> 0:09:36.400 World War Two. If you look at the financial crisis, 0:09:36.400 --> 0:09:38.880 down thirty six percent back in two thousand and eight, 0:09:39.160 --> 0:09:41.480 and we've had this kind of rolling set of crises 0:09:41.559 --> 0:09:43.960 ever since. So I think the bottom line is markets 0:09:44.240 --> 0:09:47.120 to some degree create the conditions to this unrest and 0:09:47.200 --> 0:09:49.640 to some degree anticipate what it's going to mean. Some 0:09:49.720 --> 0:09:51.800 by the time it actually occurs, a lot of it's 0:09:51.840 --> 0:09:57.040 baked into investor expectations. Irene, give us your thoughts. I 0:09:57.120 --> 0:10:01.400 basically agree with with Nick. I think also the situation 0:10:01.480 --> 0:10:04.480 in Europe is the markets did react very strongly and 0:10:04.520 --> 0:10:08.680 negatively uh in two thousand ten that March May period 0:10:08.720 --> 0:10:12.640 of enormous and certitude about greece potential default once it 0:10:12.720 --> 0:10:15.800 became clear in the next year or so that this 0:10:15.920 --> 0:10:20.000 was constantly ongoing, and that every crisis was awful in 0:10:20.040 --> 0:10:22.720 and of itself, and yet did not necessarily mean that 0:10:22.760 --> 0:10:25.840 the euro was failing or that Europe was failing, but 0:10:25.960 --> 0:10:28.920 that in a way, unfortunately was constantly pushed the can 0:10:29.000 --> 0:10:32.000 down the road or muddled through. So this seems to 0:10:32.000 --> 0:10:35.800 be again the case Italy. There is built in cynicism, 0:10:35.840 --> 0:10:39.520 building skepticism. We have looked at sixty different governments, of 0:10:39.559 --> 0:10:42.160 which Tibert Lusconi was the longest in Italy since World 0:10:42.200 --> 0:10:46.200 War two. UH. The assumption was that this probably would 0:10:46.200 --> 0:10:50.400 go as a no against the constitutional changes that Rensey 0:10:50.440 --> 0:10:53.959 wanted to impose, and we're really not understood. The thing 0:10:54.000 --> 0:10:56.480 that is to me also very interesting is, for example, 0:10:56.559 --> 0:11:00.080 in France right now, we've seen France go through all 0:11:00.120 --> 0:11:03.760 sorts of dry rations with alone deciding he will not 0:11:03.920 --> 0:11:09.280 present his candidacy again, with a new UH candidate, EMANUELA mccollon, 0:11:09.360 --> 0:11:13.400 former finance minister, creating a new party with unexpectedly coming 0:11:13.440 --> 0:11:16.040 to the forefront of his repay a center right. Yet 0:11:16.520 --> 0:11:19.200 there doesn't really seem to be an impact from that. 0:11:19.320 --> 0:11:21.720 Everyone is sort of a weight and see and I 0:11:21.760 --> 0:11:24.280 think this weight and see mood is kind of everywhere. 0:11:24.760 --> 0:11:27.880 Um we also and again I certainly agree we have 0:11:27.920 --> 0:11:30.800 a lot of it basically baked in. Uh, there will 0:11:30.840 --> 0:11:34.000 be volatility and as long as some of the economic 0:11:34.080 --> 0:11:37.920 fundamentals don't look that dramatic, well just assume we don't 0:11:38.000 --> 0:11:40.680 really know where the political situation is going right now, Okay, 0:11:40.679 --> 0:11:43.200 so just go sticking. In Europe, one of the biggest 0:11:43.240 --> 0:11:45.560 to wild cards that a lot of people talk about 0:11:45.559 --> 0:11:48.240 for next year is the status of the euro and 0:11:48.240 --> 0:11:51.079 the fact that a lot of anti European Union factions 0:11:51.160 --> 0:11:54.080 in Europe have been gaining power. I mean, that is 0:11:54.120 --> 0:11:56.160 not priced into the market right now. The breakup of 0:11:56.200 --> 0:11:59.439 the Eurozone. Correct, that is correct, because I don't think 0:11:59.440 --> 0:12:02.480 it will occur. I think again, the fascinating thing about 0:12:02.520 --> 0:12:06.240 it is just like in Greece, they absolutely hated what 0:12:06.520 --> 0:12:09.760 Brussels or Europe was imposing on them, but they did 0:12:09.800 --> 0:12:11.880 not want to get out of the Eurozone. To come 0:12:11.920 --> 0:12:15.000 back to the Drachma. In Italy it seems largely to 0:12:15.080 --> 0:12:18.520 be the same thing there is in the Northern faction, 0:12:18.559 --> 0:12:21.360 et cetera. In some of the very extreme factions more 0:12:21.360 --> 0:12:25.160 of an anti euro, anti EU sentiment, But fundamentally the 0:12:25.200 --> 0:12:27.600 Italian electorate does not want to get out of the 0:12:27.640 --> 0:12:31.200 Euro and certainly returned to the lira and its gyrations. 0:12:31.240 --> 0:12:35.400 So I think there's a very bizarre paradox between people, 0:12:35.440 --> 0:12:39.760 oddly enough not really wanting to break things apart, yet 0:12:39.840 --> 0:12:44.640 being very unhappy with the way things are. Nicholas, Yeah, 0:12:44.679 --> 0:12:47.040 I was actually looking at the data back to say 0:12:47.080 --> 0:12:51.200 World War two, which is an interesting, much more violent analog. 0:12:51.280 --> 0:12:53.760 Obviously what's going on in Europe now, And for U 0:12:53.840 --> 0:12:56.719 S stocks it wasn't early all that bad. S and 0:12:56.760 --> 0:13:02.680 P returned down etcent and that was it. After that 0:13:02.800 --> 0:13:05.560 defense spending and all that stimulus ended up having the 0:13:05.559 --> 0:13:09.200 equity markets up between nineteen and twenty five percent, with 0:13:10.480 --> 0:13:13.480 being up thirty six percent when the victor was actually one. 0:13:13.960 --> 0:13:16.559 So looking at a much more extreme version of unrest 0:13:16.600 --> 0:13:19.559 in Europe and you see US equities actually did pretty well. 0:13:20.040 --> 0:13:22.800 So what's the trade, Nick Cholis? Everyone seems to be 0:13:22.840 --> 0:13:26.960 pessimistic offering up all these dire scenarios. You're telling me 0:13:27.000 --> 0:13:30.960 that the analysis says you can make some money here. Yeah, 0:13:31.040 --> 0:13:34.920 the bottom line is markets climb that clichee wall of uncertainty. 0:13:35.120 --> 0:13:38.160 And we have so any particular sector, any specific ideal 0:13:38.240 --> 0:13:40.560 or do you just do you know an SMP index. No, 0:13:40.760 --> 0:13:42.640 we're seeing, you know, among our clients, we're seeing a 0:13:42.679 --> 0:13:46.040 ton of rotation. I mean, like I haven't seen five 0:13:46.120 --> 0:13:50.640 years from tech out of tech into financials first and foremost, 0:13:50.679 --> 0:13:53.520 and then industrials and healthcare pretty much in that order. 0:13:53.800 --> 0:13:55.920 If you look at et F flows over the past month, 0:13:56.240 --> 0:14:00.360 nine billion dollars, nine billion dollars into industrials and then 0:14:00.600 --> 0:14:04.120 between two and three into short into financials and industrials 0:14:04.120 --> 0:14:07.040 and healthcare is two to three billion dollars tech negative 0:14:07.120 --> 0:14:09.200 draws for example. Irene, and I'd love to get your 0:14:09.240 --> 0:14:14.240 perspective on at what point in history civil unrest has, 0:14:14.280 --> 0:14:18.920 if it has ever bled into markets that I think 0:14:19.040 --> 0:14:23.320 is really uh interestingly enough, often there's there's really not 0:14:23.480 --> 0:14:27.560 a lot of correlation. I mean, yes, we we can 0:14:27.600 --> 0:14:31.040 certainly look at at even as Nick mentioned, during the 0:14:31.560 --> 0:14:34.320 Great Depression, there seemed to be a sort of a 0:14:35.160 --> 0:14:40.920 slow revival. Uh. The issue is right now and what 0:14:40.960 --> 0:14:44.360 we have seen basically in in many decades is that 0:14:44.440 --> 0:14:49.240 the euro dollar parody has not been that we have 0:14:49.320 --> 0:14:53.720 not gone through that many disruptive moments, and at even 0:14:53.720 --> 0:14:56.440 when the crisis in Europe were occurring, we were not 0:14:56.560 --> 0:15:00.520 really going through a currency crisis, and intr stanly enough 0:15:00.520 --> 0:15:05.920 in September after there was a near no vote on 0:15:05.960 --> 0:15:09.400 the Mastrok referendum where there actually was a currency crisis 0:15:09.440 --> 0:15:11.640 and most of the currency had to drop out of 0:15:11.720 --> 0:15:15.680 actually the parody bands within the European Union what would 0:15:15.720 --> 0:15:19.880 become the Eurozone. Uh. Interestingly enough, that did not necessarily 0:15:19.960 --> 0:15:23.720 lead to a political crisis. So the interesting issue is 0:15:23.720 --> 0:15:27.280 that we don't really have a set correlation. The one 0:15:27.480 --> 0:15:30.120 thing that I'm still quite concerned about because I don't 0:15:30.120 --> 0:15:32.840 know how it plays out or how it will finally 0:15:32.840 --> 0:15:36.320 play at long is Brexit whether that will have longer 0:15:36.440 --> 0:15:40.760 impact on banks on the UK banks wet Irene, we 0:15:40.840 --> 0:15:42.800 gotta leave it there, but thank you very much, Professor 0:15:42.840 --> 0:15:47.520 Irene Finel Hanegmann, Adjunct Professor, International Affairs, Columbia University, and 0:15:47.520 --> 0:15:50.720 our thanks also the Nick Culis, chief market strategist at 0:15:50.880 --> 0:16:06.680 converge x. Well. Imagine that you wanted to know everything 0:16:06.840 --> 0:16:10.280 that you could about China, you would probably call Arthur Kroeber. 0:16:10.400 --> 0:16:13.920 He is a founding partner of Gavical dragon Omics, and 0:16:14.000 --> 0:16:16.160 he joins US now. He's also the author of the 0:16:16.200 --> 0:16:20.640 new book entitled China's Economy What Everyone Needs to Know. Arthur, 0:16:20.640 --> 0:16:22.720 thank you very much for being with us. So what 0:16:22.760 --> 0:16:26.240 do we need to know about China right now? Well? 0:16:26.280 --> 0:16:30.880 I think two things. First of all, um economic growth 0:16:31.200 --> 0:16:34.000 is reasonably stable. Isn't going to stay so for the 0:16:34.040 --> 0:16:37.640 next year because the government is heading towards a major 0:16:37.640 --> 0:16:41.280 political event Party Congress about a year from now, and 0:16:41.280 --> 0:16:44.840 they're gonna want to have very stable, calm growth between 0:16:44.840 --> 0:16:47.320 now and then to set the stage for that. But 0:16:47.360 --> 0:16:50.920 then the second thing is that I think President Trump 0:16:50.920 --> 0:16:54.000 has thrown a wild card into that by getting collected, 0:16:54.200 --> 0:16:57.000 and he has the potential to to make things a 0:16:57.040 --> 0:17:00.880 little bit more volatile by throwing some trade ancents at China. 0:17:00.960 --> 0:17:03.720 And so it'll be interesting to see how the Chinese 0:17:03.720 --> 0:17:06.600 respond to that if if in fact occurs, Arthur. You know, 0:17:06.640 --> 0:17:09.160 there's been a lot of discussion about how a potential 0:17:09.200 --> 0:17:13.520 trade war would negatively impact the US. What about China. 0:17:13.600 --> 0:17:16.600 How much does China have to lose by this type 0:17:16.640 --> 0:17:19.439 of trade argument? Well, they have a fair amount, because 0:17:19.520 --> 0:17:22.159 it's a it's a very trade dependent economy. They have 0:17:22.200 --> 0:17:25.080 a trade surplus, it's about five percent of GDP, and 0:17:25.240 --> 0:17:27.920 they do rely heavily on exports. But I think when 0:17:27.920 --> 0:17:30.879 you look at at this, it seems pretty clear that 0:17:30.920 --> 0:17:32.920 the US has a lot more to lose from a 0:17:33.000 --> 0:17:36.320 trade war with China than China does. Just a simple, 0:17:36.480 --> 0:17:39.440 simple example, one of the biggest exports that China since 0:17:39.480 --> 0:17:42.239 the United States is the iPhone, which is not a 0:17:42.280 --> 0:17:45.000 product that ultimately is from a Chinese company, is from 0:17:45.000 --> 0:17:48.200 an American company. So if you impose tariffs across the board, 0:17:48.520 --> 0:17:50.879 you'll be hurting American companies at least as much as 0:17:50.960 --> 0:17:54.640 Chinese companies, and maybe more so. At this point, I mean, 0:17:54.720 --> 0:17:59.280 given the rhetoric that we've seen from President elect Trump, 0:18:00.560 --> 0:18:03.600 will what will it take for China to respond with 0:18:04.000 --> 0:18:05.880 a sort of heavy hand, because so far they've taken 0:18:05.880 --> 0:18:09.119 a pretty light approach in response. Well, I think on 0:18:09.160 --> 0:18:11.560 the economic stuff, they're just waiting to see what he 0:18:11.560 --> 0:18:13.840 actually does. Is he and he said all kinds of things, 0:18:13.880 --> 0:18:16.560 But we don't know what he will actually do in 0:18:16.720 --> 0:18:19.639 terms of economic sanctions or tariffs or whatever until he 0:18:19.680 --> 0:18:22.240 takes office. So I think the Chinese are playing cool 0:18:22.240 --> 0:18:25.200 on that. What we saw over the weekend was this 0:18:25.720 --> 0:18:29.520 conversation between Trump and the president of Taiwan. Yeah, the 0:18:29.600 --> 0:18:32.480 Chinese are playing that very cool. Also, again, I think 0:18:32.520 --> 0:18:36.400 they're taking the calculation that what Trump Trump does as 0:18:36.440 --> 0:18:39.680 president elect when he's still really a private citizen, may 0:18:39.720 --> 0:18:41.840 be somewhat different than what he does when he's actually 0:18:41.840 --> 0:18:43.640 in office. So I think they're just going to wait 0:18:43.640 --> 0:18:46.639 and see. Arthur, if you've got a call from the 0:18:46.760 --> 0:18:50.399 CEO of a major U. S industrial company, or indeed 0:18:50.400 --> 0:18:52.800 someone in the United States that has a product or 0:18:52.800 --> 0:18:55.080 a service that they'd like to sell into China, what 0:18:55.160 --> 0:18:57.240 would you be telling them about how to navigate the 0:18:57.280 --> 0:19:00.919 business world right now and what kind of insights can 0:19:00.960 --> 0:19:04.400 you offer to get a deal done well. First of all, 0:19:04.400 --> 0:19:07.000 I think you have to understand whether you're entering into 0:19:07.240 --> 0:19:09.520 a market that's growing in a market that's stable. So 0:19:09.680 --> 0:19:13.240 China has a lot of different markets and they're behaving differently. 0:19:13.760 --> 0:19:16.520 The key is to have products and services that focus 0:19:16.600 --> 0:19:19.639 on the needs of what we would call upscale consumers, 0:19:19.640 --> 0:19:21.919 and these are households that have at least twenty dollars 0:19:21.920 --> 0:19:24.960 in income each year. This is the fastest growing part 0:19:25.040 --> 0:19:28.160 of the population. So if you're selling higher end products 0:19:28.200 --> 0:19:31.399 that appeal to these affluent consumers, you're doing well, you know. 0:19:31.520 --> 0:19:33.240 And it's that in major cities, because you know, when 0:19:33.240 --> 0:19:35.119 you think about a big country, it can be very 0:19:35.200 --> 0:19:37.680 daunting to go and do business there. But if you 0:19:37.920 --> 0:19:40.360 narrow it down to specific cities, then you can maybe 0:19:40.400 --> 0:19:42.480 do a little bit better. Well. But I think it's 0:19:42.520 --> 0:19:45.960 important to understand that this this population of affluent consumers 0:19:46.000 --> 0:19:48.080 exist not just in two or three cities, but probably 0:19:48.080 --> 0:19:50.800 in about fifty or sixty cities sprinkled up and down 0:19:50.800 --> 0:19:53.359 the coast. So I think you you do need to 0:19:53.400 --> 0:19:56.000 have a broader strategy. But the other thing is, if 0:19:56.040 --> 0:19:59.240 you're just entering China, don't go in with a grand idea. 0:19:59.359 --> 0:20:02.880 Go in with something small, something managementle that you can control, 0:20:02.920 --> 0:20:05.240 and then scale it up gradually over time. The biggest 0:20:05.240 --> 0:20:07.439 mistake that companies make when they go into China is 0:20:08.040 --> 0:20:09.720 they think it's a giant market and they're going to 0:20:09.800 --> 0:20:12.200 take it by storm and they have a grand plan, 0:20:12.280 --> 0:20:16.080 and that usually comes to grief. Arthur, China's un has 0:20:16.119 --> 0:20:19.000 been sort of in the backdrop this year, but there 0:20:19.040 --> 0:20:23.080 still is the possibility for a very disorderly uh devaluation 0:20:23.400 --> 0:20:26.560 of the currency. There still are a lot of outflows 0:20:27.119 --> 0:20:30.119 capital outflows from China. How worried are you about this? 0:20:30.840 --> 0:20:33.040 I'm not worried in the short term. If you look 0:20:33.040 --> 0:20:37.359 at the recent capital outflow numbers, basically they're not real outflows. 0:20:37.359 --> 0:20:40.159 They reflect the fact that China's holdings of things like 0:20:40.200 --> 0:20:43.080 the euro and the yen have gone down in value 0:20:43.119 --> 0:20:45.760 as the dollar has rallied over the last a couple 0:20:45.760 --> 0:20:49.040 of months. So we don't really see strong capital outflows now. 0:20:49.040 --> 0:20:50.760 And the other thing that we've seen is that when 0:20:50.760 --> 0:20:53.200 f flows do occur, that Chinese are very effective at 0:20:53.520 --> 0:20:56.879 imposing capital controls to keep things under wraps. So I 0:20:56.880 --> 0:20:59.840 think for the next few months, not a big worry. 0:21:00.160 --> 0:21:01.919 The worry I do have is, let's say we have 0:21:01.960 --> 0:21:06.280 another six or eight months of the dollar rising very rapidly. 0:21:06.720 --> 0:21:09.080 That will create a lot of incentives for Chinese investors 0:21:09.119 --> 0:21:11.680 to switch from rem and b ASTs the dollar. ST's 0:21:11.720 --> 0:21:14.119