WEBVTT - Emerging Markets Selloff Presents Buying Opportunities: Dennis 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:32.640 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. The 0:00:32.640 --> 0:00:36.680 blood bath and emerging markets currencies has continued today. You 0:00:36.720 --> 0:00:40.000 can look at the ms C I E M of 0:00:40.360 --> 0:00:44.360 f X index and it is a continuing it's onward 0:00:44.520 --> 0:00:48.120 decline for a fifth day. Here to talk about this, 0:00:48.280 --> 0:00:51.080 this rapid fall of one of the darlings of this 0:00:51.200 --> 0:00:53.519 year is Jeffrey Dennis. He has head of Global Emerging 0:00:53.520 --> 0:00:57.720 Market Strategy for UBS Securities. So Jeff just weigh in here. 0:00:57.840 --> 0:01:01.480 I mean, why are we seeing such severe declines kind 0:01:01.480 --> 0:01:03.640 of escalate in the way that they are right now? 0:01:04.640 --> 0:01:06.399 First of all, I think we have to keep all 0:01:06.440 --> 0:01:10.280 this in perspective because actually some of the weaker brethren, 0:01:10.360 --> 0:01:13.560 if you like, within the emerging markets that have that 0:01:13.600 --> 0:01:19.800 are under pressure Brazil, Turkey, UM, India, UM, Indonesia to 0:01:19.880 --> 0:01:23.400 a settings in Mexico. UM. They're coming off for sure, 0:01:23.480 --> 0:01:28.480 but some of the better quality emerging markets, by you know, 0:01:28.520 --> 0:01:31.480 in terms of fundamentals, like China and career in Taiwan 0:01:31.480 --> 0:01:34.080 are hardly see any I have not seen any currency 0:01:34.080 --> 0:01:36.720 decline at all, to speak out. So this is somewhat 0:01:36.760 --> 0:01:41.000 isolated or somewhat localized. But it's happening because the dollar 0:01:41.080 --> 0:01:44.280 itself is rising and that intern has got quite a 0:01:44.280 --> 0:01:47.480 lot to do with the anticipation of more FED hikes 0:01:47.520 --> 0:01:51.040 and also the rise of course in tenure bond yields 0:01:51.880 --> 0:01:55.120 above three percent. But our view is this is all 0:01:55.160 --> 0:01:58.160 happening because the global financial markets, in other words, not 0:01:58.200 --> 0:02:01.040 because of anything going wrong within the emerging markets themselves. 0:02:01.680 --> 0:02:05.040 All right. So Jeffrey Dennis having said that, and maybe 0:02:05.160 --> 0:02:09.120 it is uh, maybe a time warned but but really 0:02:09.160 --> 0:02:11.640 inaccurate way to look at investments by saying, all right, 0:02:11.639 --> 0:02:13.799 we're going to look at this geographically, and we're looking 0:02:13.840 --> 0:02:17.320 at emerging markets, so we look country by country. When 0:02:17.320 --> 0:02:21.720 you've got companies that are doing business probably not only 0:02:21.760 --> 0:02:24.919 in their home country but in other emerging markets, are 0:02:24.960 --> 0:02:30.720 there specific companies that you would point investors to and say, look, 0:02:30.800 --> 0:02:33.280 this is a great company that you want to own 0:02:33.680 --> 0:02:37.280 for a long period of time, and here's an opportunity 0:02:37.600 --> 0:02:41.560 to buy in when other people are too afraid. Well, 0:02:41.600 --> 0:02:44.240 I'm not going to talk about specific companies, but the 0:02:44.280 --> 0:02:47.160 way I would try to answer that is the following, 0:02:47.200 --> 0:02:49.960 and that is the the danger sign will be to 0:02:50.080 --> 0:02:54.559 what extent these currency declines in certain markets, as I say, 0:02:54.840 --> 0:02:58.360 and the rise in inflation, which is partly coming through 0:02:58.400 --> 0:03:01.760 because of higher all prices, does that at some point 0:03:02.480 --> 0:03:06.040 cause the fundamental story within the emerging marks to deteriorate? 0:03:06.600 --> 0:03:09.520 Does it lead to countries having to raise interest rates aggressively? 0:03:09.600 --> 0:03:11.640 Doesn't mean the growth will slow down in some of 0:03:11.639 --> 0:03:14.440 these countries because they have to react to a weaker 0:03:14.440 --> 0:03:18.280 currency in higher inflation. That is when you would see 0:03:18.320 --> 0:03:20.959 more of a risk coming through to the asset class. 0:03:21.000 --> 0:03:24.440 If you've got, in other words, the this contained in 0:03:24.560 --> 0:03:27.959 my view, currency weakness. Some does it start to contaminate 0:03:28.000 --> 0:03:31.280 the fundamentals And we're and we're not frankly really seeing 0:03:31.320 --> 0:03:33.600 that at this point. We've had a rate rise in Indonesia, 0:03:33.680 --> 0:03:36.240 to be fair, but at this stage we think that 0:03:36.240 --> 0:03:38.240 the basically the growth story in the global economy and 0:03:38.240 --> 0:03:40.440 the growth story and the emerging marks is therefore intact 0:03:40.440 --> 0:03:42.119 and so one a lot of your way to answer 0:03:42.160 --> 0:03:44.120 your question would be would be to look at export 0:03:44.200 --> 0:03:47.280 stocks that are that are coming out of these countries 0:03:47.280 --> 0:03:50.000 with much weaker currencies because they will get some benefit 0:03:50.040 --> 0:03:53.200 because the currencies are cheaper. And elsewhere in parts of 0:03:53.200 --> 0:03:56.880 the world where things look more stable, we are not 0:03:56.920 --> 0:03:59.839 seeing much declining currencies whatsoever. You got what you're gonna 0:03:59.840 --> 0:04:02.520 find then, as some of the domestic stocks will do well. Um, 0:04:02.520 --> 0:04:06.200 and in particular, we have a biggeravaging financials and emerging markets, 0:04:06.240 --> 0:04:08.440 and that's an area we would be looking at. So 0:04:08.560 --> 0:04:11.080 have you gotten a lot of calls from nervous clients recently? 0:04:11.960 --> 0:04:14.600 We've had a lot of inquiries from nervous clients for sure, 0:04:14.640 --> 0:04:18.479 and I think, um, it's inevitable when you get this 0:04:18.480 --> 0:04:22.279 this amount of selling of certain currencies, including as you 0:04:22.320 --> 0:04:24.360 said in your intro, some of the darlings of I 0:04:24.400 --> 0:04:26.760 think last year rather than this year, such as Brazil. 0:04:27.200 --> 0:04:29.480 There is there is a great concern about this. But 0:04:29.560 --> 0:04:32.719 at the end of the day, um, you know, the 0:04:32.760 --> 0:04:36.040 funds flow story is still pretty strong into the emerging markets. 0:04:36.080 --> 0:04:38.080 We haven't seen much of the way of outflows now. 0:04:38.120 --> 0:04:40.400 Of course that could happen, you know, on the back 0:04:40.440 --> 0:04:44.400 of all of this, but we we think generally investors 0:04:44.400 --> 0:04:48.040 are going to stay relatively calm and on our view 0:04:48.080 --> 0:04:50.560 of a weaker dollar and lower bondial second half of 0:04:50.600 --> 0:04:52.560 the year, I think this will prove to be a 0:04:52.640 --> 0:04:54.480 very nice buying opportunity on a sort of six to 0:04:54.560 --> 0:04:56.840 nine month view. So that's where I was going to 0:04:56.880 --> 0:04:58.240 go with this, because you said, you know, this isn't 0:04:58.240 --> 0:05:01.560 some something fundamental and emerging markets, it's something more of 0:05:01.600 --> 0:05:05.159 a market driven kind of issue. But you could argue 0:05:05.520 --> 0:05:07.760 that it was sort of a market driven issue that 0:05:07.800 --> 0:05:10.680 there was such a flood of cash going into emerging 0:05:10.720 --> 0:05:14.920 markets earlier through index funds UM so you know, what's 0:05:14.960 --> 0:05:16.920 to say that it won't accelerate. To your point, you're 0:05:16.960 --> 0:05:19.480 not seeing that yet, But how closely are you watching 0:05:19.480 --> 0:05:22.960 those sort of passive passive funny fun We are certainly 0:05:23.000 --> 0:05:25.560 watching watching that with any question. And one and one 0:05:26.120 --> 0:05:28.720 argument people could make for being having a more negative 0:05:28.800 --> 0:05:30.520 view going forward is the fact that a e M 0:05:30.600 --> 0:05:34.119 equity funds about fifty three billion dollars of money coming 0:05:34.160 --> 0:05:36.920 in so far this year, which is essentially a record 0:05:37.400 --> 0:05:39.240 for this time of the year. We haven't seen any 0:05:39.320 --> 0:05:42.760 significant We seen a slowdown those flows, but no real outflows. 0:05:42.800 --> 0:05:46.000 Were that to happen, obviously that would um you know 0:05:46.040 --> 0:05:50.000 that that would be a concern. And but from a 0:05:50.400 --> 0:05:52.440 from a fundamental point of view, if we're alsto alive 0:05:52.520 --> 0:05:55.400 by the time we get there, you know, our highest 0:05:55.440 --> 0:05:58.159 view here is that the pressure on bond yells and 0:05:58.160 --> 0:06:00.599 the pressure on the upward pressure on the dollar will 0:06:00.680 --> 0:06:03.160 fade in the second half of the year, as as 0:06:03.200 --> 0:06:06.280 inflation in the US kind of rolls over and is 0:06:06.320 --> 0:06:08.040 not seen to be the threat props it is at 0:06:08.040 --> 0:06:10.680 the moment, and if the dollar were to go shall 0:06:10.720 --> 0:06:12.719 be lower second half of the year, which is our view, 0:06:12.720 --> 0:06:14.800 and bonnos come back a bit. I think that money 0:06:15.080 --> 0:06:18.240 money is going to come back, and therefore we are 0:06:18.360 --> 0:06:20.280 in the middle of a bit of a nasty storm 0:06:20.320 --> 0:06:22.159 here and it may well go on for a few 0:06:22.160 --> 0:06:24.080 more weeks, but I don't think it's going to lead 0:06:24.120 --> 0:06:27.520 to a major bear market in emerging market equities at 0:06:27.560 --> 0:06:30.720 this stage, Thank you very much. Jeffrey Dennis is head 0:06:30.720 --> 0:06:34.919 of Global Emerging Market Strategy for UBS Securities. He's based 0:06:34.960 --> 0:06:37.400 in Boston, of course, home the Bloomberg one or six 0:06:37.400 --> 0:06:41.360 one Boston, Newburyport, in thirty in Metro West and the 0:06:41.400 --> 0:06:57.760 South Shore, and he was talking about the dollar. Italy 0:06:57.920 --> 0:07:01.000 could soon have a radical coal Asian government led by 0:07:01.000 --> 0:07:05.160 the anti establishment Five Star Movement and the far right 0:07:05.560 --> 0:07:09.880 League here to tell us more about Italy and it's uh. Well, 0:07:09.960 --> 0:07:13.720 the economy and the reaction to financial markets to the 0:07:14.080 --> 0:07:18.200 perhaps forming of a new government is uh for Aernando Giuliano. 0:07:18.320 --> 0:07:23.160 He is a columns for Bloomberg Opinion based in Rome. Fernando, 0:07:23.240 --> 0:07:25.280 thank you very much for being with us. Bring us 0:07:25.360 --> 0:07:29.000 up to date on who are the various parties that 0:07:29.040 --> 0:07:32.040 may come together to form a real government and what 0:07:32.240 --> 0:07:36.360 is their platform or at least what's their platform today. 0:07:36.880 --> 0:07:39.800 So we have two governments, two parties which did not 0:07:40.040 --> 0:07:43.160 run together in the election, let's recall that. So that's 0:07:43.200 --> 0:07:45.880 why they had to sit down and negotiate a new program. 0:07:45.960 --> 0:07:48.600 On the one hand, we have the Five Star Movements, 0:07:48.680 --> 0:07:52.320 which is a anti establishment party which rose to power 0:07:53.040 --> 0:07:55.800 very quickly over the last few years, which was set 0:07:55.880 --> 0:07:58.880 up initially by the comedian bet Pegrillo and has been 0:07:58.920 --> 0:08:02.560 a little bit of a catch hole party, really grubbing 0:08:02.640 --> 0:08:05.440 votes from less and right. And on the other hand, 0:08:05.480 --> 0:08:10.160 we have the League, which is a hard right party 0:08:10.200 --> 0:08:13.000 which in the past was taking positions to have the 0:08:13.120 --> 0:08:17.960 North basically, you know, to separate the Italy into North 0:08:18.040 --> 0:08:22.160 and South, but now it's taken more eurosceptic views. The 0:08:22.160 --> 0:08:26.520 two of them are now combined to this turbocharged populist 0:08:26.840 --> 0:08:31.680 government which has just produced its coalition agreement. It's a 0:08:31.720 --> 0:08:35.760 list of spending commitments which total more than a hundred 0:08:35.800 --> 0:08:41.559 billion euros and include some radical ideas, for example, a 0:08:41.679 --> 0:08:46.200 speed cutting income taxes, uh an income support scheme, very 0:08:46.240 --> 0:08:49.880 generous but which most importantly would set Italy on a 0:08:49.880 --> 0:08:53.320 collision course with the rest of the Eurozone and the 0:08:53.360 --> 0:08:56.160 European Union if they were to be enacted. You know, 0:08:56.280 --> 0:09:01.320 the response has been notable in some of the Italian markets, 0:09:01.360 --> 0:09:03.880 but in some ways it's sort of surprising that you 0:09:03.920 --> 0:09:08.800 haven't seen a greater sell off. For example, Italian bonds. 0:09:08.840 --> 0:09:10.800 I mean, yes, yields are at the highest level since 0:09:10.920 --> 0:09:13.760 July of last year, but still I mean, basically, they're 0:09:13.960 --> 0:09:16.120 they're calling for a blow out of their deficit and 0:09:16.160 --> 0:09:18.880 they're hoping that the Eurozone is going to help fund 0:09:19.080 --> 0:09:22.520 their lavish promises, which they're not going to do. Well, absolutely, 0:09:22.559 --> 0:09:25.720 I think the reaction has been there. I mean we've 0:09:25.720 --> 0:09:29.120 seen it accelerating over the last couple of days. I've 0:09:29.240 --> 0:09:32.400 since you know, it became clear that these two parties 0:09:32.440 --> 0:09:36.560 were serious. But it's not been as uh, you know, 0:09:36.600 --> 0:09:39.120 there could be more to come. I mean, I think 0:09:39.200 --> 0:09:42.120 that the mitigating factors here are, first of all, the 0:09:42.240 --> 0:09:45.680 European Central Bank scheme of quantitative easing, which is still 0:09:45.760 --> 0:09:48.680 running and we'll run until the autumn, so there is 0:09:48.720 --> 0:09:52.719 still a buyer of Italian debt and investors know that 0:09:52.880 --> 0:09:55.080 in the form of a central bank. And on top 0:09:55.120 --> 0:09:58.640 of that, we also have the idea that somehow these 0:09:58.679 --> 0:10:02.679 proposals are non starters. I mean, they will need to 0:10:02.720 --> 0:10:05.880 meet the President on Monday to discuss the program, and 0:10:05.920 --> 0:10:08.520 the President has said he will want to play an 0:10:08.520 --> 0:10:11.080 active role. And on top of that, you know, many 0:10:11.120 --> 0:10:14.640 of these ideas will actually need to be implemented, and 0:10:14.920 --> 0:10:17.439 you know, there will be some discussions with Euros and 0:10:17.559 --> 0:10:21.200 partners who are going to be you know, quite unsupportive 0:10:21.240 --> 0:10:23.960 to say the list. So I think there is you know, 0:10:24.000 --> 0:10:26.240 there is more to come, for sure. But on the 0:10:26.280 --> 0:10:28.760 other hand, I think the investors are looking at this, 0:10:29.000 --> 0:10:32.160 you know, mitigating factors, which may explain why the reaction 0:10:32.240 --> 0:10:35.240 is still relatively muted for the NANDO. I mean, just 0:10:35.480 --> 0:10:36.760 to sort of put this in a perspective, I was 0:10:36.760 --> 0:10:39.360 speaking to an analyst who said, basically, the market is betting, 0:10:39.600 --> 0:10:41.880 for all intents and purposes, that the current government will 0:10:41.920 --> 0:10:44.760 be completely ineffective and the tectocrats will continue to sort 0:10:44.760 --> 0:10:48.040 of chart a more logical path forward for the nation. 0:10:48.520 --> 0:10:52.040 Um is that a bank of the assumption? Well, I 0:10:52.080 --> 0:10:54.360 think there are you know, several issues. First of all, 0:10:54.480 --> 0:10:57.240 this is a coalition which has been you know, is 0:10:57.440 --> 0:11:01.200 completely new. So one possibility is that they will start 0:11:01.240 --> 0:11:04.680 squabbling once you know, reality kicks ince. So you know, 0:11:04.760 --> 0:11:08.000 what do we prioritize between say the flat you know, 0:11:08.040 --> 0:11:11.120 this kind of steep income tax reduction which the League 0:11:11.200 --> 0:11:14.400 is very keen on, and the income supports scheme, which 0:11:14.440 --> 0:11:17.160 the Five Star is keen on. So they may start 0:11:17.200 --> 0:11:20.160 squabbling and so do very little. And then on top 0:11:20.200 --> 0:11:21.960 of that, you know, there are a number of constraints. 0:11:22.040 --> 0:11:24.959 For example, the Italian constitution has a close which says 0:11:25.000 --> 0:11:28.920 that Italy has to balance the budget over the economic cycle. 0:11:29.160 --> 0:11:31.959 So there is a possibility that the president may veto 0:11:32.480 --> 0:11:36.120 some of the you know, craziest spending bills because they 0:11:36.120 --> 0:11:38.760 simply clash with the constitution. So I think there are 0:11:38.800 --> 0:11:43.360 a number of, you know, reasons to be relatively sanguine 0:11:43.400 --> 0:11:47.040 about the prospect, the spending prospect of this government. But 0:11:47.120 --> 0:11:49.440 for sure, the document we have in front of us 0:11:49.520 --> 0:11:52.600 is explosive from you know, a point of view of 0:11:52.920 --> 0:11:56.600 the public finances. This is one of the biggest gambles 0:11:56.640 --> 0:12:00.959 you've seen in a Eurozone country, be since the formation 0:12:01.080 --> 0:12:04.880 of the currency Union. Frdando, thank you so much for 0:12:04.960 --> 0:12:08.160 being with us, really interesting insights. I recommend everyone read 0:12:08.640 --> 0:12:12.800 his columns. Ferdando Giuliano is columnist for Bloomberg Opinion, coming 0:12:12.800 --> 0:12:16.600 to us from Rome, and you can find his columns 0:12:16.600 --> 0:12:18.440 on Bloomberg dot com. You can just get a sense 0:12:18.440 --> 0:12:21.199 of what they are about. One of the latest Italy 0:12:21.240 --> 0:12:24.840 gets a taste of Boris Johnson's cake, talking about how 0:12:25.120 --> 0:12:27.679 the league and five Stars dreamers want the years to 0:12:27.720 --> 0:12:30.640 help fund their lavish promises, even though that will break 0:12:30.679 --> 0:12:33.120 the rules that have already been established. A really interesting 0:12:33.160 --> 0:12:35.240 issue in PAM. Frankly, I am surprised that we're not 0:12:35.240 --> 0:12:51.960 seeing a bigger sell off. Is there some kind of 0:12:52.040 --> 0:12:55.840 two hundred billion dollar trade deficit deal with China. Is 0:12:55.880 --> 0:12:59.160 they're not different people saying different things. Here to clear 0:12:59.160 --> 0:13:01.200 it all up for US is and Mask. He's economics 0:13:01.240 --> 0:13:04.120 editor and columnist for Bloomberg Opinion, joining us here in 0:13:04.120 --> 0:13:06.720 our eleven three our studios. So, Dana, what's going on 0:13:06.800 --> 0:13:10.640 here and who's right? You know? The key is the 0:13:10.760 --> 0:13:15.720 final clause in the Chinese Foreign Ministry spokesman's answer to 0:13:15.840 --> 0:13:20.760 this question. When asked if a two hundred billion dollar 0:13:20.880 --> 0:13:26.079 deal has been hatched, he said not to blah blah 0:13:26.080 --> 0:13:31.040 blah blah comma to my knowledge. Now, that is absolutely key. 0:13:31.160 --> 0:13:34.360 It was taken as a denial, but really it's a 0:13:34.400 --> 0:13:36.760 non denial. This is important just to make sure that 0:13:36.800 --> 0:13:40.840 people understand the context here. Uh. Some people were cited 0:13:41.200 --> 0:13:44.040 anonymously as saying that the US was close to getting 0:13:44.120 --> 0:13:48.319 China to reduce its trade deficit with the US by 0:13:48.360 --> 0:13:53.240 two hundred billion dollars. Is that per year? That's unclear, 0:13:53.400 --> 0:13:56.320 But if we assume that it is, and that was 0:13:56.360 --> 0:14:00.640 the total the administration was looking for, that basedly takes 0:14:00.679 --> 0:14:03.560 care of the bulk of it, so you'd essentially be 0:14:03.720 --> 0:14:07.440 writing off the trade gap in one stroke of the pen, 0:14:08.040 --> 0:14:10.120 which is why it seems like a big number and 0:14:10.200 --> 0:14:14.040 on the face of it unlikely, but we'll even unlikely times. 0:14:15.400 --> 0:14:16.760 You know, did I thought you were going to talk 0:14:16.800 --> 0:14:20.720 about sorghum? Well that was going to be this. By 0:14:20.760 --> 0:14:23.200 the way, it doesn't contain any gluten if you just 0:14:23.280 --> 0:14:25.840 just see, you know, that was really the main question. 0:14:25.880 --> 0:14:31.440 That was exactly my wife has Celia was important, so 0:14:31.480 --> 0:14:36.680 they were really okay. So after this story was published, 0:14:38.040 --> 0:14:42.520 including by Bloomberg last night New York Time, the focus 0:14:42.680 --> 0:14:46.560 shifted to Chinese officials in Beijing. Was there a deal 0:14:46.600 --> 0:14:49.720 for two billion? Was there not a deal? The Foreign 0:14:49.760 --> 0:14:56.360 Ministry spokesman statement was taken as a denial. It wasn't really. 0:14:56.840 --> 0:15:00.200 It was way more nuanced from a to my ledge, 0:15:00.240 --> 0:15:02.280 and by the way, the Foreign Ministry does not have 0:15:02.360 --> 0:15:06.040 responsibility for trade policy in China, so it's really a 0:15:06.120 --> 0:15:09.960 non denial denial. The point that Pim makes is equally 0:15:09.960 --> 0:15:13.200 critical when taken with the knot. To my knowledge, China's 0:15:13.400 --> 0:15:18.120 suspension of an anti dumping investigation into US sorghum is 0:15:18.160 --> 0:15:21.560 a way of saying, yeah, we're playing ball here. We're 0:15:21.600 --> 0:15:25.400 playing ball here. This doesn't have to be a confrontational thing. 0:15:26.280 --> 0:15:29.200 So while no one from China came out in Beijing 0:15:29.320 --> 0:15:32.320 overnight and said, yeah, two hundred billion done, there were 0:15:32.360 --> 0:15:36.760 signals that were headed toward some kind of something. What 0:15:37.040 --> 0:15:39.240 is that? Some kind of something? That is the technical 0:15:39.360 --> 0:15:42.200 term for it? Dan, Can you just put into perspective 0:15:42.320 --> 0:15:46.280 zooming out the significance of reducing the tree deficit by 0:15:46.320 --> 0:15:50.120 two hundred billion dollars? Is that feasible? I mean, just explain. 0:15:50.680 --> 0:15:53.000 This is sort of the number that people put out 0:15:53.040 --> 0:15:56.640 there for how much basically we give to China. It's 0:15:56.680 --> 0:16:01.080 not that simple explain here, Okay? Is it feasible? Sure, 0:16:01.200 --> 0:16:06.600 it's feasible. Is it plausible as a sustainable thing? Yeah, 0:16:06.640 --> 0:16:09.200 well that's a whole separate question. Look, how could you 0:16:09.280 --> 0:16:12.720 want two hundred billion off? And let's say, for argument's sake, 0:16:13.000 --> 0:16:15.600 the US trade deficit with China is about three d 0:16:16.760 --> 0:16:20.880 meaning that we pay for we import three hundred and 0:16:20.880 --> 0:16:24.920 fifty billion dollars more from China than they import from US. Correct, 0:16:25.040 --> 0:16:29.000 that's a ballpark figure. Okay. So look, if Chinese airlines, 0:16:29.240 --> 0:16:32.200 most of which are controlled by the state, stopped buying 0:16:32.320 --> 0:16:36.520 air Bus and started using that cash to buy Boeing, 0:16:36.840 --> 0:16:40.240 they imported a whole lot more US agriculture you could 0:16:40.240 --> 0:16:44.960 get within Cooeye, within shouting distance of two hundred billion. 0:16:45.000 --> 0:16:47.360 But does it really realistic to assume they're not going 0:16:47.360 --> 0:16:50.320 to buy any more air buses, for example, and that 0:16:50.440 --> 0:16:53.960 the US is the only source for agricultural and oil 0:16:54.080 --> 0:16:57.120 now that the US is an oil exporter, there's that 0:16:57.240 --> 0:17:00.520 as well. The important thing to remember, which it's lost 0:17:00.560 --> 0:17:03.520 in a lot of this, is a large chunk of 0:17:03.520 --> 0:17:08.479 what the US quote unquote bias from China is stuff 0:17:08.520 --> 0:17:14.040 that's assembled in China by subsidiaries of US multinationals and 0:17:14.160 --> 0:17:18.600 shipped back here for consumption in the domestic market. Look, 0:17:19.400 --> 0:17:23.240 the global supply chains are really important here, and the 0:17:23.359 --> 0:17:26.760 vast majority of those global supply chains are anchored by 0:17:27.000 --> 0:17:33.320 US headquartered companies. Look, iPhones are assembled by a subsidiary 0:17:33.400 --> 0:17:37.240 in China of a Taiwanese company and sent back here. 0:17:37.640 --> 0:17:41.040 That this phone Lisa in front of you right now, 0:17:41.160 --> 0:17:46.200 Where was it? Where was it? Okay, Korean company? This 0:17:46.280 --> 0:17:50.880 iPhone is now holding? Seriously, this thing has wound its 0:17:50.920 --> 0:17:54.439 way around the globe half a dozen times before it 0:17:54.480 --> 0:17:56.720 appeared at the A T and T store in Montague 0:17:56.720 --> 0:18:01.959 Street in Brooklyn. So when we talk about things that 0:18:02.040 --> 0:18:05.480 America buys from China and how it's so much more 0:18:06.000 --> 0:18:08.480 than China buys from America, you know we need to 0:18:08.480 --> 0:18:12.960 be careful. Uh, Dan, can I just ask you in 0:18:13.040 --> 0:18:16.080 maybe twenty seconds, isn't it interesting that we are now 0:18:16.200 --> 0:18:20.760 even talking about bilateral trade negotiations when maybe two years 0:18:20.800 --> 0:18:23.639 ago we were talking about multilateral trade negotiations and this 0:18:23.720 --> 0:18:30.760 is turning out to be normal. Part of the doctrine, 0:18:31.080 --> 0:18:34.040 if you can even call it that, of Team Trump 0:18:34.160 --> 0:18:37.639 is that it's a big conspiracy and everyone everywhere is 0:18:37.680 --> 0:18:41.760 out to get the US because we're so noble. Okay, 0:18:42.760 --> 0:18:49.359 if the US negotiates with a wide variety of parties simultaneously, 0:18:49.520 --> 0:18:52.159 the US doesn't have the same leverage as if it 0:18:52.240 --> 0:18:57.199 engages in one on one negotiations. That's part of the 0:18:57.240 --> 0:18:59.879 foundational idea. Again, I don't want to glorify it with 0:19:00.000 --> 0:19:02.280 you sort of intellectual scaffolding, but you get the picture. 0:19:02.640 --> 0:19:05.959 Thank you very much. Dan Moss, economics editor, columnist for 0:19:06.119 --> 0:19:12.920 Bloomberg Opinion, talking about the US China trade conversations, confrontations 0:19:13.359 --> 0:19:32.960 and denials, but not really denials. Right now, I want 0:19:32.960 --> 0:19:36.280 to shift gears a bid and go to Aaron Brown. 0:19:36.359 --> 0:19:38.879 He's former managing director and head of financial market Research 0:19:38.920 --> 0:19:43.439 at a q R Capital Management, also a Bloomberg opinion columnist. Aaron, 0:19:43.520 --> 0:19:46.120 thank you so much for being with us. You wrote 0:19:46.119 --> 0:19:49.000 a column that really caught my attention this month where 0:19:49.000 --> 0:19:52.120 you were talking about buying and holding the market through 0:19:52.240 --> 0:19:55.639 index funds and the pitfalls that can ensue. Can you 0:19:55.680 --> 0:19:58.119 just give us a sense of what you were talking about, 0:19:58.359 --> 0:20:03.200 what the general thesis is it is for this column. Um, sure, 0:20:03.880 --> 0:20:07.440 buying and holding the market is clearly the dominant strategy 0:20:07.560 --> 0:20:12.160 for most UH retail investors. It's a solid, low cost, 0:20:12.440 --> 0:20:15.760 tax efficient, well diversified way to get your stock exposure. 0:20:16.400 --> 0:20:19.040 But it's not so obvious how to do it. UH. 0:20:19.200 --> 0:20:21.639 The usual way people do it is by an SMP 0:20:21.760 --> 0:20:25.080 five indext fun which is a perfectly good idea. It's 0:20:25.119 --> 0:20:27.919 low cost, it's the traditional way. It's worked well for 0:20:28.000 --> 0:20:32.160 many decades. But there's no particular reason to do it, 0:20:32.320 --> 0:20:35.160 and and it kind of looked at in a number 0:20:35.200 --> 0:20:40.040 of ways. You're overweighting UH the tech companies, financial companies, 0:20:40.840 --> 0:20:44.159 healthcare companies. You're really missing out on a lot of sectors. 0:20:44.640 --> 0:20:49.600 You've got one of your investment in just ten companies UM, 0:20:49.680 --> 0:20:52.240 and there's a lot of reason to think about moving 0:20:52.359 --> 0:20:56.600 to more diversified versions of it. For example, and equally waited, 0:20:56.640 --> 0:20:58.960 a kind of fund that puts the same amount of 0:20:59.000 --> 0:21:04.359 dollars in each five SMP funds. There are other other 0:21:04.880 --> 0:21:08.439 schemes people use as well. Before we before you go 0:21:08.480 --> 0:21:11.000 onto the other schemes, I just want to drill into 0:21:11.040 --> 0:21:13.359 some of the points that you made because they're really 0:21:13.400 --> 0:21:16.240 interesting to me. In part. For example, when people get 0:21:16.280 --> 0:21:21.320 back their dividends or other kinds of payments, UM, it 0:21:21.440 --> 0:21:25.119 just gets funneled into stocks that are by nature the 0:21:25.119 --> 0:21:30.280 most expensive. Yes, and and the most expensive which can 0:21:30.359 --> 0:21:32.560 mean the best in some cases, but also can mean 0:21:32.560 --> 0:21:35.480 the most overvalued. Uh. There are a lot of neglected 0:21:35.520 --> 0:21:38.280 stocks that are very good. Uh. You know, near the 0:21:38.280 --> 0:21:41.080 bottom of the SMP, the last two stocks and the 0:21:41.160 --> 0:21:44.280 sp F hundred. There are some bad stocks in there 0:21:44.320 --> 0:21:46.120 as well. I mean, when you do an index fund, 0:21:46.800 --> 0:21:48.720 agree to take the good with the bad because you're 0:21:48.720 --> 0:21:51.480 going for average. But do you want the average of 0:21:51.520 --> 0:21:54.520 the best, you know, the highest price ten companies, or 0:21:54.520 --> 0:21:58.520 do you want the average of the five biggest companies? Uh? 0:21:58.720 --> 0:22:01.959 Aaron wondering if you could just give people an example 0:22:02.760 --> 0:22:07.040 so that we understand that there is a difference between indexes. 0:22:07.040 --> 0:22:09.800 Because when you say buying the market, that makes sense. 0:22:09.840 --> 0:22:11.679 But then you drill down one step and you go, 0:22:11.720 --> 0:22:14.199 all right, so what really is the market? And I 0:22:14.200 --> 0:22:16.880 think your point about when you own the SMP five 0:22:17.320 --> 0:22:22.120 in an index fund, the top whatever it is ten 0:22:22.280 --> 0:22:26.439 holdings of fifteen holdings, and that that's like of the 0:22:26.640 --> 0:22:30.320 entire fund. So you're not really invested in the sm 0:22:30.400 --> 0:22:34.360 P five hundred companies in an equal way. You are 0:22:34.400 --> 0:22:43.080 really lopsided, as you just described, by buying companies like Apple, Microsoft, Berkshire, Hathaway, Johnson, Johnson, uh, Intel, Chevron, 0:22:43.080 --> 0:22:46.800 and so on exactly. And and and those are very 0:22:46.800 --> 0:22:49.199 good companies. And and you know, I'm not telling anyone 0:22:49.240 --> 0:22:52.399 that's a bad investment to do it. Um it's not 0:22:52.480 --> 0:22:55.280 as diversified as it could be. And and those companies 0:22:55.280 --> 0:22:58.640 have similarities. They they they're obviously they're all big companies. 0:22:58.680 --> 0:23:02.040 For one thing, Uh, they tend to have high valuation ratios. 0:23:02.040 --> 0:23:04.000 So you're not getting a lot of assets, you're not 0:23:04.040 --> 0:23:06.439 getting a lot of earnings for your dollar. You go 0:23:06.520 --> 0:23:08.800 lower down in the SMP five hundred, and you can 0:23:08.800 --> 0:23:13.879 find a lot more value stocks UM, which which you 0:23:13.880 --> 0:23:16.680 know many people like, in which have historically have performed. 0:23:17.000 --> 0:23:19.520 But I want to be very careful here. Some people 0:23:20.520 --> 0:23:22.919 go for a waiting scheme because it's giving them some 0:23:23.000 --> 0:23:26.520 particular investment thesis, and you go too far in that direction. 0:23:26.560 --> 0:23:29.480 You're back to asset management to get active management, and 0:23:29.480 --> 0:23:33.520 you're paying forty fifty sixty basis points. I'm only talking 0:23:33.560 --> 0:23:36.920 about waiting schemes that can be done for twenty basis 0:23:36.960 --> 0:23:40.840 points are so very inexpensive. SMP five hundred you get 0:23:40.840 --> 0:23:43.040 for four or five basis points if you do it 0:23:43.119 --> 0:23:47.720 with market weights, But you can get very similar and 0:23:47.840 --> 0:23:50.680 you get the same stocks waited differently. You pay a 0:23:50.760 --> 0:23:53.840 little bit more, you pay ten to twenty basis points UM, 0:23:53.960 --> 0:23:56.880