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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Welcome to the Daybreak

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Speaker 1: Asia podcast. I'm Doug Chrisner. We begin in China, where

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Speaker 1: the government said over the weekend it will not back

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Speaker 1: down in the face of a renewed tariff threat from

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Speaker 1: President Trump. It was late Friday. Trump suggested new levies

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Speaker 1: on Chinese imports of one hundred percent, and he also

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Speaker 1: said the US would impose export controls on any and

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Speaker 1: all critical software beginning November first. Now, these moves came

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Speaker 1: in reaction to China imposing export curbs on rare earth

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Speaker 1: minerals on Sunday. Though Beijing said the US should stop

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Speaker 1: issuing threats, the Ministry of Commerce also urged further negotiations,

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Speaker 1: while at the same time saying it will not hesitate

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Speaker 1: to retaliate. Joining me now for a closer look is

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Speaker 1: Paul Dobson. He is Bloomberg's executive editor for Asia Markets.

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Speaker 1: Paul joined us from Singapore. Paul, thank you for making time.

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Speaker 1: It looks as though China is drawing a clear red

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Speaker 1: line here in response to these export controls. How bad

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Speaker 1: could this get? Do you think?

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Speaker 2: Yeah?

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Speaker 3: Hi there, Doug, Well, it could suddenly escalate further from here,

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Speaker 3: it seems like China feels the latest measures it's put

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Speaker 3: in place so already a response to the action that

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Speaker 3: the US has taken over various curbs on shipments of

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Speaker 3: goods and technology to China, and so the fact that

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Speaker 3: the US is then escalating it again does certainly ramp

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Speaker 3: up the tensions, and I think that that's why we

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Speaker 3: saw a fairly severe market reaction in US hours in

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Speaker 3: Friday trading. But over the weekend, the latest developments that

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Speaker 3: we've seen, with some comments from Donald Trump that seem

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Speaker 3: to suggest there's still room for negotiations, is giving the

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Speaker 3: market a little bit of renewed hope as we get

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Speaker 3: going on Monday morning with a little bit of a

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Speaker 3: rebound in US futures. And I think that, you know,

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Speaker 3: the market's broad interpretation of this at the moment is

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Speaker 3: that both China and the US are jostling for positions

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Speaker 3: ahead of a potential meeting between Trump and She. They

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Speaker 3: both want to show, you know, kind of what their

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Speaker 3: firepower is, what they have in reserve, what they could

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Speaker 3: use if things escalate. But it's telling that both of

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Speaker 3: them have set the deadline for when these new measures

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Speaker 3: would begin sometime in November, So after that moment when

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Speaker 3: there's the possibility of this meeting, so I think that,

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Speaker 3: you know, there's a strong possibility that the market has

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Speaker 3: in its mind that somebody will back down, or that

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Speaker 3: there'll be another compromise, or they'll be delaying more talks.

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Speaker 3: At the same time, you know, each time we get

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Speaker 3: a headline that shows one hundred percent tariff threat or

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Speaker 3: something like that, the market has to react and start

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Speaker 3: to price in some of the risks that that may

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Speaker 3: happen and that we may get another escalation and another fallout.

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Speaker 1: We heard from Vice President JD. Vance over the weekend,

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Speaker 1: and he called on Beijing, in his words, to choose

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Speaker 1: the path of reason, and in his view, the US

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Speaker 1: has a lot of leverage. I'm wondering, if we had

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Speaker 1: to gauge here between who has more of an advantage

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Speaker 1: right now? Could you say that it's the US or

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Speaker 1: do you necessarily think that it's China who has the

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Speaker 1: best position here in terms of negotiation.

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Speaker 3: China is definitely in a far better stronger position than

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Speaker 3: it was at the time of the first Trump presidency.

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Speaker 3: It's much better organized and much better prepared for the

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Speaker 3: escalations of these tariffs, and it holds the cards when

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Speaker 3: it comes to rare earth materials, also high powered magnets,

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Speaker 3: and on top of that, some of the electric vehicle

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Speaker 3: batteries as well as something that China is exporting both

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Speaker 3: the technology and the product to the rest of the world,

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Speaker 3: so that's all giving it some power. On top of that,

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Speaker 3: you know, it's causing the US some more issues by

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Speaker 3: withholding purchases of beans, which is annoying the farmers, which

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Speaker 3: is a key sort of area of support for Donald Trump.

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Speaker 3: On the other side, China clearly doesn't want to be

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Speaker 3: facing these hundred percent harris and Trump knows that that

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Speaker 3: gives him their forage back. The other way, he's willing

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Speaker 3: to escalate and go that extra sort of step and

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Speaker 3: that extra place that China might not be able to

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Speaker 3: or might not want to. So I'm not sure that

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Speaker 3: it's easy to tease out who exactly is holding the

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Speaker 3: strongest out of cards here. That's the whole point of

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Speaker 3: you know, what the sparring and the positioning and the

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Speaker 3: negotiations is over. What we do know is that if

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Speaker 3: they continue to ratchet it up, then everybody.

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Speaker 1: Suffers Directionally, it seems like we're looking at a further decoupling.

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Speaker 1: Is that right?

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Speaker 3: I think the long term that's definitely the course, no

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Speaker 3: matter what happens. You know, you can see that both

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Speaker 3: countries and both sort of both both countries are carving

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Speaker 3: out sort of regions within their orbit where there's stronger

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Speaker 3: partnerships and looking for independence where they can from the

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Speaker 3: other side. So you see that very strongly with China

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Speaker 3: chrying to develop its own tech sector, its own AI

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Speaker 3: tech sector, its own chip makers. In due course, you

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Speaker 3: see that with the US looking at alternative sources for

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Speaker 3: rare earth materials. You know, the supply chains are definitely uncovering,

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Speaker 3: the areas of influence are definitely uncompening, but it's so

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Speaker 3: much it's almost impossible to unravel and it will take

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Speaker 3: a long long time. So there is that mutual codependence

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Speaker 3: still in certain areas and the need for cooperation. And

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Speaker 3: there are bigger issues as well. You know, if you

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Speaker 3: think about things like climate change that no one country

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Speaker 3: can solve on its own, there isn't a need to

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Speaker 3: be to be working together on some of those things.

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Speaker 3: So you know, that's the reality and the difficulty of

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Speaker 3: all of these negotiations. I think what the US at

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Speaker 3: least wants is a little bit of a fairer price

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Speaker 3: for those things that aren't those massively essential and critical

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Speaker 3: kind of supplies. And that's where the negotiations will come

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Speaker 3: back down to at some.

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Speaker 1: Point midweek and China will get the September price data.

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Speaker 1: As you know, deflation obviously has been a persistent problem,

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Speaker 1: particularly at the wholesale level. Do you think think that's

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Speaker 1: going to be the case when these numbers are released

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Speaker 1: this week, that we'll just get a reinforcement of that

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Speaker 1: idea that deflation is firmly kind of in place in

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Speaker 1: the Chinese economy.

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Speaker 3: Trying to get out of that trap with its anti

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Speaker 3: involution measures, but it's taking time and the property sector

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Speaker 3: in particular is still ailing as well. So resolving those

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Speaker 3: problems is a very long term issue for China. I think,

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Speaker 3: you know, if we go back to the trade negotiation

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Speaker 3: side of things, the US thinks that China is in

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Speaker 3: a bit of a weak place, that its economy is

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Speaker 3: hurting at the moment, and so it can apply maximum

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Speaker 3: pressure through the tariffs. China thing is probably okay with

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Speaker 3: its growth. It's still running around five percent on an

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Speaker 3: annual basis, which is the target or the plan. It

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Speaker 3: knows that it can do extra stimula if it needs

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Speaker 3: to to get to that level. But actually exports haven't

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Speaker 3: really dropped off massively despite the introduction of whatever tariffs

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Speaker 3: we've seen so far from the US. They've just been

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Speaker 3: redirected to other points in the world, and so China

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Speaker 3: probably doesn't feel too worried even if we have those disinflationary,

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Speaker 3: your deflationary measures coming through about the economy, although it

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Speaker 3: is trying to take all of these steps to turn

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Speaker 3: things around slowly.

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Speaker 1: I want to go to Japan next, because we had

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Speaker 1: a pretty dramatic move in the market last week when

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Speaker 1: talks between the Liberal Democratic Party and its junior partner

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Speaker 1: Cometo simply collapsed, ending without an agreement. I mean, talk

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Speaker 1: to me a little bit about the way that you

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Speaker 1: view this and the severity of this situation now, particularly

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Speaker 1: considering that last week we were talking about Sana Takeiichi

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Speaker 1: becoming the first female prime minister of Japan.

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Speaker 3: It is so much news out there to try to

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Speaker 3: get your head around on him a Monday in the

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Speaker 3: start of the week, isn't that, Doug, So I think

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Speaker 3: that it's a really interesting situation today is a holiday

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Speaker 3: in Japan, so it will take a little bit more

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Speaker 3: time before we get more clarity. But yes, the LDP

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Speaker 3: is in a quantry. Now, does Takaichi try to go

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Speaker 3: it alone and rule with a minority, Does she try

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Speaker 3: to find new partnerships for a coalition or there's a

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Speaker 3: remote plart distability as well. The other parties could try

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Speaker 3: to find an alternative PM candidate to Techich and circumvent

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Speaker 3: the LDP altogether. So we're in a little bit of

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Speaker 3: a chaotic moment for Japan's markets right now. Is completely

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Speaker 3: uncertain how it will all turn out. What we do

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Speaker 3: know is that a policy gridlock would be unfavorable for

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Speaker 3: Japan's financial markets and most likely being negative for the

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Speaker 3: equity market. What I think is really interesting is whether

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Speaker 3: that turns into a positive for yen as it behaves

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Speaker 3: like a haven, whether it becomes a negative because people

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Speaker 3: are worried about the economy and the sort of the

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Speaker 3: slow growth that it's facing and the rising debtload that

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Speaker 3: it's trying to contend with at the same time.

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Speaker 1: We'll leave it there, Paul, thank you so much. Always

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Speaker 1: a pleasure. Paul Dobson is Bloomberg's executive editor for Asia Markets,

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Speaker 1: joining from Singapore, and the equity markets in the States

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Speaker 1: kind of swooned last Friday. We had the S and

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Speaker 1: P five hundred down about two point seven percent, its

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Speaker 1: worst day in about six months. Coming up, we'll speak

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Speaker 1: with Francis Stacey, wealth manager at Scarlet Oak Financial, here

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Speaker 1: on the Daybreak Asia podcast. Welcome back to the Daybreak

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Speaker 1: Asia Podcast. I'm Doug Chrisner. The bullmarket in US equities

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Speaker 1: is now three years old. It began October twelfth, twenty

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Speaker 1: twenty two, and since then the S and P five

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Speaker 1: hundred d is up. Are you ready for this? Eighty

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Speaker 1: three percent? And in that same period, twenty eight trillion

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Speaker 1: dollars has been added to market value. For a closer

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Speaker 1: look now at where things stand and where we may

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Speaker 1: go from here, I'm joined by Francis Stacey, wealth manager

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Speaker 1: at Scarlet Oak Financial. Francis, thanks for making time to

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Speaker 1: chat with me on this. What will it take for

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Speaker 1: this bull market to continue? Do you think? Well?

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Speaker 2: The thing is is that really what we're looking for

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Speaker 2: is that the market's up until Friday, and up until

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Speaker 2: a little bit of a breakout in volatility. I've kind

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Speaker 2: of been ignoring all of the sort of catalysts for

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Speaker 2: a sellof and my reasoning for that is that the

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Speaker 2: M two money stock is at a record level, so

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Speaker 2: basically there's so much liquidity in the system. It's a

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Speaker 2: wash with liquidity in That is sort of the thesis

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Speaker 2: behind the bull market. You also have a situation where

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Speaker 2: we're coming out a September sort of stagflationary environment. You

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Speaker 2: now have an amelioration, you know, looking like it for

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Speaker 2: you know, continuing amelioration and inflation, and then you have

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Speaker 2: the FED taking a devish stance based on the labor markets,

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Speaker 2: and so you have that alongside the liquidity being a

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Speaker 2: wash in the system, and you don't have cracks in

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Speaker 2: the credit market, and so I do see that it's

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Speaker 2: possible that we could find some support here and go

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Speaker 2: back up and retest those highs.

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Speaker 1: So we focus a lot on the big tech names

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Speaker 1: like Nvidia and Meta to what extent has the equity

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Speaker 1: market been unable to kind of broaden out or break

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Speaker 1: out from the domination that these names have That concerns

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Speaker 1: any people because it just kind of dominates market psychology.

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Speaker 2: Absolutely, And one of the things that's being asked is,

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Speaker 2: you know, it can it be sustainable that the mag

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Speaker 2: seven in essence has such a great influence over the

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Speaker 2: markets and the market share. The reason that has been

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Speaker 2: more sustainable than anybody could have suspected from my viewpoint,

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Speaker 2: is the fact that you have an enormous amount of

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Speaker 2: capex expenditure, you know, capital expenditure in the GDP calculation

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Speaker 2: that is AI capex, and so AI capex is actually

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Speaker 2: propping up GDP, and I think that that's one of

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Speaker 2: the reasons those stocks have remained largely popular. Again, a

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Speaker 2: bit of a sell off on Friday, for sure, but

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Speaker 2: before that, you know, all time hihs for most of them,

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Speaker 2: except for Amazon.

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Speaker 1: So the government shutdown is another factor. I don't really

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Speaker 1: know that it's been predominant in terms of a lot

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Speaker 1: of market psychology right now. Maybe I'm wrong. How do

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Speaker 1: you see the government shutdown fitting into this narrative?

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Speaker 2: Well, the biggest macro economic theme for the government shutdown

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Speaker 2: is does it threaten the liquidity flow? Does it take

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Speaker 2: the liquidity in the system, Because what happened was the

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Speaker 2: Fed you know, obviously started raising interest rates and they

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Speaker 2: you know, have had such high interest rates for so

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Speaker 2: long relatives to the last decade you would think, well,

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Speaker 2: why didn't that cause a recession, and being a Monday

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Speaker 2: morning quarterback, The reason it didn't cause a recession is

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Speaker 2: because the fiscal spending came in and saved the day,

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Speaker 2: even though they were reducing the balance sheet and raising rates.

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Speaker 2: So that fiscal spending has been what's keeping the markets

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Speaker 2: and asset prices in general elevated and creating this sort

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Speaker 2: of bubble phenomena. And so if the government shutdown were

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Speaker 2: to go on and on and on and threaten liquidity

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Speaker 2: by drastic spending cuts, that would be a catalyst for

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Speaker 2: a repricing. Also, if you know enough people get unemployed

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Speaker 2: that they have you know, they can't keep up with

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Speaker 2: their credit card payments. We are living in a bifurcated

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Speaker 2: economy where the lower sixty percent are living paycheck to paycheck.

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Speaker 2: They don't have any savings, They're paying for groceries on

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Speaker 2: credit cards. The credit card interest rates are just astronomical,

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Speaker 2: and so there this is sort of being hung in

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Speaker 2: the balance. But if enough of these people lose their

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Speaker 2: pay or lose their jobs that you start to see

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Speaker 2: a meaningful or systemic uptick in defaults around credit, then

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Speaker 2: that could be a game changer.

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Speaker 1: Well, let's talk a little bit about the credit markets.

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Speaker 1: We've seen some meltdowns recently. I'm thinking of names like Sacks,

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Speaker 1: New Fortress Energy, Try Color Holdings, First Brands Group, all

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Speaker 1: of which have grabbed some of the headlines here. But

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Speaker 1: I'm trying to get a sense of what's happening under

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Speaker 1: the surface, particularly as private credit is involved.

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Speaker 2: Certainly, I mean, you do see cracks all over the system.

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Speaker 2: So you see an uptick of foreclosures in Florida and

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Speaker 2: Nevada primarily, you're seeing an uptick in auto loan defaults.

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Speaker 2: You're seeing an uptech in you know, late payments for

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Speaker 2: credit cards, credit card defaults, et cetera. Because the system

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Speaker 2: and the labor market are under pressure. However, whether that

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Speaker 2: results in a recession or an end to this bull

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Speaker 2: market is going to be Do these credit problems, these

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Speaker 2: cracks underneath? Do these cause a systemic issue?

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Speaker 1: So we're going to hear from the big banks beginning Tuesday.

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Speaker 1: We'll hear from JP Morgan. Then, I'm curious as to

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Speaker 1: what you will be listening for, particularly when it comes

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Speaker 1: to loans. You mentioned credit risk a moment ago. Will

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Speaker 1: the banks necessarily be forthcoming on their exposure to loans

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Speaker 1: possibly going bad.

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Speaker 2: Yeah, well, hard to say what they're going to say, right,

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Speaker 2: but that's definitely what you're looking for, because when you

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Speaker 2: think about it, when loans go bad, you know, the

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Speaker 2: banks are able to write them off of the balance sheet,

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Speaker 2: but by writing them off of the balance sheet, you're

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Speaker 2: actually removing that liquidity from the system. So I would

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Speaker 2: be listening for any kind of a language, any language

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Speaker 2: around you know, if they have an uptick and defaults,

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Speaker 2: or they have this or that, I would look. I

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Speaker 2: would be looking for language where it's so systemic that

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Speaker 2: again it's going to interrupt this huge flow of liquidity

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Speaker 2: that it's had these asset asset prices climbing for the

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Speaker 2: last you know, several years, eighty seven percent, you said

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Speaker 2: in the S and P. Five hundred. I mean, that's

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Speaker 2: just in direct correlation to the liquidity in the system.

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Speaker 1: So with a government shutdown, we have a lack of

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Speaker 1: official data and that has made it somewhat tricky. I

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Speaker 1: think for a lot, particularly the bond market, to kind

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Speaker 1: of use in terms of guidance. We're going to hear

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Speaker 1: from Chair Powell on Tuesday. He's going to offer an

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Speaker 1: outlook on the economy, maybe give some hints about what

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Speaker 1: monetary policy may look like ahead. What are you expecting

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Speaker 1: from the Fed between now, let's say in the end

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Speaker 1: of the year, is it a foregone conclusion that we're

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Speaker 1: going to get two more rate cuts.

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Speaker 2: That's certainly what's being priced in at the moment. I

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Speaker 2: think his language is going to be dubvish, more dubbish.

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Speaker 2: I think it's going to be in lockstep with Waller

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Speaker 2: without looking like their kowtowing to the Trump administration. But

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Speaker 2: I think they're going to, you know, find their data

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Speaker 2: dependent and I think that they're going to find the

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Speaker 2: fact set from the available data that supports the more

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Speaker 2: dubbish stance. And I do think it is some of

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Speaker 2: these little inflections that we're seeing in credit markets, or

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Speaker 2: little accelerations in credit markets, or little cracks in the

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Speaker 2: labor market, that you know, Powell just wants to get

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Speaker 2: ahead of it.

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Speaker 1: So are you inclined to be, in terms of an

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Speaker 1: investment strategy defensive right now?

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Speaker 2: I'm inclined to watch key support metrics. I always believe

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Speaker 2: in hedges. You know, However, I'm not sure that the

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Speaker 2: bull market is completely over yet. Some of the data

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Speaker 2: providers I look at, you know, think that you know, growth,

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Speaker 2: growth and inflation are going to reaccelerate, and you know,

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Speaker 2: so that's obviously a Goldilock scenario. And then some think

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Speaker 2: that actually growth is going to continue higher and inflation

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Speaker 2: is going to go back down again in the coming quarters.

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Speaker 2: So that's the trajectory we're on right now, unless we

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Speaker 2: have a catalyst that you know, makes volatility spike, something systemic,

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Speaker 2: something credit like that, you know, says that that's not possible.

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Speaker 2: So I'd be careful, But I'm right now, I'm buying

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Speaker 2: the dips.

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Speaker 1: What if we get a substantial correction in the equity market?

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Speaker 1: Last week we heard from Crystallinia Gyorgheva, who is the

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Speaker 1: head of the IMF, and she acknowledged that perhaps financial

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Speaker 1: stability would be at risk if this call it a bubble,

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Speaker 1: if you will, if that bursts. Does she have a point?

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Speaker 2: She certainly has a point. And we have axles and

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Speaker 2: wheels and credit cycles are not dead. You know, Tesla's

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Speaker 2: look very different from the Model T, but there are

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Speaker 2: still axles and wheels, and that is certainly what we

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Speaker 2: have with Fiat and credit cycles and business cycles and

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Speaker 2: this cycle will definitely come to an end, but it

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Speaker 2: could last a lot longer than people think. And if

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Speaker 2: it were to last a lot longer than people think,

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Speaker 2: I would, you know, look at the liquidity in the system,

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Speaker 2: because even though that liquidity is concentrated in the upper

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Speaker 2: forty percent of the economy, and we are living in

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Speaker 2: a very bifurcated economy, that upper forty percent is consuming

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Speaker 2: a lot of things. They're hiring people, you know, they're

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Speaker 2: making money, they have assets, they're spending money and stuff

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Speaker 2: like that, and so that's the thing that's kind of

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Speaker 2: kept US afloat.

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Speaker 1: How are you looking at markets outside the US these days?

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Speaker 2: It was interesting the rate cut in Europe based on

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Speaker 2: what's going on in Germany. I think, you know, probably

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Speaker 2: most they were in growth for most of this year,

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Speaker 2: but I think some of its softening, and I think,

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Speaker 2: you know, probably they will have a rollover of their

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Speaker 2: business cycle, as we will. And I don't know the

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Speaker 2: timing of it exactly, but we just have a lot

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Speaker 2: of geopolitical risk, and yet we have a lot of

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Speaker 2: liquidity still left in the system from COVID. So it's

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Speaker 2: going to be how that sort of plays out. I

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Speaker 2: think It's been interesting with the tariffs because they've you know,

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Speaker 2: the data has trickled in so erratically that you haven't

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Speaker 2: really been able to superprice that in which is actually

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Speaker 2: lowered volatility in the markets, and so just watching all

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Speaker 2: these factors. But credit markets are the big game changers

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Speaker 2: when it comes to recessions or meaningful reversals.

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Speaker 1: So before I let you go on the subject of tariffs.

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Speaker 1: Over the weekend, the Chinese government eventually said it's not

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Speaker 1: going to back down from this renewed thread of tariffs

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Speaker 1: from President Trump. Where is the relationship right now between

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Speaker 1: the US and China and when what kind of risk

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Speaker 1: does it represent.

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Speaker 2: It's deteriorating. I think that the risk is going to

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Speaker 2: come over a longer trajectory of time of dedollarization. We're

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Speaker 2: seeing that with precious metals prices. We're seeing that with

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Speaker 2: you know, advances from the bricks economy. We're seeing that.

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Speaker 2: And Trump is trying to word that off with the

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Speaker 2: Genius Act and trying to you know, make us so

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Speaker 2: relevant when it comes to crypto and FIAT as an

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Speaker 2: amalgamation that we can compete with that. I don't know

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Speaker 2: where that ends up eventually, but you know if for

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Speaker 2: decades people try to dedollarize that momentum is eventually going

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Speaker 2: to catch up with us.

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Speaker 1: Francis will leave it there. Thank you so much. It's

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Speaker 1: always a pleasure. Francis days. He is wealth manager at

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Speaker 1: Scarlett Oak Financial. Joining us here on the Daybreak Asia

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Speaker 1: Part Thanks for listening to today's episode of the Bloomberg

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Speaker 1: Daybreak Asia Edition podcast. Each weekday, we look at the

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Speaker 1: story shaping markets, finance, and geopolitics in the Asia Pacific.

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Speaker 1: You can find us on Apple, Spotify, the Bloomberg Podcast

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Speaker 1: YouTube channel, or anywhere else you listen. Join us again

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Speaker 1: tomorrow for insight on the market moves from Hong Kong

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Speaker 1: Bloomberg