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Speaker 1: Good morning, and welcome to the Bloomberg Daybreak Asia podcast.

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Speaker 1: I'm Doug Prisner. Here are the stories we're following today. Today,

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Speaker 1: financial markets mapped out Donald Trump's return to the White House,

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Speaker 1: as well as the potential for Republicans to control both

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Speaker 1: houses of Congress. Now, a major part of Trump's economic

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Speaker 1: policy is tariffs. His plan is to place tariffs on

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Speaker 1: all US imports. This would include charges of between ten

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Speaker 1: to twenty percent on all imported goods, and where Chinese

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Speaker 1: products are concerned, tariffs of as much as sixty percent.

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Speaker 1: For a closer look, I'm joined now by John lu

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Speaker 1: Bloomberg News Executive editor for Greater China. John joins us

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Speaker 1: from our studios in Beijing. Can we start with reaction

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Speaker 1: to what you're feeling right now in the Chinese capital

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Speaker 1: to the Trump victory?

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Speaker 2: John, I think there's actually a bit of awe at

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Speaker 2: the moment that Donald Trump was able to pull off

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Speaker 2: the sort of victory that it seems like he was

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Speaker 2: able to pull off potentially a trifecta, taking both the

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Speaker 2: Senate and the House along with the White House. And

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Speaker 2: we see today or the thing that I'm hearing from

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Speaker 2: lots of people here in Beijing is wow, where you know,

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Speaker 2: it's really amazing he was able to do that. I

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Speaker 2: don't think people have gotten yet to the point of

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Speaker 2: thinking very deeply about what next.

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Speaker 1: John, you know better than I the challenges that are

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Speaker 1: facing the Chinese economy at the moment. The export side

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Speaker 1: seems to have been holding up reasonably well. It's the

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Speaker 1: domestic economy that's really been struggling. So too have imports

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Speaker 1: to China to some extent. In your view, how well

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Speaker 1: is China prepared to respond to the potential trade war

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Speaker 1: with the US or a different style of trade war,

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Speaker 1: let's put it that way.

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Speaker 2: I think China is better prepared in the sense that

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Speaker 2: we've seen this show before, Like we've lived through four

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Speaker 2: years of a Donald Trump administration and we've gone through

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Speaker 2: a trade war, and so in that respect, I think

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Speaker 2: China is much more prepared in terms of how to

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Speaker 2: negotiate what the main points of contention potentially probably will be.

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Speaker 2: In terms of how well the economy could take on

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Speaker 2: as sixty percent tariffs all around, I think that is

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Speaker 2: the answer to that is not very well. There have

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Speaker 2: been some estimates by ubs, for instance, that calculate if

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Speaker 2: Donald Trump did in fact, put sixty percent tariffs on

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Speaker 2: all Chinese exports to the US. That would essentially cut

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Speaker 2: two point five percentage points from China's GDP. That's about

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Speaker 2: that means China would be growing half as fast as

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Speaker 2: it has been in the last couple of years as

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Speaker 2: a result.

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Speaker 1: Given how the Chinese economy is struggling at the moment,

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Speaker 1: is there a particular vulnerability where the US could potentially

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Speaker 1: take advantage of this weaker state and try to capitalize

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Speaker 1: that If these tariffs are really a form of the

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Speaker 1: first part of a negotiation, does the US necessarily have

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Speaker 1: a bit of the upper hand here?

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Speaker 2: I think definitely the United States has in upper hand

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Speaker 2: when it comes to these negotiations. China depends on being

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Speaker 2: able to have access to foreign markets to create jobs,

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Speaker 2: to create demand for its manufactured goods. It's gonna be

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Speaker 2: the Chinese government has been trying to wean itself off

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Speaker 2: of that dependency, but it's going to take time and

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Speaker 2: it's not going to happen very quickly, and so in

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Speaker 2: the short term, I think there are a lot of

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Speaker 2: cards in Donald Trump's and the United States hand in

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Speaker 2: terms of how those negotiations go. I have heard quite

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Speaker 2: a number of Chinese officials sort of bring up the

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Speaker 2: idea or bring up the sense that Donald Trump has

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Speaker 2: actually said himself that this is maybe a negotiating tactic,

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Speaker 2: So they're kind of approaching as in a hopeful way,

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Speaker 2: maybe he will not actually on day one impose those terrors.

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Speaker 1: The Biden administration, i think it's fair to say, really

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Speaker 1: built on the tough on China strategy that was undertaken

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Speaker 1: by the first Trump administration, and what the Biden administration

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Speaker 1: did in kind of building on that was I'm thinking,

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Speaker 1: in particular the export controls on certain advanced high technology,

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Speaker 1: especially the semiconductors. So if you move away from the

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Speaker 1: issue of tariffs, the question becomes is Beijing prepared for

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Speaker 1: additional US restrictions on sales to China. Remember during the

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Speaker 1: first Trump administration, Huawei got caught up in that, didn't

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Speaker 1: it It did.

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Speaker 2: I think the big difference, i would say between the

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Speaker 2: way that the Biden administration and the first Trump administration

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Speaker 2: prosecuted these curves on technology was the Biden administration has

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Speaker 2: been much more successful, I think in getting the American

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Speaker 2: allies to go along with their policies, and it's I

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Speaker 2: think much more in question how effective a Trump administration

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Speaker 2: would be in doing that. At the same time, I

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Speaker 2: think the Chinese are very concerned about losing even more

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Speaker 2: access to American technology, of Western technology in general. There's

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Speaker 2: a ton of money being spent in Chin to try

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Speaker 2: and create domestic technologies to replace those things. Again, that

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Speaker 2: takes time. It's not going to happen in the next

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Speaker 2: week or year or a couple of years.

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Speaker 1: So let's imagine for a moment that Trump's threat of

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Speaker 1: these tariffs at sixty percent is really the first part

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Speaker 1: of a negotiating strategy. If he follows through, let's say

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Speaker 1: the negotiations were to fall off the rails at some

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Speaker 1: point those tariffs are really imposed. Are Chinese authorities willing

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Speaker 1: to do much more to help the economy, do you think?

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Speaker 1: And the timing is kind of interesting because we just

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Speaker 1: had the meeting of the Standing Committee and indications that

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Speaker 1: we may be getting a little bit more fiscal support

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Speaker 1: for the Chinese economy. So put that in context for me.

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Speaker 2: Yeah, So I think the timing of that meeting of

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Speaker 2: the National People's Congress Standing Committee that you just mentioned

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Speaker 2: is very interesting. It usually happens at the end of

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Speaker 2: October this meeting, they pushed it back until November fourth

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Speaker 2: through eighth, so it ends after the election, and so

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Speaker 2: a lot of people have wondered if that timing wasn't

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Speaker 2: changed so that the that Chinese officials could calibrate their

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Speaker 2: response to reflect the new administration potentially in Washington. And

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Speaker 2: so the idea would be with Trump coming in, potentially

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Speaker 2: China would do more in terms of stimulus to try

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Speaker 2: and get domestic consumption up to make up for this

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Speaker 2: additional tariffs cutting off demand from the United States.

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Speaker 1: That's John Lou Bloomberg News, Executive editor for Greater China,

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Speaker 1: and you can hear more of our conversation coming up

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Speaker 1: this weekend on Bloomberg Daybreak weekend. Joining us now is

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Speaker 1: Tim Pagliari. He is the chief investment officer at cap Wealth.

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Speaker 1: Joining from Franklin, Tennessee. Tim, thanks for making time to

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Speaker 1: chat with us. Obviously, today for markets was very much

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Speaker 1: about mapping out Donald Trump's return into the White House,

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Speaker 1: as well as the potential for Republicans to take control

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Speaker 1: of both houses of Congress. How do you view what's

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Speaker 1: going on in the price section.

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Speaker 3: Well, it's obviously you know there are a number of

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Speaker 3: Trump trades that have shown through today. I have in

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Speaker 3: Boltanski at BTIG probably made one of the best calls

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Speaker 3: of anyone. He said that the Fannie Mae Freddie mac

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Speaker 3: the GSE's coming out of conservatorship, was the number one

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Speaker 3: Trump trade. He recommended the preferreds some of them were

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Speaker 3: up seventy five percent today. It's just incredible.

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Speaker 1: It's interesting. Last week I was reading a note from

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Speaker 1: strategist over at City Group. They recommended selling any rally

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Speaker 1: in US talks if the election resulted in a Republican sweep.

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Speaker 1: They view such a scenario basically as as creating a

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Speaker 1: bit of uncertainty where corporate darnings are concerned. Would you

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Speaker 1: agree with that or would you push back a bit?

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Speaker 3: I'd push back a lot. I mean, I think that

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Speaker 3: what Nest needed right now pro growth policies to help

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Speaker 3: us deal with this tremendous budget deficit that everybody's finally

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Speaker 3: starting to talk about. And it's been the elephant in

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Speaker 3: the room for quite a while. And you know, the

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Speaker 3: interest rates going up. That's really not Trump's fault. That's

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Speaker 3: just a fact of life that we've got almost ten

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Speaker 3: trillion dollars worth of debt. We have to refinance between

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Speaker 3: now and the end of the first quarter, and you know,

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Speaker 3: the Fed has to re establish, you know, the Yel curve.

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Speaker 3: So they busted the Yel curve. They're going to bring

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Speaker 3: short term rates down. Longer term rates are going to

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Speaker 3: go where the bond market says they need to go

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Speaker 3: to get a reasonable return given inflation and all the

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Speaker 3: other factors that go along with too much government spending.

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Speaker 1: So we have higher yields today as a result of

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Speaker 1: the selloff in the bond market. At the long end,

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Speaker 1: I think we picked up around sixteen basis points on

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Speaker 1: the ten years. A lot of worry here that Trump's

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Speaker 1: propose will fuel as you're kind of pointing out, larger

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Speaker 1: budget deficits and then require maybe even greater supply in

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Speaker 1: the bond market. So is now the best time, let's say,

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Speaker 1: to extend tax cuts, would you say?

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Speaker 3: Absolutely? And I think they have to address growth in

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Speaker 3: the economy. They have to keep the economy growing and

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Speaker 3: it has to grow faster than it has and so

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Speaker 3: those are that's what the market is looking for. That

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Speaker 3: is the only way really out of this box without

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Speaker 3: any more pain than what a company's higher rates and

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Speaker 3: if they can do that, then we've got a really

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Speaker 3: bright future with AI and some of the innovation and

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Speaker 3: things that will come from all of that.

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Speaker 1: One of the standouts today the financials, maybe we get

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Speaker 1: a little bit less in the way of regulation. Would

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Speaker 1: that be the bet that you're making if you had

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Speaker 1: to look at the banks right now?

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Speaker 3: Absolutely? I mean, I think Jamie Diamond was the one

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Speaker 3: that said under a Harris administration, banks could look forward

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Speaker 3: to a lot more regulation and red tape government interference.

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Speaker 3: And so there was just this was a relief rally

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Speaker 3: for the banks. They'd been undervalued and underperforming relative to

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Speaker 3: the rest of the market all year long, and this

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Speaker 3: was just kind of a catchup. Right now, they're still

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Speaker 3: under way under the earnings multiples and price to book,

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Speaker 3: all the other things that you would look at and

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Speaker 3: evaluating a company.

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Speaker 1: One of the key points when you talk about the

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Speaker 1: Trump economic plan is tariffs on imported goods to the

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Speaker 1: United States, particularly when it comes to China. Is this

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Speaker 1: a policy that you think is wise right now?

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Speaker 3: Well, I think it's a negotiation tool. I had lunch

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Speaker 3: with Art Laffer last week in an event that he hosted,

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Speaker 3: and we talked specifically about it. I mean Trump, Trump's

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Speaker 3: in aotiator and he's going to negotiate, and he's going

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Speaker 3: to level the playing field so that there is real

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Speaker 3: free trade. And I think that's that's what you'll see

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Speaker 3: with tariffs. Now. If it causes an increase in some tariffs,

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Speaker 3: you know, then so be it. But we're not on

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Speaker 3: a level playing field with most countries right now. And

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Speaker 3: free trade there has to be give and take, and

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Speaker 3: you know, we have to build those bridges and get

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Speaker 3: back to even talking and trading with our enemies so

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Speaker 3: that we can, you know, move move this world forward

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Speaker 3: without war and without some of the other things that

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Speaker 3: happened when you stop discussing things with your adversaries.

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Speaker 1: One of the things that I saw today in the

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Speaker 1: price section, when you look at the small cap space,

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Speaker 1: the Russell two thousand picked up more than five and

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Speaker 1: a half percent. Speculation here is obviously that the smaller

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Speaker 1: firms are going to benefit from any time type of

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Speaker 1: protectionistic stance from the Trump administration. Would you put new

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Speaker 1: money to work in small caps right now?

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Speaker 3: I think small caps are they're good values. They will

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Speaker 3: do well in a lower corporate tax environment and a

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Speaker 3: pro growth environment, and so you know, yes, I would

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Speaker 3: put money to work there. I'd put money to work

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Speaker 3: in a variety of things, especially infrastructure plays with artificial intelligence.

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Speaker 3: You know, they've there's a lot of inventory these ships.

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Speaker 3: Now they're having to build out these networks and they're

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Speaker 3: finding holes in the networks and everything from electricity usage

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Speaker 3: you know, and demand to the quality of the fiber

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Speaker 3: and what they're going to need to transmit all this

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Speaker 3: data at the speed that they need to move once

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Speaker 3: these networks are built out.

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Speaker 1: One of the other things that was happening in markets

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Speaker 1: today kind of a reduction on bets for the scope

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Speaker 1: of rate cuts by the Fed, particularly if you look

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Speaker 1: at what the bond market may be telegraphing the risk

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Speaker 1: of maybe higher inflation in the future, or at least

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Speaker 1: in a reemergence of inflationary pressure. Conventional wisdom right now

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Speaker 1: is that the Fed goes ahead and cuts rates by

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Speaker 1: twenty five basis points tomorrow, the key policy rate. How

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Speaker 1: do you see the Fed entering into the narrative right

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Speaker 1: now the story that the market seems to be telling.

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Speaker 3: Us, Well, again, the Fed has a problem, you know,

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Speaker 3: and it's not inflation. It was the inverted deal curve,

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Speaker 3: and with all the three financing, they have to bring

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Speaker 3: the short end of the curve down. They have to

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Speaker 3: have the long end of the curve high enough to

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Speaker 3: attract new money. This whole thing that inflation has gone away,

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Speaker 3: that was really not fair. I mean, the inflation is

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Speaker 3: still embedded in this economy. Two thirds of inflation as

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Speaker 3: wages and benefit costs. Just look at the last contracts

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Speaker 3: at big contracts at Boeing, the contracts with the long shoreman.

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Speaker 3: I mean, they're all in the nine to twelve percent

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Speaker 3: range in terms of annual increases. That doesn't get you

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Speaker 3: to two percent. Chairman Poll has said that. He said

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Speaker 3: anything above the FED target that's not accompanied by productivity gains,

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Speaker 3: it's inflationary. And so we still have a lot of

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Speaker 3: wage inflation in the system, and you know it's people

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Speaker 3: are trying to catch up from the twenty twenty five

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Speaker 3: percent that they lost over the last two or three years.

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Speaker 1: So I'm trying to understand whether what you're describing creates

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Speaker 1: upward pressure across the treasury curve and yield terms, and

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Speaker 1: if that's the case, maybe we avoid buying bonds at

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Speaker 1: the moment. Or are you looking at it in some

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Speaker 1: other way and maybe identifying opportunity in the bond market

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Speaker 1: right now, I.

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Speaker 3: Think they're opportunities. Once rates get closer to that five

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Speaker 3: percent range, and I think the ten year treasury will

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Speaker 3: we go to five, then it provides a reasonable value

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Speaker 3: if you believe the Fed can be successful in moving

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Speaker 3: inflation down to that two and a half percent target.

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Speaker 3: Trump's plan of cutting energy costs through more exploration and

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Speaker 3: increasing our energy reserves, that will help a lot. That's

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Speaker 3: a very disinflationary thing as it moves through the economy,

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Speaker 3: and so that's what that's what you need investors. Bond

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Speaker 3: investors need a reasonable return above inflation after taxes.

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Speaker 1: Are you seeing opportunities offshore right now?

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Speaker 3: Not really. I think you know, we're the best economy

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Speaker 3: in the world. We have the ability to address our

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Speaker 3: problems with creativity. One of the interesting things about what

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Speaker 3: Trump has done, he has financed his own transition team,

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Speaker 3: and I've spoken with some of the transition members. They

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Speaker 3: are approaching this with creativity. They're going to look at

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Speaker 3: ways conventional and unconventional ways of solving this problem. You know,

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Speaker 3: they promised six months as shock and awe as they

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Speaker 3: go through the first six months of his administration.

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Speaker 1: Tim will leave it there. Thank you so much for

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Speaker 1: making time to chat with us here on the Bloomberg

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Speaker 1: day Break Asia podcast. He's Tim Pagliara, chief investment Officer

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Speaker 1: at cap Wealth, joining us from Franklin, Tennessee. Tim, thanks

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Speaker 1: so much.

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Speaker 3: Thank you. Doug.

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Speaker 1: This is Bloomberg day Break Asia. You're morning brief on

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