WEBVTT - NAFTA Trade Issues Baked Into TPP Are Now Gone, Froman Says 0:00:04.760 --> 0:00:08.080 Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. 0:00:08.119 --> 0:00:11.159 Along with my co host Lisa Abramowitz. Each day we 0:00:11.280 --> 0:00:14.480 bring you the most important, noteworthy, and useful interviews for 0:00:14.520 --> 0:00:16.880 you and your money, whether at the grocery store or 0:00:16.920 --> 0:00:20.680 the trading floor. Find the Bloomberg P L Podcast on iTunes, 0:00:20.840 --> 0:00:29.440 SoundCloud and at Bloomberg dot com. I am thrilled to 0:00:29.520 --> 0:00:32.199 welcome Ambassador Michael Frohman to the show. He is a 0:00:32.200 --> 0:00:35.839 Distinguished Fellow at the Council of Foreign Relations and he 0:00:35.920 --> 0:00:41.160 was President Obama's principal advisor, negotiator, and spokesperson on international 0:00:41.200 --> 0:00:45.080 trade investment issues. He led the negotiations of the Trans 0:00:45.320 --> 0:00:50.279 Pacific Partnership and the Transatlantic Trade and Investment Partnership UH. 0:00:50.800 --> 0:00:54.280 Ambassador Frohman thrilled to have you. Right now, we're hearing 0:00:54.280 --> 0:00:56.720 a lot about how broken a lot of these trade 0:00:56.760 --> 0:01:01.200 agreements are. Is there one aspect of NAFTA and some 0:01:01.280 --> 0:01:05.240 of the other trade agreements that could be tweaked to 0:01:05.360 --> 0:01:07.720 sort of ameliorate some of the anger? And where do 0:01:07.760 --> 0:01:11.200 you think it's the anchor is really coming from? Well? Absolutely, 0:01:11.240 --> 0:01:14.119 I think NAFTA is now twenty three years old, and 0:01:14.440 --> 0:01:18.360 under President Obama, we sought to renegotiate NAFTA through the 0:01:18.400 --> 0:01:21.560 Trans Pacific Partnership. Canada and Mexico were members of TPP. 0:01:22.160 --> 0:01:25.880 Mexico agreed in the context of TPP to have binding 0:01:25.959 --> 0:01:29.240 and enforceable labor and environmental provisions, which they did not 0:01:29.400 --> 0:01:32.920 have in in NAFTA. They agreed to open up their 0:01:33.000 --> 0:01:36.479 energy sector to US participation. They agreed to put disciplines 0:01:36.640 --> 0:01:39.320 on their state owned companies, They agreed to a whole 0:01:39.360 --> 0:01:43.080 series of obligations around the digital economy. And similarly Canada. 0:01:43.160 --> 0:01:46.280 Canada had refused to open up its dairy and poultry 0:01:46.319 --> 0:01:50.160 markets to US exports in NAFTA, and through t PP, 0:01:50.320 --> 0:01:52.600 we were able to open up those markets. So there 0:01:52.640 --> 0:01:56.120 certainly is improvement to be to be had in in 0:01:56.120 --> 0:01:58.360 in NAFTA. We did that in t p P, and 0:01:58.360 --> 0:02:00.800 I think the question now is what does the Trump 0:02:00.800 --> 0:02:03.880 administration seek to do beyond what we did in t 0:02:04.040 --> 0:02:07.760 p P to to address this. I've heard Secretary Ross 0:02:07.760 --> 0:02:11.120 has mentioned he wants to talk about the digital economy, 0:02:11.360 --> 0:02:16.720 about raising UH living standards in Mexico. That's exactly what 0:02:16.760 --> 0:02:20.600 our labor chapter and our Digital Economy chapter did in TPP, 0:02:20.800 --> 0:02:22.399 and I think we're all waiting to see what else 0:02:22.400 --> 0:02:24.560 he wants to do and the administration wants to do 0:02:24.600 --> 0:02:27.520 that goes beyond that ambassador from and can you give 0:02:27.560 --> 0:02:30.840 us some details of the nitty gritty of where, when, 0:02:30.840 --> 0:02:34.480 and how these negotiations take place, and how are they 0:02:34.560 --> 0:02:38.359 prepared for some of the technical background information that would 0:02:38.440 --> 0:02:43.359 come with the bureaucracy and the new administration. So Congress 0:02:43.360 --> 0:02:48.080 passed a law in June of fifteen called Trade Promotion Authority, 0:02:48.400 --> 0:02:51.280 which lays out a whole series of processes that the 0:02:51.320 --> 0:02:54.600 administration has to go through before negotiating any trade agreement. 0:02:55.040 --> 0:02:58.560 And that involves deep consultations with Congress, I think for 0:02:58.800 --> 0:03:02.280 at least ninety days. It involves reaching out to stakeholders 0:03:02.280 --> 0:03:05.360 and having public hearings and getting input. And this is 0:03:05.360 --> 0:03:07.840 the normal process you go through when you negotiate in 0:03:08.360 --> 0:03:12.119 a trade agreement. So the Trumble administration seems to be 0:03:12.120 --> 0:03:16.240 beginning that process now, and I think UH Secretary Ross 0:03:16.440 --> 0:03:19.920 indicated earlier this week on an interview here on Bloomberg 0:03:20.000 --> 0:03:21.760 that it was going to take some number of months 0:03:21.800 --> 0:03:26.880 before they would get started actually in renegotiating NAFTA, primarily 0:03:26.880 --> 0:03:29.799 for that reason, and and that's uh, that's the first 0:03:29.800 --> 0:03:31.760 step that needs to be done. I think once you 0:03:31.800 --> 0:03:33.800 get beyond that, and you have a clear sense of 0:03:33.800 --> 0:03:35.840 what it is you want to put on the table, 0:03:35.880 --> 0:03:38.840 what the parameters of the negotiation will be. It that 0:03:38.960 --> 0:03:43.200 involves consultations with with our partners Canada and Mexico to 0:03:43.360 --> 0:03:46.200 determine whether they are willing to engage on that basis. 0:03:46.240 --> 0:03:49.520 And of course, as we reopen NAFTA, they may well 0:03:49.600 --> 0:03:51.360 have their own issues that they want to put on 0:03:51.360 --> 0:03:54.120 the table. Well, I want to pick up on that point. 0:03:54.160 --> 0:03:57.440 In particular, there was a story today about how Mexico's 0:03:57.480 --> 0:04:01.640 sugar industry, which is upset about the idea of possibly 0:04:01.680 --> 0:04:07.200 being blocked or tariffed taxed by importing sugar into the US, 0:04:07.400 --> 0:04:11.280 might block imports of American high fructose corn syrupe in retaliation. 0:04:11.600 --> 0:04:15.640 How concerned are you that relations between Mexico and the 0:04:15.760 --> 0:04:20.680 US will deteriorate before negotiations even begin and derail any 0:04:20.680 --> 0:04:24.560 potential to really come up with a beneficial plan. Well, 0:04:24.600 --> 0:04:28.600 these are there are some longstanding outstanding issues. Sugar with 0:04:29.400 --> 0:04:33.000 Mexico is one of them. The U s sugar industry 0:04:33.040 --> 0:04:36.720 brought some actions under our trade remedy laws UH that 0:04:36.720 --> 0:04:39.800 that kept Mexican sugar out of our market. We negotiate 0:04:39.880 --> 0:04:42.880 an agreement to settle that. That agreement has been uh 0:04:43.360 --> 0:04:44.960 fraying at the edges or there's been a lot of 0:04:44.960 --> 0:04:49.239 pressure on that agreement. And the comments you mentioned reflect 0:04:49.279 --> 0:04:52.239 the concerns the Mexican sugar producers have, and they've always 0:04:52.240 --> 0:04:54.080 threatened that if we keep sugar out of our mark 0:04:54.120 --> 0:04:57.200 their sugar out of our market, they'll keep our fructos 0:04:57.279 --> 0:05:00.080 out of out of their markets. And so they are 0:05:00.080 --> 0:05:03.039 a substitute for each other to a certain degree. All 0:05:03.040 --> 0:05:07.280 that puts a premium on making sure that you're using 0:05:07.320 --> 0:05:09.359 all the good will that you have with your neighbors, 0:05:09.400 --> 0:05:12.960 that you're making sure that you're addressing their concerns and 0:05:13.200 --> 0:05:16.279 it doesn't deteriorate into a trade war, because any of 0:05:16.279 --> 0:05:20.320 these issues can lead to sanctions and counter sanctions and 0:05:20.360 --> 0:05:23.000 that's not good for for for any of us. And so, 0:05:23.400 --> 0:05:27.000 whether it's trigger with Mexico or dairy issues with with Canada, 0:05:27.440 --> 0:05:29.800 we have outstanding trade issues that need to get addressed. 0:05:29.920 --> 0:05:32.839 Many of them were addressed in the context of of 0:05:32.960 --> 0:05:37.279 TPP and going forward, since the administration is determined that 0:05:37.279 --> 0:05:39.080 it doesn't want to move forward in it with its 0:05:39.080 --> 0:05:41.200 own participation in TVP. It's going to find it's going 0:05:41.240 --> 0:05:43.960 to need to find other ways of addressing these outstanding issues. 0:05:44.600 --> 0:05:49.440 Do you believe that there's any political connection between TPP 0:05:49.880 --> 0:05:53.440 trade and the rhetoric on trade and the desire for 0:05:53.680 --> 0:05:58.240 UH commerce Secretary Ross talked about those negotiations. Is there 0:05:58.240 --> 0:06:03.880 any connection between that and the border wall proposal? Well, look, 0:06:04.000 --> 0:06:07.400 I think there will be lots of uh PhD dissertations 0:06:07.400 --> 0:06:10.640 written on this last election and what was what went 0:06:10.680 --> 0:06:13.760 into the well, just give them your headline, give you 0:06:13.800 --> 0:06:19.039 about the fifteen seconds. So like, I think that notwithstanding 0:06:19.080 --> 0:06:22.279 the rather remarkable economic recovery of the last seven years, 0:06:22.279 --> 0:06:24.440 there are a lot of people who are angry and resentful, 0:06:25.080 --> 0:06:29.159 and they're seeing the impact on wages and jobs much now. 0:06:29.240 --> 0:06:31.520 Economists will tell us much of that impact, the vast 0:06:31.560 --> 0:06:34.120 majority of the impact comes from technology. Some of it 0:06:34.160 --> 0:06:37.960 comes from globalization. But you don't get to vote on technology, 0:06:38.000 --> 0:06:39.720 you don't get to vote on globalization. You get to 0:06:39.760 --> 0:06:42.320 vote on trade agreements, and you get to vote on immigration, 0:06:42.400 --> 0:06:47.200 and so UH taking action against whether it's foreign governments 0:06:47.320 --> 0:06:50.520 or foreign immigrants is a bit of a scapegoat for 0:06:50.839 --> 0:06:55.400 people's understandable economic and securities. They may be the wrong target, 0:06:55.440 --> 0:06:57.479 they may not be the cause of the problems, but 0:06:57.560 --> 0:07:01.080 they are a reflection of how angry and anxious people 0:07:01.120 --> 0:07:03.640 are about their economic well being in the country. Well, 0:07:03.720 --> 0:07:06.280 I gotta say that is a very diplomatic answer, and 0:07:06.320 --> 0:07:09.359 I wanted you're a diplomat. Ambassador Michael Frohman, Thank you 0:07:09.480 --> 0:07:13.640 very much, former US Trade Representative, currently a Distinguished Fellow 0:07:14.080 --> 0:07:30.520 at the Council on Foreign Relations. We've got the Axel Murk. 0:07:30.600 --> 0:07:32.960 He is the president and chief investment officer of Murk 0:07:33.160 --> 0:07:38.480 Investments and Axel. Maybe you could respond to this information 0:07:38.720 --> 0:07:42.000 and maybe explain how this fits into the context of 0:07:42.040 --> 0:07:46.080 what the e CBS attempting to do. Well, Yes, him 0:07:46.200 --> 0:07:51.320 highly Well. I think Mr drag is known to pivot um. 0:07:51.360 --> 0:07:53.800 Every six months he comes up with a completely new 0:07:53.880 --> 0:07:56.360 story and and every time he holds the meeting, he 0:07:56.400 --> 0:07:58.600 gives some positive negatives, and then half a year later 0:07:58.640 --> 0:08:00.040 he says, see, I told you. I was like, I 0:08:00.080 --> 0:08:02.240 mentioned all the policies, so I mentioned all the negatives, 0:08:02.280 --> 0:08:05.400 and so this time around the glass was harful. He 0:08:05.560 --> 0:08:09.080 said everything is working. Our apolicies are fantastic. And by 0:08:09.120 --> 0:08:12.800 the way, yep, we are attentive but not anxious about 0:08:12.840 --> 0:08:14.840 anything that's coming up. Meaning if if things do go 0:08:14.920 --> 0:08:17.880 bad with the upcoming elections, I'll bail you guys out. 0:08:18.320 --> 0:08:21.560 And so what I have been arguing, including on your program, 0:08:21.880 --> 0:08:23.960 is that we've reached the bottom of the interest rate 0:08:24.000 --> 0:08:26.600 title in Europe and that is not priced in. And 0:08:26.640 --> 0:08:29.120 we've seen it in the euro, especially last today, how 0:08:29.120 --> 0:08:32.040 it's been moving higher. And that's exactly that that they 0:08:32.040 --> 0:08:34.280 are looking at the way how they can get out 0:08:34.320 --> 0:08:37.400 of this this massive cit they're doing. And and sure 0:08:37.520 --> 0:08:39.680 enough everything is always too what's been priced in, and 0:08:39.720 --> 0:08:41.400 the Euro has been moving higher, and even on the 0:08:41.400 --> 0:08:43.600 back of a good job report. But all I've been 0:08:43.600 --> 0:08:46.960 weakening today Axcel To that point, what would the market 0:08:47.000 --> 0:08:51.880 effect be should the ECB start raising rates sooner than 0:08:52.400 --> 0:08:56.480 is currently being priced in. Well, that that's bound to 0:08:56.559 --> 0:09:00.040 happen because everything is pricing in that that look, and 0:09:00.160 --> 0:09:03.679 it's gonna win. That the Dutch is gonna be pulling, 0:09:04.240 --> 0:09:05.679 They're going to be out of the U or whatever 0:09:05.679 --> 0:09:08.880 it might be, and there's so much negative news price 0:09:08.960 --> 0:09:11.600 then there is a price then that that the rates 0:09:11.600 --> 0:09:13.720 are going to go forever lower, and and there's that 0:09:13.760 --> 0:09:15.320 they have been an effective not going to go lower. 0:09:15.320 --> 0:09:17.120 And so what's going to happen in my view is 0:09:17.160 --> 0:09:19.360 that that the euro is going to strengthen over time. 0:09:19.760 --> 0:09:22.800 Um and because we we've praked been all these wonderful 0:09:22.920 --> 0:09:24.320 rate heps in the US. But I think in the 0:09:24.400 --> 0:09:26.360 US we are far more behind the curvesin in Europe. 0:09:26.760 --> 0:09:30.280 So but hold on a second, because which assets specifically 0:09:30.760 --> 0:09:35.240 will sell off the most should the ECB say raise 0:09:36.000 --> 0:09:39.160 benchmark rates. I don't know before the end of this year, 0:09:39.559 --> 0:09:41.880 which assets. It's a good question. I mean, in the 0:09:41.920 --> 0:09:45.200 last two days the German bones have been significantly underperforming. 0:09:45.200 --> 0:09:47.280 If you're kind of on the micro level, yel freas 0:09:47.280 --> 0:09:49.160 have been narrowing partially on the backle of drug is 0:09:49.160 --> 0:09:51.480 saying everything is fine. But in the in the medium term, 0:09:51.520 --> 0:09:54.200 of course, the problem is that over years there are 0:09:54.440 --> 0:09:56.520 all all the single banks have been doing. If they've 0:09:56.559 --> 0:09:59.880 compressed with premium, that means all risk assets are EXPENSI 0:10:00.280 --> 0:10:02.160 and that means all risk asses may come down. And 0:10:02.240 --> 0:10:05.480 that is everything from from stocks to to jump bonds 0:10:05.520 --> 0:10:07.800 and then yes, even on the on the stafer bond set. 0:10:07.880 --> 0:10:10.920 So I I've been quoted by you guys and saying 0:10:10.960 --> 0:10:13.760 that I'm negative on both bonds and equities, and that's 0:10:13.760 --> 0:10:17.800 absolutely right. I just don't see unless we have this 0:10:18.200 --> 0:10:21.920 gigantic economic growth that we're going to get and get 0:10:22.040 --> 0:10:25.640 to a normalization without a very serious correction in the 0:10:25.720 --> 0:10:29.600 nasset prices. And and stocks might be more vulnerable um 0:10:29.760 --> 0:10:32.600 than than than some other securities are. But but I 0:10:32.640 --> 0:10:35.439 do think, yes, that both stocks and bondable up. So 0:10:35.559 --> 0:10:40.360 do you think we're in a credit bubble? Um bubble 0:10:40.440 --> 0:10:43.240 is a loaded term, but but by all means we 0:10:43.360 --> 0:10:46.320 have we have been. What what's difference on the credit 0:10:46.360 --> 0:10:48.880 bubble in two thousand seven is that if it if 0:10:48.920 --> 0:10:52.679 it were to burst, I don't see necessarily a disorderly 0:10:52.760 --> 0:10:55.240 collapse as there was a risk in two thousand seven. 0:10:55.520 --> 0:10:58.160 But that doesn't mean we're not in the bubble. It 0:10:58.200 --> 0:11:01.520 doesn't mean we cannot have a your correction, and so 0:11:01.960 --> 0:11:05.360 basically we cannot afford to have high rates. I once 0:11:05.440 --> 0:11:08.320 talked to a FET official. He has just retired from 0:11:08.360 --> 0:11:12.280 a regional fete, and I asked him kind of why 0:11:12.280 --> 0:11:15.240 why is the FET so scared of hiking rates um 0:11:15.280 --> 0:11:18.160 of of of kind of pushing out surprises down, stock 0:11:18.200 --> 0:11:20.280 market down, and so well they the FETE is never 0:11:20.320 --> 0:11:22.959 concerned about it unless they caused the bubble. And then 0:11:23.000 --> 0:11:26.560 then he paused, meaning that one of the reasons we 0:11:26.679 --> 0:11:29.040 can't high grade this because we've built this recovery and 0:11:29.120 --> 0:11:31.760 anceprise inflation. And so if we were to try to 0:11:31.760 --> 0:11:34.720 get ahead of the curve, we would not just tumble 0:11:34.760 --> 0:11:37.079 the stock market, but we could cause your economic calm. 0:11:37.320 --> 0:11:39.720 And that's the other problem we have. We we we 0:11:39.720 --> 0:11:42.560 we we. The set has become a slave of the market, 0:11:42.880 --> 0:11:45.040 and it's showing the market knows that. And this is 0:11:45.080 --> 0:11:46.840 taking the set for a right, so to speak. So 0:11:47.320 --> 0:11:50.199 Accel's move from Europe and moved to the U S 0:11:50.240 --> 0:11:52.520 where we just got this job's report. Uh, they gave 0:11:52.559 --> 0:11:55.240 the market exactly what it what it wanted. And you're 0:11:55.280 --> 0:11:58.760 seeing traders piled back into risk your assets from stocks 0:11:58.800 --> 0:12:01.520 to high and some of the assets that you were 0:12:01.520 --> 0:12:06.080 saying in Europe are inflated by low rate policies. Do 0:12:06.120 --> 0:12:10.439 you think that this sort of knee jerk Pavlovian response 0:12:10.559 --> 0:12:14.120 to this goldilocks environment is just simply setting up the 0:12:14.200 --> 0:12:17.360 market for a bigger fall. When the Fed eventually does 0:12:17.400 --> 0:12:21.800 start hiking rates faster, Well, it does every time, right, 0:12:21.800 --> 0:12:24.960 I mean the last time we have the goldilocks economy 0:12:25.200 --> 0:12:28.600 was in the mid two thousand's, right, that didn't end 0:12:28.600 --> 0:12:30.439 too well. Now again, I'm not suggesting we're gonna have 0:12:30.440 --> 0:12:33.559 a two thousand eight sort of collapse again. But but yes, 0:12:33.600 --> 0:12:37.040 when everything's got great, you should start planning for for 0:12:37.160 --> 0:12:40.400 the period thereafter, and and and and so that means 0:12:40.400 --> 0:12:42.440 you pick chips off the table, you're bound to portfolio 0:12:42.520 --> 0:12:44.800 and then tried to take food and steps, but Alex 0:12:45.559 --> 0:12:49.000 just to accel, just to sort of take the other 0:12:49.080 --> 0:12:50.560 side of that. I mean, everyone who has tried to 0:12:50.559 --> 0:12:54.120 take chips off the table has suffered, right, I Mean 0:12:54.360 --> 0:12:58.320 it's been and that's why, and that's all the more 0:12:58.360 --> 0:13:01.240 reasons to do it, right. I Mean, when the I'm 0:13:01.280 --> 0:13:04.280 one of the few folks who's who's cautioning, and and 0:13:04.600 --> 0:13:07.800 when when I shut up and stop being cautious about 0:13:07.840 --> 0:13:10.280 the markets, yes, then definitely sell your portfolio, right, I 0:13:10.320 --> 0:13:13.839 mean it's the anybody who has been cautious has on 0:13:14.000 --> 0:13:16.559 the perform You're, as they say, you're the last man 0:13:16.679 --> 0:13:21.200 in when you go in that's that. Then then we're done. 0:13:21.280 --> 0:13:23.640 For here. I just wanted when you stop calling me 0:13:23.960 --> 0:13:26.880 your stocks. There you go, but no here I want 0:13:26.920 --> 0:13:28.560 I want to before you go, I want you to 0:13:28.640 --> 0:13:31.720 tell us what do you think about the forget what 0:13:31.800 --> 0:13:34.000 you want, what we want, anybody wants. Tell me what 0:13:34.040 --> 0:13:36.760 you believe interest rates will be at the end of 0:13:36.800 --> 0:13:39.760 twenty seventeen, and go ahead. I'll give you a wild 0:13:39.760 --> 0:13:43.960 guest for the for any point in two thousand eighteen. Yeah, well, 0:13:44.000 --> 0:13:45.880 I'll give you the same answer I've given you before 0:13:45.920 --> 0:13:48.000 when you asked me this question. As whoever will be 0:13:48.080 --> 0:13:51.360 will be behind the curve. It doesn't matter when normal 0:13:51.440 --> 0:13:54.800 rightside matters where they are relative to inflation, and the 0:13:54.920 --> 0:13:58.880 set is should be two should be around two point 0:13:58.880 --> 0:14:02.320 one percent right now? Possibly possibly possibly that's what tis 0:14:02.480 --> 0:14:04.480 in but it is depending on the market. If the 0:14:04.520 --> 0:14:07.080 market is doing great, we'll get higher rates. If the 0:14:07.120 --> 0:14:09.240 market balls the fit, we're not going to get it. 0:14:09.320 --> 0:14:11.960 So the market isn't charged yet. If we're gonna have 0:14:12.040 --> 0:14:14.800 continued rallies in the stock market of bombs are going 0:14:14.840 --> 0:14:17.400 to behave will continue hiking rates. But if we see 0:14:17.520 --> 0:14:20.720 trouble because of anything U then you can blame the Chinese, 0:14:20.720 --> 0:14:24.200 you can blame the frenchise who or Trump whoever it 0:14:24.280 --> 0:14:28.440 might be. Um, then UM, then the DST expectations will 0:14:28.520 --> 0:14:31.200 come down. And so I know then exposession is going 0:14:31.280 --> 0:14:32.840 to come. I know the next PR market is going 0:14:32.880 --> 0:14:35.520 to come. The time is of course not known. But 0:14:35.680 --> 0:14:38.360 what we do know is that they said the reason 0:14:38.400 --> 0:14:42.320 they're there so so so extremely slow and raising rates 0:14:42.320 --> 0:14:45.480 it because they just don't want to unravel anything. And 0:14:45.560 --> 0:14:48.280 the problem is, of course in doing so, they're creating 0:14:48.320 --> 0:14:50.360 more bubbles, and at some point it's going to unravel. 0:14:50.360 --> 0:14:51.800 And we find that I tell you exactly when that 0:14:51.800 --> 0:14:54.400 will have happened, Well, we're gonna call you when it happens. 0:14:54.480 --> 0:14:58.720 Axel Merk, President, chief investment Officer Merk Investments, based in 0:14:59.000 --> 0:15:15.520 San Francisco, munis in focus with Joe my sec editor 0:15:15.640 --> 0:15:19.520 Bloomberg Brief Markets. You know, I gotta ask you, Joe. 0:15:19.600 --> 0:15:21.720 One of the things that we're always talking about is 0:15:21.760 --> 0:15:24.160 Puerto Rico. But I was noticing that there are a 0:15:24.160 --> 0:15:27.200 lot more problems in the MUNI market than just Puerto Rico. 0:15:27.320 --> 0:15:29.880 Can you give us sort of the bird's eye view 0:15:29.880 --> 0:15:33.520 of what's going on in Illinois and whether this demonstrates 0:15:33.560 --> 0:15:37.560 something larger than just finance's Illinois absolutely like, I'm not 0:15:37.640 --> 0:15:40.040 ever going to recover from this. No, Illinois could solve 0:15:40.040 --> 0:15:43.240 all its problems tomorrow if they had the political will 0:15:43.320 --> 0:15:45.200 to do it, which is exactly one of the one 0:15:45.240 --> 0:15:48.200 of the rating agencies brought up last week. They say, Wow, 0:15:48.320 --> 0:15:52.960 a state that goes three years without a budget, which 0:15:53.000 --> 0:15:57.120 is what we're heading into, Uh, is demonstrating lack of 0:15:57.200 --> 0:16:00.280 political will. But they could do it tomorrow. Or very 0:16:00.320 --> 0:16:05.000 wealthy state they're you know, the capital of the Midwest, right, 0:16:05.880 --> 0:16:08.520 everyone goes to Illinois. Everyone goes to Chicago. Just to 0:16:08.520 --> 0:16:12.280 put this into perspective, Uh, Joe mysa. Illinois revenue so 0:16:12.400 --> 0:16:16.560 a steep year over year drop last month, the commission said, Uh, 0:16:16.600 --> 0:16:19.680 this is I mean, according to a monthly report issued 0:16:19.720 --> 0:16:22.960 Tuesday by the PIE part partisan Commission on Government Forecasting 0:16:23.000 --> 0:16:27.280 and Accountability, UH significant downward adjustment to its estimates coming 0:16:27.320 --> 0:16:32.040 in March. Had overall base revenues that had to a shortfall, 0:16:32.080 --> 0:16:34.960 gross personal income tax everything is down, down, down, down down. 0:16:35.120 --> 0:16:37.560 So this is more than just simply coming up with 0:16:37.560 --> 0:16:40.600 a budget. I mean, they face pension issues, they pay, 0:16:40.480 --> 0:16:44.480 they face Uh, you know, revenue, tax revenue issues. It's 0:16:44.520 --> 0:16:46.920 really that easy. A lot of the a lot of 0:16:46.920 --> 0:16:52.600 that fall in revenue was because an income tax increased 0:16:53.240 --> 0:16:58.000 lapsed and uh you know that. So there's that um 0:16:58.040 --> 0:17:00.880 But of course there's also some people moving out of state. Yes, 0:17:00.920 --> 0:17:04.119 you're right there. Uh you know, Illinois is is a 0:17:04.160 --> 0:17:06.720 pin you brought up before, the sort of big picture. 0:17:07.080 --> 0:17:10.119 Illinois is sort of an outlier. It's the exception that 0:17:10.240 --> 0:17:14.560 proves the rule. Uh, the rule being, you know, municipalities 0:17:14.600 --> 0:17:17.680 take care of themselves. They're well run, they don't default 0:17:17.720 --> 0:17:20.200 on their debt. In Illinois, what you have is the 0:17:20.400 --> 0:17:23.399 lawmakers sort of driving the bus off the cliff. Remember 0:17:23.440 --> 0:17:26.879 the old headlines in the New York Times bus plunge kills. 0:17:27.080 --> 0:17:31.560 This is what it's like. Bus plunge in Illinois. Happy Friday. Uh, 0:17:31.600 --> 0:17:33.399 you know, I want to I want to ask though, 0:17:33.560 --> 0:17:36.960 about the bonds of Illinois. There was a great chart 0:17:37.080 --> 0:17:40.880 on the terminal this week by Martin Braun looking at 0:17:40.920 --> 0:17:45.320 how foreign money is flooding into municipal bonds in the 0:17:45.400 --> 0:17:48.320 United States, and I found this fascinating. I'm wondering, are 0:17:48.320 --> 0:17:51.720 they going to places like Illinois. Oh, of course they are, 0:17:51.880 --> 0:17:56.200 especially because uh, you know, by driving the bus off 0:17:56.240 --> 0:17:58.080 the cliff. For the last you know, two and a 0:17:58.119 --> 0:18:02.720 half three years, we've seen spreads over the benchmark municipal 0:18:03.480 --> 0:18:08.400 Uh it's almost children fifties sometimes of three basis points 0:18:08.400 --> 0:18:12.639 over what triple A municipalities borrow four. So you're getting 0:18:12.640 --> 0:18:15.360 a big yield premium. But of course for foreign investors 0:18:15.400 --> 0:18:20.080 who are getting sometimes zero percent, uh, US munies look terrific. 0:18:20.160 --> 0:18:22.480 They just have to kind of there is a learning 0:18:22.520 --> 0:18:26.160 curve to them. Just to put this into more into 0:18:26.200 --> 0:18:30.800 sharper focus. Uh. This was in January, right, the Attorney 0:18:30.880 --> 0:18:36.399 General of Illinois asked a judge to lift an order 0:18:36.480 --> 0:18:41.600 that required state workers to be paid during the state's 0:18:41.600 --> 0:18:44.639 record nineteen month as you said, the budget impass in 0:18:44.720 --> 0:18:47.480 hopes and so on, and they filed a motion in 0:18:47.560 --> 0:18:50.920 the Saint Clair County to dissolve the order that would 0:18:50.920 --> 0:18:54.080 have authorized the state controller to actually pay out the wages, 0:18:54.240 --> 0:18:57.560 so they don't have to pay out the wages. At 0:18:57.560 --> 0:19:04.320 what point does this just not come workable? Uh? Probably 0:19:04.400 --> 0:19:08.640 June one, Okay, that's when they really should have their 0:19:08.880 --> 0:19:12.320 next budget all set and ready to go. And you 0:19:12.359 --> 0:19:15.760 know what chances are they will because I really don't 0:19:15.840 --> 0:19:22.280 know municipalities except the ones that are in extremists that 0:19:23.240 --> 0:19:26.000 drive the bus off the cliff. So you think that 0:19:26.080 --> 0:19:29.840 somebody who goes into into Illinois bonds that are yielding 0:19:30.160 --> 0:19:33.080 three or four percentage points above where other where triple 0:19:33.119 --> 0:19:35.239 A meetings are yielding, that they're going to get their 0:19:35.240 --> 0:19:42.080 money back. That's money good. Sure, Illinois can't afford not 0:19:42.960 --> 0:19:46.960 to pay its debts, so they're not going. They're not going. 0:19:47.520 --> 0:19:49.800 You know, first of all, bankruptcy is in an option 0:19:49.840 --> 0:19:55.119 for states. But yeah, they're you know, Illinois going to 0:19:55.280 --> 0:19:58.879 be okay. Well, one area that might not be okay. 0:19:58.960 --> 0:20:01.600 We need to talk about putter Eco because this week 0:20:01.680 --> 0:20:05.119 there were some developments. The Fiscal Control Board rejected the 0:20:05.160 --> 0:20:09.239 governor's plan for financial plan going forward. Can you give 0:20:09.320 --> 0:20:11.639 us some color around this, what this means for bond 0:20:11.640 --> 0:20:13.399 holders and what this means in general for the for 0:20:13.440 --> 0:20:17.040 the island's financial health. Wow. We had a terrific piece 0:20:17.560 --> 0:20:22.560 on Bloomberg View today by Antonio Weiss, the ex Treasury 0:20:22.560 --> 0:20:26.520 official who helped out with the UH setting up the 0:20:26.560 --> 0:20:32.600 oversight board, and he said he advocates bankruptcy because he 0:20:32.640 --> 0:20:36.239 doesn't think the new governor is going far enough in 0:20:37.160 --> 0:20:42.240 adjusting the debt, so he is really advocating haircuts for all. 0:20:42.600 --> 0:20:44.840 You know, you still have some hedge funders out there 0:20:45.600 --> 0:20:50.520 who bought Puerto Rico geos or bought Puerto Rico sales 0:20:50.560 --> 0:20:53.640 tax geos are general obligation bonds. Go ahead, right Who 0:20:53.760 --> 0:20:57.320 who believe that it's geos at par I? Remember that 0:20:57.400 --> 0:21:00.240 was a rallying cry. Guess what, no g knows it 0:21:00.359 --> 0:21:02.560 par for you? It looks like hair cuts for all. 0:21:02.760 --> 0:21:06.800 And with this wife piece today, that was sort of 0:21:07.920 --> 0:21:10.760 really putting it on the table, telling the governor, who, 0:21:10.840 --> 0:21:15.479 by the way, is advocating cuts for everyone, but this 0:21:15.560 --> 0:21:18.120 wife's pieces, No, no, you're not going far enough. You've 0:21:18.200 --> 0:21:21.120 got to really reduced that no par for you. Will 0:21:21.200 --> 0:21:23.920 keep that in mind as we head towards lunchtime. Joe Mesa, 0:21:24.000 --> 0:21:26.960 thank you so much for joining us. As always, Joe Mesk, 0:21:27.080 --> 0:21:31.159 editor for Bloomberg Grief on municipal markets and expert on 0:21:31.280 --> 0:21:47.080 all things related to Muni's. Now we want to hear 0:21:47.080 --> 0:21:49.480 from Ian wish Art. He is a Bloomberg News reporter 0:21:49.600 --> 0:21:52.359 in Brussels, and he wrote a story today that I 0:21:52.440 --> 0:21:57.479 found fascinating about Theresa May who is the head of 0:21:58.320 --> 0:22:02.320 Britain and sort of the internal discussions that she's having 0:22:02.560 --> 0:22:06.119 with parliament in that country about what she may have 0:22:06.240 --> 0:22:10.400 to face as she engages in the Brexit process. Ian, 0:22:10.400 --> 0:22:12.000 thank you so much for joining us. Can you give 0:22:12.040 --> 0:22:14.800 us a little bit of color around some of the 0:22:14.920 --> 0:22:19.800 pessimistic paintbrush that the parliament parliamentary members are trying to 0:22:20.840 --> 0:22:22.639 give to Theresa May, to give her sort of a 0:22:22.680 --> 0:22:26.960 dose of reality. That's right, Hello from Brussels, where the 0:22:27.080 --> 0:22:30.800 summit has been going on between EU leaders and basically 0:22:31.359 --> 0:22:34.320 you're right. There's a lot of people in a lot 0:22:34.320 --> 0:22:37.120 of members of the Parliament of the UK who who 0:22:37.160 --> 0:22:39.479 aren't happy with the way that the Prime Minister Theresa 0:22:39.520 --> 0:22:42.880 May has gone about this. Some on one hand, want 0:22:42.960 --> 0:22:45.919 her to trigger what they call Article fifty, which is 0:22:46.000 --> 0:22:49.160 part of the e use Constitution which allows a country 0:22:49.200 --> 0:22:51.560 to leave the EU. They wanted to do that as 0:22:51.600 --> 0:22:54.640 soon as possible. Others want her to wait a lot 0:22:54.680 --> 0:22:58.120 longer to make sure she knows exactly what she wants, 0:22:58.160 --> 0:23:02.200 and she's trying to balance, really balance those two extremes 0:23:02.320 --> 0:23:06.000 of opinion um to please everybody at the same time 0:23:06.040 --> 0:23:09.000 in London. Before she comes back here to Brussels to 0:23:09.040 --> 0:23:12.760