WEBVTT - High Probability for U.S.-China Trade Tension in 2018, Miller Says 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:32.440 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. China. 0:00:32.560 --> 0:00:35.159 When we talk about China these days, it's usually with 0:00:35.280 --> 0:00:38.000 a bent of optimism. The economic data coming out of 0:00:38.040 --> 0:00:42.159 the nation has been positive. It has re upped Ji 0:00:42.360 --> 0:00:45.040 and Ping's tenure as the head of the country and 0:00:45.080 --> 0:00:48.400 seems to be showing increased unity here to sort of 0:00:48.400 --> 0:00:51.040 break all the myths that we might be depending on. 0:00:51.080 --> 0:00:54.400 As Leland Miller, president of the China Beije Book International, 0:00:54.440 --> 0:00:56.880 which is based in New York, and he joins me 0:00:57.000 --> 0:01:01.200 here from the rid Holes Wealth Management second Annual Evidence 0:01:01.320 --> 0:01:04.120 Based Investing Conference in New York. Leland, thank you so 0:01:04.200 --> 0:01:06.679 much for being with us. So what are we getting 0:01:06.680 --> 0:01:09.920 wrong about Chinese economy right now? Well, the thing that 0:01:09.959 --> 0:01:12.480 everyone has right right now is that China's economy is 0:01:12.920 --> 0:01:15.400 doing pretty well and is doing much better than a 0:01:15.440 --> 0:01:17.680 year ago. So a year and a half ago, we're 0:01:17.680 --> 0:01:20.039 in the middle of the China crisis. Everyone wondered whether 0:01:20.080 --> 0:01:23.520 this was it. UM the Chinese government intervened. They decided 0:01:23.560 --> 0:01:26.640 they needed a really good economy UH for the Party Congress, 0:01:26.760 --> 0:01:29.839 and they got it. The problem is people don't understand 0:01:29.840 --> 0:01:32.560 what they did in order to get them to this point. 0:01:32.840 --> 0:01:35.760 There's a belief that the Chinese government has been deleveraging. 0:01:35.920 --> 0:01:40.320 It's been the economy has been deleveraging. They've been rebalancing, UH, 0:01:40.360 --> 0:01:44.080 They've been cutting capacity on the supply side and commodities 0:01:44.080 --> 0:01:46.520 in order to get the economy on a firm or footing. 0:01:46.640 --> 0:01:49.120 None of these have actually been happening. So the belief 0:01:49.200 --> 0:01:51.400 that these things are are are You've had this great 0:01:51.440 --> 0:01:56.400 economic performance despite deleveraging, despite rebalancing, despite all these strong policies. 0:01:56.880 --> 0:01:58.440 It's a myth. Well, I want to I want to 0:01:58.480 --> 0:01:59.840 push back on you just I mean, if I look 0:01:59.840 --> 0:02:02.760 at of headlines today out of China, China is said 0:02:02.800 --> 0:02:06.160 to weigh crackdown on high rate micro lenders. China's scrutiny 0:02:06.200 --> 0:02:09.079 of H and A leads to record refinancing costs. There 0:02:09.120 --> 0:02:12.040 has been an increase in benchmark yields a lot, in 0:02:12.120 --> 0:02:15.360 large part due to local crackdowns on some of this leverage. 0:02:15.600 --> 0:02:18.520 How does this not count for you, Well, deleveraging means 0:02:18.520 --> 0:02:21.720 that different things to different people. Now, when we track corporates, 0:02:21.720 --> 0:02:24.280 what we're looking for is whether corporates are borrowing more 0:02:24.320 --> 0:02:26.960 or less, and whether they're paying more or less. And 0:02:27.160 --> 0:02:30.079 what we've seen over the past year is not deleveraging. 0:02:30.240 --> 0:02:32.919 So we have seen financial sector crackdowns, we've seen wealth 0:02:32.960 --> 0:02:35.640 management products been attacked, we've seen other things within the 0:02:35.639 --> 0:02:38.720 inner bank market's been been honed in on by regulators 0:02:38.760 --> 0:02:41.440 to try to keep control of what's happening between banks. 0:02:41.720 --> 0:02:43.959 But when it comes to whether corporates are borrowing more, 0:02:44.080 --> 0:02:46.480 we have seen an unmistakable trend over the past year. 0:02:46.760 --> 0:02:50.040 And to get this performance in seen they weren't borrowing less, 0:02:50.120 --> 0:02:53.240 and they weren't and they weren't paying more. There was 0:02:53.760 --> 0:02:57.160 significant borrowing, there was credit easing, and what we've seen 0:02:57.240 --> 0:03:00.280 is not just an absence of deleveraging but going the 0:03:00.320 --> 0:03:02.760 other way, particularly in the third quarter. So there's no 0:03:02.880 --> 0:03:05.320 deleveraging going on right now. And the third quarter was 0:03:05.360 --> 0:03:08.639 actually quite dramatic and how much the Chinese loosened the 0:03:08.639 --> 0:03:10.760 floodgates in order to get this performance going into the 0:03:10.760 --> 0:03:13.080 Party congress. So not all borrowing is the same. And 0:03:13.160 --> 0:03:16.040 one thing that you highlighted, UH in your recent uh 0:03:16.200 --> 0:03:19.200 op ed that you published with for Bloomberg View was 0:03:19.680 --> 0:03:22.840 that there is also a myth that China is moving 0:03:22.880 --> 0:03:26.760 more toward service sectors and away from industrial sectors. Can 0:03:26.800 --> 0:03:29.120 you talk about that? Sure? I mean, I don't know 0:03:29.160 --> 0:03:31.680 how many times I have to be confronted with this, 0:03:31.880 --> 0:03:34.400 these pie charts that the Chinese government puts out showing 0:03:34.840 --> 0:03:38.400 services going up and manufacturing going down, and thus we 0:03:38.440 --> 0:03:41.600 are rebalancing. But the reality is we tracked these things sectorally, 0:03:42.000 --> 0:03:44.960 and what we've seen over the course of and even 0:03:44.960 --> 0:03:48.120 the second half of STEEN is a reversal of rebalancing. 0:03:48.320 --> 0:03:50.960 So the way they got this performance was by juicing 0:03:51.000 --> 0:03:53.040 the old economy sectors. They said they were gonna be 0:03:53.080 --> 0:03:55.400 shutting down, that they were going to be cutting jobs 0:03:55.440 --> 0:03:58.600 in They didn't do that. So manufacturing going really well, 0:03:58.880 --> 0:04:03.400 property has been bloating, commodities has been exploding. UH, Services, 0:04:03.600 --> 0:04:06.120 retail they've been doing fine, but it's been fits and starts. 0:04:06.160 --> 0:04:09.280 So this is not a new economy lead, UH, a 0:04:10.200 --> 0:04:13.120 new economy sector led economy. This has not been something 0:04:13.160 --> 0:04:15.640 in which you are shifting to a new age for 0:04:15.720 --> 0:04:18.960 Chinese growth. They relied on their old growth measures UH 0:04:19.000 --> 0:04:21.440 in order to get their growth, and it's going to 0:04:21.520 --> 0:04:23.960 hurt them down the road. So Leland. As part of 0:04:23.960 --> 0:04:27.520 the Beije book, you quizzed over three thousand, three hundred 0:04:27.600 --> 0:04:31.200 firms across China, both about their particular companies as well 0:04:31.240 --> 0:04:33.839 as the larger sit of the economy. Do they have 0:04:33.920 --> 0:04:37.400 a more pessimistic view of the overall Chinese economy than 0:04:37.480 --> 0:04:42.240 say people internationally that are looking at the good growth numbers? Nodding, Well, 0:04:42.279 --> 0:04:44.560 this is going to be the most interesting quarter we've 0:04:44.560 --> 0:04:46.320 had in a while, Q one. Maybe even more interesting 0:04:46.360 --> 0:04:49.159 than that because for the past year, Chinese firms were 0:04:49.200 --> 0:04:51.560 a bulliant, and they were a bulliant because of something 0:04:51.600 --> 0:04:54.599 we call the Party Congress. Put they knew the government 0:04:54.640 --> 0:04:58.960 would never allow um instability writing up to the Party Congress, 0:04:59.000 --> 0:05:01.360 so even though they were dealing with a number of obstacles, 0:05:01.800 --> 0:05:04.839 they were very confident going forward that nothing bad would happen. 0:05:05.120 --> 0:05:07.120 Now the Party Congress has gone, you're gonna have at 0:05:07.160 --> 0:05:10.920 least a quarter in which Si Jinping's team is getting 0:05:10.960 --> 0:05:13.120 into place. They're not gonna allow instability there, and then 0:05:13.160 --> 0:05:16.320 it becomes very interesting because how is she going to 0:05:16.360 --> 0:05:19.800 meet these incredibly high expectations people have from He's gonna 0:05:19.839 --> 0:05:22.440 combat pollution, he's gonna combat corruption, he's going to keep 0:05:22.520 --> 0:05:25.159 jobs uh stable, he's gonna keep the growth rate stable, 0:05:25.160 --> 0:05:27.240 he's gonna be de leverage, he's gonna do rebounce. So 0:05:27.320 --> 0:05:29.000 he's supposed to be doing all these things at the 0:05:29.040 --> 0:05:32.160 same time as as as he's solidifying the economy. Uh. 0:05:32.480 --> 0:05:34.320 People are going to be in for a surprise here. 0:05:34.320 --> 0:05:36.200 It's not possible. So he's going to write it on 0:05:36.240 --> 0:05:38.520 a unicorn and everybody's going to feel happy. Do you 0:05:38.520 --> 0:05:40.560 think that, just real quick, do you think that the 0:05:40.640 --> 0:05:43.720 economy could be in for a spectacular downturn in the 0:05:43.800 --> 0:05:46.840 near future. I don't think spectacular downturn. I don't think 0:05:46.880 --> 0:05:50.640 near future. But we are very worried about not really 0:05:50.680 --> 0:05:53.880 from the Chinese domestic side, but from the from the 0:05:53.960 --> 0:05:56.479 US China trade tension side. So we think there's a 0:05:56.680 --> 0:06:00.240 very high probability that that the calm you've seen in 0:06:00.240 --> 0:06:04.080 the relationship for the past year goes away in ten 0:06:04.200 --> 0:06:08.080 and you start seeing some very problematic developments in the 0:06:08.120 --> 0:06:10.400 relationship and that will have a dramatic effect on not 0:06:10.480 --> 0:06:13.040 just the economy, but the currency capital outflows, and we 0:06:13.040 --> 0:06:14.640 could be seeing some of the headaches we've been seeing 0:06:14.640 --> 0:06:17.000 in past years. Leland Miller, fascinating to speak with you. 0:06:17.040 --> 0:06:19.560 Thank you so much for joining us. Leland Miller, President 0:06:19.640 --> 0:06:23.799 of China beige Book International based in New York. Really 0:06:23.960 --> 0:06:39.000 fascinating insight into China. This week has been all tech 0:06:39.120 --> 0:06:41.160 all the time. Not only have we gotten a lot 0:06:41.160 --> 0:06:45.359 of tech earnings, but tech executives have been on Capitol 0:06:45.480 --> 0:06:49.880 Hill talking with Congress explaining what went wrong heading into 0:06:49.640 --> 0:06:53.640 the presidential election that led to so much quote fake 0:06:53.839 --> 0:06:57.920 news and advertisements that were not properly disclosed. Here to 0:06:57.960 --> 0:07:00.720 discuss a Scott Galloway, Professor of Mark Getting at n 0:07:00.880 --> 0:07:03.720 y U Stern School of Business, also the author of 0:07:03.760 --> 0:07:08.320 a new book, The Four The Hidden DNA of Amazon, Apple, Facebook, 0:07:08.800 --> 0:07:12.400 and Google. Scott, you know you've talked about how Facebook 0:07:12.520 --> 0:07:16.000 is a young company that doesn't fully appreciate its role 0:07:16.520 --> 0:07:20.000 in media and perhaps the importance of being a media 0:07:20.200 --> 0:07:24.120 player in the US. And I'm just wondering, from your perspective, 0:07:24.280 --> 0:07:27.200 do you what do you think they could have done well. 0:07:27.200 --> 0:07:28.880 The first thing would be to acknowledge they are a 0:07:28.920 --> 0:07:31.560 media firm. They still haven't. They still haven't acknowledged, but 0:07:31.680 --> 0:07:35.400 do you think they are well? The definit into pure definition, 0:07:35.440 --> 0:07:37.720 according to Marion Webster, as a medium that reaches and 0:07:37.760 --> 0:07:40.920 influences people as media. So that's the definition. And then 0:07:40.920 --> 0:07:43.520 on a business level, you spent a billion dollars on 0:07:43.560 --> 0:07:48.080 original content, pay sports leagues to produce original content, and 0:07:48.120 --> 0:07:51.400 then run advertising against that content. You boom your a 0:07:51.440 --> 0:07:56.040 media company. So you know, crises, the crisis itself doesn't 0:07:56.080 --> 0:07:58.840 hurt a firm, it's the response to the crisis. And 0:07:58.880 --> 0:08:02.080 when a company refuses to acknowledge that there are media 0:08:02.120 --> 0:08:04.240 firms for fear that they might trade at a lower 0:08:04.360 --> 0:08:08.960 multiple or that they might expect some sort of expectation 0:08:09.000 --> 0:08:11.360 of responsibility that we have on media firms as being 0:08:11.360 --> 0:08:13.000 part of the fourth the state, I think it just 0:08:13.040 --> 0:08:15.680 makes us angrier and angrier. So I would argue this 0:08:15.760 --> 0:08:17.560 is a kind of a fast moving train wreck in 0:08:17.600 --> 0:08:21.200 a textbook case study and how not to handle a crisis. 0:08:21.280 --> 0:08:24.040 But the first thing is, you know, I am Facebook 0:08:24.040 --> 0:08:26.320 and I'm a media company, and they have refused to 0:08:26.360 --> 0:08:28.880 do that. It's absolutely ridiculous. How would that change anything 0:08:28.920 --> 0:08:32.120 for them? Well, be I don't think it changed anything 0:08:32.440 --> 0:08:34.080 for them. It would change things for us, And that 0:08:34.200 --> 0:08:38.480 is we could we could legitimately expect them to show 0:08:38.480 --> 0:08:41.160 the same type of veracity or some attempt to show 0:08:41.760 --> 0:08:45.400 some sort of supervision around this content. Bloomberg is not 0:08:45.400 --> 0:08:48.080 going to be weaponized by Russia. I'm fairly certain of that. 0:08:48.440 --> 0:08:51.320 How do you really know? But I'm willing. I'm willing 0:08:51.360 --> 0:08:52.800 to go a lot of money that because I think 0:08:52.840 --> 0:08:55.520 you take your responsibility and your influence and your role 0:08:55.559 --> 0:08:58.040 in the fourth the state very seriously, go on, go on, nokidding, 0:08:58.679 --> 0:09:00.680 you know, I just it's up a little bit about 0:09:00.679 --> 0:09:03.280 what you mentioned with Facebook and the idea that they 0:09:03.280 --> 0:09:05.920 could be potentially worried that their multiples would go down. 0:09:06.440 --> 0:09:11.080 Why does being a media company automatically sort of suggest 0:09:11.160 --> 0:09:12.720 that you're going to make less money, even though that's 0:09:12.760 --> 0:09:16.080 how we all view it. Yeah, So my guesses you 0:09:16.080 --> 0:09:17.800 guys are going to forget more about that than I know. 0:09:17.960 --> 0:09:21.920 Just crudely speaking, certain sectors traded higher multiples. People like 0:09:22.120 --> 0:09:25.560 technology stocks, they like software companies. So you want to 0:09:25.559 --> 0:09:27.080 be a technology firm, You don't want to be a 0:09:27.120 --> 0:09:31.439 media company puts you in a different, multiple category, So 0:09:31.520 --> 0:09:34.880 I guess that going forward, my first question is a 0:09:34.880 --> 0:09:37.240 lot of people are looking at Facebook more as a 0:09:37.280 --> 0:09:40.560 media company. Do you expect, uh that people's valuation of 0:09:40.600 --> 0:09:42.960 the company will go down as well even though it 0:09:43.080 --> 0:09:46.959 is reporting good earnings. I don't think so. My sense 0:09:47.080 --> 0:09:49.720 is that we're sort of beyond trying to figure out 0:09:49.760 --> 0:09:52.040 what it is. I think that them identifying themselves as 0:09:52.040 --> 0:09:55.760 a media company is more around setting the expectations of 0:09:55.760 --> 0:09:58.720 what of what they should be held responsible for or 0:09:58.840 --> 0:10:04.160 not use. Me. Having said that, what where you might 0:10:04.160 --> 0:10:06.040 see a decline in the stock if we're writing for 0:10:06.040 --> 0:10:07.839 consumers to step in here, it's not going to happen. 0:10:08.280 --> 0:10:10.440 These companies are going to continue to, in my opinion, 0:10:10.480 --> 0:10:13.679 grow their earnings and have incredibly robust businesses because consumers. 0:10:14.040 --> 0:10:16.839 We'll talk a big game about privacy and weaponization and 0:10:16.880 --> 0:10:20.079 the supply chain ethics of a dress out of somebody 0:10:20.080 --> 0:10:22.199 coming out of Bangladesh, and then they want to they 0:10:22.240 --> 0:10:24.480 want that little black dress delivered to them within forty 0:10:24.559 --> 0:10:28.000 five minutes. So consumers talk of big game about the stuff, 0:10:28.000 --> 0:10:31.200 but they don't vote with their pocketbooks generally speaking. So 0:10:31.240 --> 0:10:32.560 you're seeing this guy, I think you're going to see 0:10:32.559 --> 0:10:35.080 these companies perform as well or better than they ever have. 0:10:35.240 --> 0:10:37.920 What you might see is the risk of regulation might 0:10:38.000 --> 0:10:40.840 result in a lower multiple placed on those profits. But 0:10:40.840 --> 0:10:42.360 I don't see the profits going down. You know, I 0:10:42.360 --> 0:10:44.800 want to push back because Facebook is actually trying to 0:10:45.240 --> 0:10:47.319 vet some of their content more and they have been 0:10:47.320 --> 0:10:50.480 employing more people to do this. It's messy, it's imprecise. 0:10:50.559 --> 0:10:53.240 At what point is this, you know, going against the 0:10:53.280 --> 0:10:56.120 First Amendment and violating people's right to say what they 0:10:56.160 --> 0:10:59.199 want to say, because this ultimately wasn't just about paid advertising, 0:10:59.200 --> 0:11:02.120 It was about what people were posting on their personal sites. 0:11:02.440 --> 0:11:05.280 Well complicated and expensive. That sounds like a decent description 0:11:05.280 --> 0:11:08.640 of democracy. And they used the defense and quite frankly, 0:11:08.679 --> 0:11:10.760 I think you've been co opted into their narrative that 0:11:11.360 --> 0:11:13.240 that they can shouldn't be an arbiter of truth. Well, 0:11:13.240 --> 0:11:15.480 they're sure as hell can try. You try every day 0:11:15.480 --> 0:11:17.840 to be an arbiter of truth. You try every day 0:11:17.960 --> 0:11:21.200 to employ this fantastic and expensive thing called human discretion 0:11:21.480 --> 0:11:23.679 around your advertisers and your content. Why shouldn't they be 0:11:23.720 --> 0:11:26.559 held at the same standards as you do? You have 0:11:26.679 --> 0:11:33.000 evidence that they absolutely do not have discretion over their advertisers. Yeah, 0:11:33.040 --> 0:11:35.480 an intelligence unit of the Russian government paid in rubles 0:11:35.520 --> 0:11:38.319 to so caught chaos in our nation. I think that's 0:11:38.320 --> 0:11:40.200 pretty decent proved. But a lot of it wasn't that 0:11:40.280 --> 0:11:41.640 much money, right, I mean it could have just been 0:11:41.720 --> 0:11:44.559 one employee that was not author I mean, how far 0:11:44.640 --> 0:11:48.360 up does this go? Well? Okay, when when the notion 0:11:48.480 --> 0:11:51.880 was first proposed, they said it was crazy. Then it 0:11:52.040 --> 0:11:55.120 ended up wait, a few million impressions, and now we've 0:11:55.200 --> 0:11:57.080 learned that it's a hundred and twenty seven million people 0:11:57.120 --> 0:11:59.079 sell you that? But how much would they have to 0:11:59.120 --> 0:12:01.320 pay for that? I don't know. I don't know what 0:12:01.360 --> 0:12:03.280 the business model is around that. You know, because there 0:12:03.280 --> 0:12:04.319 are a lot of people. There are a lot of 0:12:04.360 --> 0:12:07.400 eyeballs on Facebook just generally, um, and advertisements could be 0:12:07.440 --> 0:12:10.520 passed around you. Just what I'm trying to get to is, 0:12:11.040 --> 0:12:13.920 you know, yes, big decisions are you know, a big 0:12:14.280 --> 0:12:18.400 like conglomerate. It's like CBS for example, it matters whether 0:12:18.440 --> 0:12:20.400 the spots for the Super Bowl or whether it's for 0:12:20.440 --> 0:12:25.160 a rerun of Law and Order. Right, So the data 0:12:25.200 --> 0:12:28.320 I'm focused on is that a hundred seven million people 0:12:28.360 --> 0:12:30.560 saw these apps, so that's quite a bit. And in 0:12:30.600 --> 0:12:34.040 my opinion, I'm fairly certain that the New York Times 0:12:34.040 --> 0:12:36.839 and CBS in Bloomberg are going to be able to 0:12:36.880 --> 0:12:40.400 protect our elections from subterfuge. The New York Times will 0:12:40.440 --> 0:12:42.720 do with a hundred million of free cash flow. How 0:12:42.760 --> 0:12:46.600 come Facebook camp with twelve billion? There you go, Scott Galloway, 0:12:46.600 --> 0:12:48.480 thank you so much for joining U. Scott Galloway, Professor 0:12:48.559 --> 0:12:51.600 of Marketing at n y U Stern School of Business, 0:12:51.679 --> 0:12:53.960 also the author of a new book, The Four The 0:12:54.000 --> 0:12:58.040 Hidden DNA of Amazon, Apple, Facebook, and Google, which goes biblical. 0:12:58.320 --> 0:13:13.400 This is Bloomberg, and as we've been saying today, we 0:13:13.400 --> 0:13:17.320 are broadcasting live from the rid Holts Wealth Management second 0:13:17.440 --> 0:13:21.920 annual Evidence Based Investing Conference in New York City. And 0:13:22.000 --> 0:13:24.240 who do I have with me none other than Barry 0:13:24.320 --> 0:13:27.160 rid Holts himself. He is the founder of it Holds 0:13:27.200 --> 0:13:30.400 Wealth Management and a Bloomberg View columnist. And he also 0:13:30.520 --> 0:13:34.839 has a fantastic podcast, Masters in Finance. I highly recommended it. 0:13:34.840 --> 0:13:38.840 It's airs on Believe ten am and six pm on Saturday, 0:13:39.120 --> 0:13:42.040 repeats all weekend Masters in Business. You can find it 0:13:42.200 --> 0:13:45.720 wherever finer podcasts are sold all right, So, Barry, evidence 0:13:45.760 --> 0:13:50.559 based investing, I mean, isn't all investing based on evidence? 0:13:50.960 --> 0:13:53.400 You would imagine that, wouldn't you. When when we were 0:13:54.040 --> 0:13:58.200 slowing around with the idea of doing this, every person 0:13:58.320 --> 0:14:01.400 we presented the idea too said the exact same thing. 0:14:01.920 --> 0:14:05.680 Isn't all investing based on evidence? And as it turns out, 0:14:06.000 --> 0:14:08.720 not so much. Well, but what do you mean by that? Well, 0:14:09.080 --> 0:14:12.080 there's lots of myths, there's lots of theories, there's lots 0:14:12.080 --> 0:14:15.880 of behaviors, and behavioral economics is a big part of 0:14:15.920 --> 0:14:20.480 evidence based investing. So let's assume you want to put 0:14:20.520 --> 0:14:24.080 a portfolio together. How are you going to construct that portfolio? 0:14:24.320 --> 0:14:27.400 One of the first questions is should you use an index, 0:14:27.480 --> 0:14:30.520 should you use smart beta? Should you pick stocks yourself? 0:14:31.200 --> 0:14:33.160 And when you look at the data, one of the 0:14:33.200 --> 0:14:37.520 things you find is stock picking is really really hard. 0:14:38.160 --> 0:14:41.520 Picking a manager who can pick stocks is even harder, 0:14:42.000 --> 0:14:45.680 and then picking a manager who could pick stocks consistently 0:14:45.840 --> 0:14:49.800 over time net of costs and fees is almost impossible. 0:14:49.840 --> 0:14:53.680 It's absolutely a needle in a haystack. So that sort 0:14:53.720 --> 0:14:57.120 of data that's out there forces you to say, what 0:14:57.200 --> 0:14:59.640 am I doing, does one does what I'm doing makes 0:14:59.640 --> 0:15:04.000 sense them a probabilistic standpoint, where am I really throwing 0:15:04.000 --> 0:15:07.280 a hall marry here with a very low chance of success? 0:15:07.560 --> 0:15:10.120 What does the evidence suggest? So if what you're saying 0:15:10.400 --> 0:15:14.320 is the case, then why shouldn't everybody just go to indexing? Well, 0:15:14.440 --> 0:15:18.160 we've seen a lot of people move in general towards indexing. 0:15:18.560 --> 0:15:22.280 It's not a coincidence that um Tim Buckley, the incoming 0:15:22.320 --> 0:15:24.680 CEO of Van Guard is gonna be speaking here next 0:15:24.800 --> 0:15:31.560 and Vanguard has swollen up from a trillion dollars around 0:15:31.560 --> 0:15:34.760 the time of the financial crisis, they're now over four 0:15:34.800 --> 0:15:39.280 point four trillion dollars. So we look at indexing as 0:15:39.360 --> 0:15:42.640 a core part of people's portfolio. It doesn't have to 0:15:42.640 --> 0:15:46.800 be straight up market cap weighted indexing. There's arguments for 0:15:46.880 --> 0:15:49.640 things like factor models. We just heard Cliff Assness of 0:15:49.680 --> 0:15:54.120 a qu R describe ways to put together portfolios using 0:15:54.200 --> 0:15:59.240 quantitative data that shows we know things that like valuation. 0:15:59.600 --> 0:16:02.600 Lower cost stocks tend to do better over time than 0:16:02.680 --> 0:16:06.160 more expensive stocks. We looked at we discussed the five 0:16:06.240 --> 0:16:09.080 factor of Fama French model. If we want to really 0:16:09.080 --> 0:16:10.960 get into the weeds, we could look at things like 0:16:11.000 --> 0:16:13.600 what does that mean? So you just I think, spoke French. 0:16:13.800 --> 0:16:17.040 So Eugene Fama just won the Nobel Prize last year. 0:16:17.120 --> 0:16:21.280 He's a professor at at University of Chicago. His colleague 0:16:21.400 --> 0:16:25.680 Can French as a professor at the Dartmouth Um College. 0:16:25.800 --> 0:16:32.000 And they've crunched numbers for decades looking at what characteristics 0:16:32.120 --> 0:16:36.480 of companies do better over time and just some of 0:16:36.520 --> 0:16:39.680 the factors that we know. We know higher quality stocks 0:16:40.320 --> 0:16:43.680 defined by low levels of dead and there's a whole 0:16:43.760 --> 0:16:46.680 run of things that defines what's high quality versus low quality. 0:16:47.080 --> 0:16:49.520 Not surprisingly, they tend to do better over time then 0:16:49.680 --> 0:16:54.360 low quality stocks. The some of the surprising anomalies they've 0:16:54.400 --> 0:16:59.359 discovered has been things like small cap small cap tends 0:16:59.360 --> 0:17:01.520 over time I am and not one or two or 0:17:01.520 --> 0:17:05.440 three years, but decades that tends to do better than 0:17:05.640 --> 0:17:09.960 large cap. Some people actually Cliff talked about is the 0:17:10.040 --> 0:17:15.040 small cap premium? Is it a liquidity premium? You know 0:17:15.119 --> 0:17:18.880 big stocks trade very easily. Uh, Is it a risk premium? 0:17:18.880 --> 0:17:22.480 Are you taking on more risk? We've also another factor 0:17:22.560 --> 0:17:27.399 that actually Cliff Fastness created was momentum. Is momentum a 0:17:27.440 --> 0:17:30.880 factor that helps people invest and and it turns out 0:17:30.920 --> 0:17:34.040 that all these things contribute to better performance. So how 0:17:34.080 --> 0:17:37.000 do these quantitative strategies deal with something like the tax 0:17:37.040 --> 0:17:40.040 bell that we're just hearing about. Moody's just put out 0:17:40.080 --> 0:17:42.320 a in a note that said that the credit implications 0:17:42.359 --> 0:17:47.520 for investment grade companies was positive, whereas for speculative grade companies, UH, 0:17:47.640 --> 0:17:50.320 not so much because they couldn't deduct the interest as 0:17:50.400 --> 0:17:53.240 much going forward, and that would outweigh some of the benefits. 0:17:53.480 --> 0:17:56.680 How would quantitative investing kind of address something like that? 0:17:56.880 --> 0:17:59.720 So quality, as an example, if you're looking at a 0:17:59.760 --> 0:18:03.520 qual ulity screen for companies that have less debt, this 0:18:03.600 --> 0:18:07.080 isn't going to affect them. On the other hand, lower 0:18:07.160 --> 0:18:10.920 quality companies, UH might be more negatively impacted by these 0:18:11.000 --> 0:18:14.359 changes and deductibility. So we still, by the way, we 0:18:14.400 --> 0:18:17.360 still don't know what the final tax bill looks like. 0:18:17.440 --> 0:18:19.000 This is what was introduced. What do you think is 0:18:19.000 --> 0:18:20.560 gonna happen with it? I think there's gonna be a 0:18:20.600 --> 0:18:23.920 lot of horse trading where where whoever created the bill 0:18:24.160 --> 0:18:28.120 created a bunch of anchor points corporate tax rates where 0:18:28.160 --> 0:18:30.919 they're starting. That suggests to me, all right, if we 0:18:30.960 --> 0:18:34.240 have to go to will go to percent repatriation rate, 0:18:34.320 --> 0:18:37.000 which I which seems actually quite high to me. Well, 0:18:37.200 --> 0:18:40.399 I had originally suggested nobody listens to me about this 0:18:40.440 --> 0:18:45.399 first step, but I suggested it graduated. The first billion 0:18:45.520 --> 0:18:47.879 is five percent, and the next two billion is this. 0:18:48.359 --> 0:18:51.840 But listen, if you want to bring that, that's the carrot, 0:18:52.160 --> 0:18:54.400 isn't Is there a stick also on the tax bill? 0:18:54.840 --> 0:18:56.960 It's and if you don't bring it in, you're gonna 0:18:56.960 --> 0:18:59.760 get wack. I haven't heard that, and that's that they 0:18:59.760 --> 0:19:01.600 don't otherwise, I mean, they already bringing it back through 0:19:01.600 --> 0:19:03.960 the corporate bond market. I'm not sure it would incentivize 0:19:03.960 --> 0:19:06.040 them to do this. You know, if you want to 0:19:06.080 --> 0:19:08.960 move some cash from overseas and bring it home to 0:19:09.000 --> 0:19:11.600 do so. It seems weird that Apple, which has more 0:19:11.760 --> 0:19:16.159 cash on its books than you know, than India has GDP. 0:19:17.920 --> 0:19:21.320 Why are they borrowing money to buy back stocks. It's well, 0:19:21.400 --> 0:19:23.320 it's that's how they're bringing the cash back because they're 0:19:23.320 --> 0:19:25.960 paying less of an interest rate. Very Unfortunately, we have 0:19:26.040 --> 0:19:28.080 to leave it there, but we'll have to continue this conversation. 0:19:28.160 --> 0:19:30.359 Barry rid Holds, founder of rit Holt's Wealth Management and 0:19:30.359 --> 0:19:34.280 Bloomberg columnists, also he is running this conference today the 0:19:34.359 --> 0:19:38.600 rit Holt's Wealth Management second Annual Evidence Based Investing. This 0:19:38.800 --> 0:19:53.040 is Bloomberg. Thank you so much, Greg. So, we are 0:19:53.080 --> 0:19:56.960 awaiting Republican leaders to unveil their tax reform bill, which 0:19:57.040 --> 0:19:59.440 is expected any minute, and care to tell us a 0:19:59.440 --> 0:20:01.760 little bit about what we're expecting to be in that 0:20:01.840 --> 0:20:06.040 tax legislation is Laura Davison, Bloomberg Tax Reporters. So, Laura, 0:20:06.080 --> 0:20:08.280 I do know that they released some talking points earlier 0:20:08.359 --> 0:20:12.240 today from those and other insights, What are we gleaning 0:20:12.359 --> 0:20:14.879 about what's in this bill? Well, we're cleaning that this 0:20:15.200 --> 0:20:17.680 six too much of what House Republicans have talked about. 0:20:17.680 --> 0:20:19.480 You know, the big tax cuts down to a corporate 0:20:19.560 --> 0:20:23.080 rate that's expected to be permanent, um, you know, passed 0:20:23.119 --> 0:20:26.560 through the small businesses are getting a rate, so that 0:20:26.600 --> 0:20:29.280 does carve out, uh, you know some what they're calling 0:20:29.320 --> 0:20:32.880 professional services firms that could be investment managers or doctors, 0:20:32.920 --> 0:20:35.320 lawyer's accountants, that sort of thing. On the individual side, 0:20:35.760 --> 0:20:38.520 a new child tax creditors, three dollars doubling of the 0:20:38.560 --> 0:20:41.639 standard deduction. H A lot of those headlines things that 0:20:41.640 --> 0:20:43.920 they were going for are in there. The question now 0:20:43.960 --> 0:20:46.640 and what what we're really passing through is what sort 0:20:46.640 --> 0:20:49.399 of deductions and credits are taken away. You know, on 0:20:49.440 --> 0:20:52.359 the international side, there's a lot of concerns from some 0:20:52.440 --> 0:20:55.440 multinational corporations about how they're going to be taxing um 0:20:55.520 --> 0:20:57.760 profits that you're bringing back on shore profits you might 0:20:57.760 --> 0:21:00.520 be sending overseas. Uh. And this is always really tricky 0:21:00.520 --> 0:21:03.440 and gets really drawn into the details and could could 0:21:03.480 --> 0:21:06.239 cause problems for the bill moving forward. Well, one thing 0:21:06.280 --> 0:21:08.719 that we were just talking with Carla Kadana about was 0:21:08.840 --> 0:21:12.880 the mortgage deduction. We found out that, uh that they 0:21:12.920 --> 0:21:16.640 will keep the deduction for loans that are under five 0:21:16.720 --> 0:21:19.960 hundred thousand dollars, but for over that, uh, those will 0:21:20.000 --> 0:21:23.040 be removed. Is that accurate? Yes, that's correct, that's there. 0:21:23.040 --> 0:21:24.960 So they're basically moving that it used to be a 0:21:25.000 --> 0:21:27.480 million dollars down to five hundred thousands, so basically cutting 0:21:27.480 --> 0:21:29.840 that in half. And the reason is is because it 0:21:29.920 --> 0:21:31.439 raises a lot of money that they can use to 0:21:31.480 --> 0:21:34.520 put towards tax cuts. Mortgage interests is a very popular one. 0:21:34.560 --> 0:21:37.600 It's often called like the sacred cows of of the 0:21:37.640 --> 0:21:39.480 tax code. But it looks like they did a little 0:21:39.480 --> 0:21:41.399