WEBVTT - ICYMI: The Risks to US Exceptionalism

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>You're listening to Bloomberg Business Week with Carol Masser and

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<v Speaker 2>Tim Stenoveek on Bloomberg Radio.

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<v Speaker 3>Well, the dollar fell, long dated bond yields rose, and

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<v Speaker 3>stocks wavered as President Trump's push to remove FED Governor

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<v Speaker 3>Lisa Cook fueld, concerns about central make independence and inflation risks.

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<v Speaker 3>It's not just that, though, it's also in Vidia Tomorrow.

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<v Speaker 3>We've been saying there's a lot riding on that report.

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<v Speaker 3>It's the world's biggest stock. It makes up three percent

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<v Speaker 3>of the global market cap of all public companies. Will

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<v Speaker 3>bring those numbers to you as soon as they cross tomorrow.

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<v Speaker 3>This is the backdrop for our conversation with Ben Inker.

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<v Speaker 3>He's the co head of Asset Allocation Portfolio Manager at GMO.

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<v Speaker 3>It's the Boston based asset manager co founded by Jammy Grantham,

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<v Speaker 3>with seventy billion dollars in assets under management. Ben looks

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<v Speaker 3>closely at megacap concentration, so yeah, in Nvidia certainly on

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<v Speaker 3>his radar. He joins us from Boston. Ben, we're going

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<v Speaker 3>to talk about the mag seven in the US and

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<v Speaker 3>the context of the rest of the world. But First,

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<v Speaker 3>the threat of FED independence. What we were just talking

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<v Speaker 3>about with Endo Current who covers the global economy, the

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<v Speaker 3>President saying he will fire FED Governor Lisa Cook if

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<v Speaker 3>he is successful. Does it change your view of US markets?

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<v Speaker 2>It probably doesn't change my view all that much because

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<v Speaker 2>we're pretty skeptical of at least the US stock market

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<v Speaker 2>these days. It would have It would create some more

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<v Speaker 2>concerns for US about US bonds and create more concern

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<v Speaker 2>about the US dollar because I think if the President

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<v Speaker 2>is successful in bullying the Federal Reserve into lowering interest

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<v Speaker 2>rates more than the economy warrants, the two places that

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<v Speaker 2>that comes out are long term bonds and the dollar.

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<v Speaker 2>And the dollar, by virtue of being quite over value today,

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<v Speaker 2>could fall really quite hard.

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<v Speaker 3>Do the president's attacks on the Federal Reserve confirm your skepticism?

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<v Speaker 3>Does it essentially give you evidence that saying, hey, we

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<v Speaker 3>are right in our call to be skeptical of US

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<v Speaker 3>equities right now.

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<v Speaker 2>Well, we do think it is part of one of

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<v Speaker 2>the key problems for US companies right now. The US

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<v Speaker 2>stock market is trading at a big premium to the

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<v Speaker 2>rest of the world. That is an issue. The US

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<v Speaker 2>dollar is very overvalued. That is an issue. But the

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<v Speaker 2>other thing we really worry about for the US is

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<v Speaker 2>the US is facing a series of supply shocks that

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<v Speaker 2>the rest of the world is not. So we've got

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<v Speaker 2>the tariffs, which increase inflation and decrease economic activity. We've

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<v Speaker 2>got the move against immigrants, which tends to do the same,

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<v Speaker 2>and then we've got this uncertainty problem where we have

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<v Speaker 2>an administration that makes its decisions apparently by tweet, and

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<v Speaker 2>where you really don't know week to week what is

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<v Speaker 2>going to happen, and that makes it very difficult for

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<v Speaker 2>USA businesses to make good long term investment decisions. This

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<v Speaker 2>is part and parcel of that problem. So while I

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<v Speaker 2>certainly hope the administration does not succeed in pushing a

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<v Speaker 2>Thud governor off of the board on the basis of

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<v Speaker 2>a criminal referral, because you can have a criminal referral

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<v Speaker 2>on just about anyone for just about no reason at all,

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<v Speaker 2>So I hope it doesn't happen. If it does, it's

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<v Speaker 2>another sign of policy uncertainty in a country that is

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<v Speaker 2>suddenly a wash in it.

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<v Speaker 1>And we know that you are a skeptic of US

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<v Speaker 1>equities because of their high valuations, but the Magnificent Six

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<v Speaker 1>dominate US equity performance. What breaks their momentum and what

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<v Speaker 1>will you replace them with if they falter?

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<v Speaker 2>Yeah, I mean to be clear, we are quite skeptical

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<v Speaker 2>of the fact that the average US company trades at

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<v Speaker 2>a big premium to the average company in the rest

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<v Speaker 2>of the world. The Magnificent Six, which is the Magnificent

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<v Speaker 2>seven x Tesla, because Tesla is not only a very

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<v Speaker 2>different company, it's also a much much more expensive company

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<v Speaker 2>than the rest. The Magnificent Six have been extraordinary in

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<v Speaker 2>their ability to continue to grow at a scale where

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<v Speaker 2>other companies in the past have really hit limits to growth.

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<v Speaker 2>Now they're trading around thirty times earnings on average. That

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<v Speaker 2>Lord knows, that's not cheap. If they can maintain their

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<v Speaker 2>past levels of growth, it's still a perfectly reasonable valuation

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<v Speaker 2>for them. The question is can they maintain it. We're

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<v Speaker 2>not honestly sure. One of the things that is very

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<v Speaker 2>different from the past is they have hugely ramped up

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<v Speaker 2>their aggregate capex. These were always very capital life businesses,

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<v Speaker 2>had wonderful free cash flow, and today they are investing

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<v Speaker 2>in aggregate hundreds of billions of dollars in property, plant,

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<v Speaker 2>and equipment, and it's a huge bet that they are

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<v Speaker 2>going to be able to make a lot of money

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<v Speaker 2>out of AI. Will that come true, I don't know

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<v Speaker 2>If it does not. It is one of the most

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<v Speaker 2>you know, economically meaningful bets we've ever seen from the

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<v Speaker 2>stock market and could be a real problem for them.

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<v Speaker 1>Why do you think US premium has persisted despite stronger

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<v Speaker 1>growth overseas?

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<v Speaker 2>You know, it's it's funny. I think some of it

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<v Speaker 2>is the reflected the reflected glow of the MAG six.

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<v Speaker 2>Because of the MAG six, the aggregate S and P

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<v Speaker 2>has done better fundamentally right now, That fundamental out performance

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<v Speaker 2>is a piece of it. The dollar has been a

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<v Speaker 2>big source of the outperformance because the dollar has appreciated

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<v Speaker 2>by a lot over the last decade versus every other

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<v Speaker 2>currency on the planet. And then the valuation in the

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<v Speaker 2>US over the last decade has really expanded relative to

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<v Speaker 2>the rest of the world. But there is this base

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<v Speaker 2>of sort of fundamental outperformance, all of which is owed

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<v Speaker 2>to the MAG six. So the Magi have been amazing

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<v Speaker 2>over the last decade. They're expensive, but they're amazing. The

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<v Speaker 2>rest of the US has not been amazing, but has

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<v Speaker 2>still captured some of the glow because they've been more

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<v Speaker 2>associated with the MAG six than companies outside the US,

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<v Speaker 2>and that I just don't see how it's sustainable because

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<v Speaker 2>those companies are going to have to do a lot

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<v Speaker 2>better than they have in the past to justify their valuations.

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<v Speaker 3>We're speaking with a Ben Ankor, co head of Acid

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<v Speaker 3>Allocation portfolio manager at GMO. Of course, the co founded

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<v Speaker 3>firm by Jammy Grantham seventy billion dollars in assets under management,

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<v Speaker 3>been on the valuation side when it comes to the

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<v Speaker 3>MAG six. I know you've talked about US stocks being

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<v Speaker 3>more highly valued than international stocks, and if we look

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<v Speaker 3>at stocks in the US, obviously that's based on where

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<v Speaker 3>investors think they're going to go. You said it could

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<v Speaker 3>be justified if they continue their growth rate as the

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<v Speaker 3>way they've been growing in recent years. What would you say, though,

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<v Speaker 3>to someone who says, well, the US is a unique

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<v Speaker 3>environment from a regulatory perspective, from an economic power perspective,

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<v Speaker 3>from an international relations perspective, and there is this premium

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<v Speaker 3>in the US because well, we have a regulatory environment

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<v Speaker 3>that allows for that. That essentially says, okay, well that

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<v Speaker 3>is justified that the rest of the world doesn't have,

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<v Speaker 3>and indeed, we haven't seen outperformance of the rest of

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<v Speaker 3>the world save for the first few months of this year.

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<v Speaker 3>We'll see what the future brings. But isn't the doesn't

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<v Speaker 3>the US deserve to have a premium on it based

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<v Speaker 3>on those factors.

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<v Speaker 2>Look, if the US deserves to have a premium, it

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<v Speaker 2>would be on the basis of having a higher return

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<v Speaker 2>on capital than we have in the rest of the world.

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<v Speaker 2>There are plenty of countries where there are not a

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<v Speaker 2>lot of regulations over what companies do. Most of the

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<v Speaker 2>emerging world doesn't have that much any regulations. The return

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<v Speaker 2>on capital isn't necessarily that brilliant. They aren't wonderful places

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<v Speaker 2>to operate. The US has been a good place for

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<v Speaker 2>businesses to operate. One we are a very big market. Two,

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<v Speaker 2>we have had a regulatory system that is very rules based,

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<v Speaker 2>very kind of slow to change, And it has been

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<v Speaker 2>a good base to try to sell to the rest

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<v Speaker 2>of the world. All of that is under threat right now.

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<v Speaker 2>The US is not such a brilliant place to be

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<v Speaker 2>as a base for the rest of the world because

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<v Speaker 2>things like steel and aluminum costs a lot more in

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<v Speaker 2>the US than they do anywhere else on earth, because

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<v Speaker 2>we have the big the big tariffs on them. From

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<v Speaker 2>a regulatory perspective, while the biggest you know, the biggest

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<v Speaker 2>victims might be companies providing wind power or looking to

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<v Speaker 2>do so. We today operate in a world where the

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<v Speaker 2>regulatory environment is much less predictable, and unfortunately, we also

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<v Speaker 2>now operate in an environment where it is pretty clear

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<v Speaker 2>that the way you want to get ahead, at least

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<v Speaker 2>as a very large cap company, is getting in the

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<v Speaker 2>good graces of the government, which is a very different

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<v Speaker 2>game than we have had for the last eighty years

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<v Speaker 2>in the US, and that you know, that pushes towards

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<v Speaker 2>rent seeking behavior, it pushes towards corrupt behavior. It is

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<v Speaker 2>not a situation where you would say, aha, these are

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<v Speaker 2>the companies that should be training in a premium for

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<v Speaker 2>the rest of the world. That is more like what

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<v Speaker 2>we have seen in countries like Russia or China, where

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<v Speaker 2>in general people have said, oh, well, if you're going

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<v Speaker 2>to invest there, you better have a discount to make

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<v Speaker 2>up for the fact that you don't know what the

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<v Speaker 2>government is going to do. And the incentives for companies

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<v Speaker 2>are not necessarily profit maximizing for shareholders.

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<v Speaker 3>You know, speaking of Washington, and we're going to have

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<v Speaker 3>more questions on this. The President is having a cabinet

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<v Speaker 3>meeting right now. We're monitoring it. If he does start

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<v Speaker 3>to take questions, we will bring you those questions and

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<v Speaker 3>answers as soon as we get them. Check out live

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<v Speaker 3>go on the Bloomberg terminal to see that right now.

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<v Speaker 3>Then on that the idea of the US government taking

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<v Speaker 3>a stake in these companies, as you mentioned, it does

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<v Speaker 3>concern you. We did hear from Howard Lutnik earlier on

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<v Speaker 3>CNBC who said the idea of taking a stake in

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<v Speaker 3>a defense company such as Lockheed Martin for example, could

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<v Speaker 3>be talked about at a certain point in the future.

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<v Speaker 3>What's the warning that you have for US involvement US

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<v Speaker 3>government involvement in private enterprise.

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<v Speaker 2>Well, you know, the basic problem is as the government

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<v Speaker 2>gets more involved in private enterprise, the needs of shareholders

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<v Speaker 2>take a back seat. And that isn't obviously, you know,

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<v Speaker 2>that isn't necessarily the absolute worst thing in the world.

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<v Speaker 2>But we do see, and we have seen time and

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<v Speaker 2>time again, where businesses are more answerable to the government

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<v Speaker 2>than they are to their standard owners. You get less

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<v Speaker 2>good business decisions. Now. On the other hand, if you

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<v Speaker 2>are a defense contractor, it may well be in your

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<v Speaker 2>interest to have the government take a stake, because if

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<v Speaker 2>you are one where the government has not taken a stake,

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<v Speaker 2>maybe you're less likely to win the next competition.

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<v Speaker 3>Ben, speaking of the President, we got to leave it there.

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<v Speaker 3>Ben Inker, co head of Acid Allocation portfolio manager at

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<v Speaker 3>GMO