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Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.

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Speaker 1: Along with my co host Lisa Abramowitz. Each day we

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Speaker 1: bring you the most important, noteworthy, and useful interviews for

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Speaker 1: you and your money, whether at the grocery store or

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Speaker 1: the trading floor. Find the Bloomberg p L Podcast on iTunes,

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Speaker 1: SoundCloud and at Bloomberg dot com. Let's turn our attention

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Speaker 1: now to geopolitical events. Jack Divine joins us. He is

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Speaker 1: a founding partner and president of the ark And Group,

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Speaker 1: also a member the Council and Foreign Relations. Also the

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Speaker 1: author of the book entitled Good Hunting, A Spy Master's Story,

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Speaker 1: and he's a spy hunter. I was going to let

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Speaker 1: him tell us my masters. Yes please, Mr Divine, thank

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Speaker 1: you very much for being with us. I wanted to

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Speaker 1: let you describe a little bit of your thirty two

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Speaker 1: year career for the Central Intelligence Agency. No one's ever

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Speaker 1: done that. Asked me to sum up my career in

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Speaker 1: a minute, but I will. At the top of my career,

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Speaker 1: was responsible for all the what we would call spies

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Speaker 1: around the world. People in the business never referred them

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Speaker 1: as spies or agents, but I was the chief spymaster

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Speaker 1: at the highest point, I've served in seven foreign countries.

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Speaker 1: I wasn't in charge of the program to drive the

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Speaker 1: Russians out of Afghanistan with UH famous Congressman Charlie Wilson.

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Speaker 1: On the downside, I was drawn into reluctantly into the

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Speaker 1: Iran country affair. I was in Chilly when I Yendi

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Speaker 1: was overthrown, and I was ahead to the counter narcotics

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Speaker 1: program with escobar bit the dust. So I've spent a

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Speaker 1: long time. I've written to it, and UH, I'm passionate

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Speaker 1: about the intelligence business and the CIA. So you've got

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Speaker 1: a strong stomach for risk and for for potential of problems.

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Speaker 1: I'm wondering what you think about President elect Trump's recent

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Speaker 1: stance on the c i A and on intelligence briefings.

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Speaker 1: He was quoted as saying, you know, I'm like a

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Speaker 1: smart person. I don't have to be told the same

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Speaker 1: thing in the same words every single day for the

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Speaker 1: next eight years. Do you think this poses a problem?

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Speaker 1: I think it's important to understand the really the breath

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Speaker 1: of CIA. It's not just producing analysis, it's it's collecting

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Speaker 1: information around the world, and it's an instrument of the

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Speaker 1: president when he wants to get things done, um below

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Speaker 1: the radar, and every president has used the CIA in

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Speaker 1: that capacity up Dwight Eisenhower had three hundred covert action

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Speaker 1: operations and give you the sense of it. So I think, uh,

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Speaker 1: I think it's a terrible mistake to disdain the CIA

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Speaker 1: as an institution and its people. It's very dangerous. Most

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Speaker 1: most presidents, at least UM find a way, uh not

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Speaker 1: to go head to head with the agency's people. We're

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Speaker 1: not talking about the elites, the senior people. We're talking

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Speaker 1: about people that grew up in institution. You have to

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Speaker 1: be very careful. They're very professional, they're dedicated, and disdain

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Speaker 1: is about the worst thing that they tolerate. You have

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Speaker 1: to watch the people don't head for the doors. They

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Speaker 1: do in business the best ones. So I think it's

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Speaker 1: ill timed. I understand why, um, the President elect Trump

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Speaker 1: may be dissatisfied with the intelligence he's getting. UM, there's

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Speaker 1: ways to fix that, make clear your your own your

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Speaker 1: own interests and priorities. But I think to walk away

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Speaker 1: from it or to disdain it, and this is really extraordinary,

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Speaker 1: and I think it will turn out to be a

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Speaker 1: huge mistake, hopefully will be reset quickly. I mean, um,

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Speaker 1: there are a lot of professional people that I'm sure

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Speaker 1: we'll will try to make some sense of this, but

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Speaker 1: this was, um, from my perspective, the biggest mistake on

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Speaker 1: the national security arena, which doesn't bode well I think

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Speaker 1: for the the next couple of years this needs to

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Speaker 1: be straightened and quickly. Can you make sense or give

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Speaker 1: us some sense of your thoughts having to do with

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Speaker 1: Russia and cyber attacks in the U S election and

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Speaker 1: so on. I mean, I think the first, I think

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Speaker 1: I think the verse. First of all, we should say

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Speaker 1: that Putin is a product of the intelligence system, and

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Speaker 1: he was a KGB officer for over fifteen years. He

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Speaker 1: worked in the Eastern Germany when the great spy masters

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Speaker 1: the East German Marcus Wolfe, he headed up the their

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Speaker 1: version of the FBI. He has a mindset that understands

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Speaker 1: intelligence and may understand some of the darker side, because

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Speaker 1: the experience with Marcus wolf is really pretty black. So

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Speaker 1: the fact that Russians would be hacking in to our

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Speaker 1: areas of policy and uh and of foreign and domestic

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Speaker 1: interest should be of no surprise. I mean, this is

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Speaker 1: what not only big powers do around the world, medium

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Speaker 1: and now small and even individuals do this. So the

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Speaker 1: fact that hacking is not the issue, and I I'm

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Speaker 1: surprised that we spend so much time on that question.

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Speaker 1: It's really whether you take that information and use it domestically.

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Speaker 1: Now that is a shocker. Uh in the business. For

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Speaker 1: all the years I was in it, there were unwritten rules.

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Speaker 1: If yes, someone will give you different, different variations of

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Speaker 1: it's called the Moscow rules, in which we basically operated

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Speaker 1: where we would not beat up their officers and they

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Speaker 1: wouldn't beat up hours I put it in those youth,

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Speaker 1: and we wouldn't counterfeit money, they wouldn't count there. There

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Speaker 1: were rules of the game, and one of the rules

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Speaker 1: of the game was not to interfere in the internal

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Speaker 1: politics of either country. And again you're not going to

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Speaker 1: find a treaty, no lawyers are attached to it um

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Speaker 1: and I think this is a violation to that. If

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Speaker 1: in fact it turns out that the Russians not only hacked,

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Speaker 1: but more importantly use that inform trying to influence this

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Speaker 1: is a change in the game and we need to

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Speaker 1: We need to, I think, sit down privately in public

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Speaker 1: with the Russians and decide whether we're going to have

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Speaker 1: this new arrangement where we go after and try to

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Speaker 1: influence internal affairs, big story, huge story, seismic shift and intelligence.

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Speaker 1: If indeed this has been done. The way that you're

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Speaker 1: talking makes me think that the CIA and the KGB

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Speaker 1: have direct contact and discussions about the manners with which

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Speaker 1: they go about their business. Is that is that really

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Speaker 1: the case? I think it evolves over over years. You

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Speaker 1: don't sit down and demarcate the the issues. But in

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Speaker 1: my own case, I not only random or the drive

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Speaker 1: the Russians out of Afghanistan. Years later, I was the

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Speaker 1: guest of the KGB in Moscow in June of ninety one.

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Speaker 1: The government fell in August of ninety one. That had

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Speaker 1: to do with my presence there. But the point that

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Speaker 1: I would make is, of course we've have relations to

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Speaker 1: deal with them. It's part of you know, how do

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Speaker 1: you have a a safety net so that you can

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Speaker 1: pick up the phone and call each other and uh

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Speaker 1: and back off of something that mayby misinterpreted. So I

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Speaker 1: think that if there aren't communications today, they better reset

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Speaker 1: just real quick. Are you optimistic about the year ahead?

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Speaker 1: Well you have to wait. I'm going to put out

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Speaker 1: my forecast and I would say I'm bullish on all right.

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Speaker 1: Jack Divine, founding partner and president of the Arkin Group,

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Speaker 1: also UH the author of Good Hunting, a Spymasters Story.

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Speaker 1: Jack is a thirty two year veteran of the Central

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Speaker 1: Intelligence Agency, used to be the head of all the Spies.

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Speaker 1: I want to bring in Hugh Johnson, chairman and c

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Speaker 1: i O of Hugh Johnson Advisors, who oversees more than

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Speaker 1: a billions of dollars. I want to get your view, Hugh,

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Speaker 1: on how exactly you're pricing in so many uncertainties that

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Speaker 1: are supposed to come together with some clarity perhaps next year. Uh.

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Speaker 1: Most people are expecting it to be bigger growth expectations.

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Speaker 1: Are you convinced are you all in on this narrative

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Speaker 1: that growth will just be on gangbusters run in the

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Speaker 1: US and that it's up from here for stocks and

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Speaker 1: down from here for government bonds? Can you can you

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Speaker 1: just tell that that Lisa covers the bond market very well?

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Speaker 1: She does, she does, And no, I think gangbusters is

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Speaker 1: the word, that's the strong word, and that's a little

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Speaker 1: bit too strong. And when you take a look at

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Speaker 1: the forecast for the economy, forecast for earnings, yeah, sure,

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Speaker 1: we might get something from the Trump bump. You're right,

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Speaker 1: there's a lot of uncertainty. There's uncertainty is to the magnitude.

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Speaker 1: There's uncertainty is to the timing. That makes it very

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Speaker 1: difficult to put together a sensible forecast for what's going

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Speaker 1: to happen in stock prices. But nevertheless, we're going to

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Speaker 1: get something in the order of a Trump bump, and

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Speaker 1: you don't see that in a lot of forecasts right now.

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Speaker 1: That consensus is something like two point three percent growth

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Speaker 1: in the US economy two thousand and seventeen with a

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Speaker 1: Trump bump or something I think is a reasonable expectation

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Speaker 1: of what's going to happen next year in the form

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Speaker 1: of obviously tax cuts and spending increases. And again the

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Speaker 1: timing is important, but what I think it's going to

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Speaker 1: maybe move us up towards the at best two point seven.

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Speaker 1: You might get as high as two point nine. That's

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Speaker 1: going to make a difference for what earnings do in

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Speaker 1: two thousand and seventeen. They might be a little bit

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Speaker 1: higher than You put it all together, and you say,

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Speaker 1: what's the case for stocks in the end, there is

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Speaker 1: you can make the case for stocks being where they

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Speaker 1: are and maybe being a little bit higher, but it's

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Speaker 1: very hard to do. Valuation is really an issue, even

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Speaker 1: if you include some forecast or some expectation of the

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Speaker 1: Trump bump. We hold on a second, h Am, I

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Speaker 1: hearing you correctly that you're basically bearished on stocks right now. No,

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Speaker 1: that's that's not correct, because that what I'm saying is

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Speaker 1: that it's all within the context of an ongoing bull market.

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Speaker 1: If you ask yourself, as the current stock market, economic

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Speaker 1: interest rate cycle alive and well, the answer is yes.

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Speaker 1: Trump has essentially postponed the end of it, is given

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Speaker 1: a little bit new life to the economy. I think

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Speaker 1: that we still have a ball market. It's going to

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Speaker 1: go through two thousand seventeen. The case through two thousand

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Speaker 1: eighteen becomes a little more difficult, but nevertheless positive bull

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Speaker 1: market environment. But within the context of that ball market environment,

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Speaker 1: I'm saying we've gotten a little ahead of ourselves. I

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Speaker 1: guess is the way to say it a little bit pricey.

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Speaker 1: So on a short intermediate term basis, you've got to

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Speaker 1: be really careful, careful because of valuation, and you've got

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Speaker 1: to be really quite frankly tough on prices that you

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Speaker 1: pay to buy stocks. You're picking of entry points has

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Speaker 1: got to be extraordinarily good. At this point in the

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Speaker 1: second we've had a big move on the upside, we're

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Speaker 1: a little bit pricey. You've got to be good at

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Speaker 1: picking entry points, and you have to be patient in

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Speaker 1: order to be good at entry points. Hugh Johnson SMP

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Speaker 1: is up nearly eleven so far during the year. Dal

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Speaker 1: Jones Industrial Average up more than fourteen percent. Tell us

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Speaker 1: about financial stocks, do you think that is an area

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Speaker 1: that's going to do well in Yeah? You know him.

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Speaker 1: When you take a look at all of this, it

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Speaker 1: really looks really good. This has been one heck of

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Speaker 1: a year, surprisingly good, much better than any of us,

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Speaker 1: most of us anyway, had expected. So I think, you know,

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Speaker 1: you're probably not going to get that big a year

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Speaker 1: and two thousand and seventeen it might be positive, but

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Speaker 1: it's not going to be in the order of ten

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Speaker 1: to twelve percent that we're seeing this year. We're not

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Speaker 1: going to see anything like that. And again, I think

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Speaker 1: the reason I'm saying that, are concluding that is valuation.

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Speaker 1: I can't put together enough earnings growth, uh in order

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Speaker 1: to make the case for a real big move up

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Speaker 1: in stock prices from current levels. Another way of getting

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Speaker 1: at that same thing and saying it is that you've

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Speaker 1: got to be a really good stock picker, and you've

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Speaker 1: got to pick good entry points when you pick, if

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Speaker 1: you pick the right stock. So be a good stock picker,

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Speaker 1: be a good uh, be a good spector picker. Financials

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Speaker 1: are going to do well, but you and I both

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Speaker 1: know they've had a big move to the upside. So

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Speaker 1: you've got to be a lot more careful now than

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Speaker 1: you had to be, say, around election time. You know,

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Speaker 1: one thing that I'm innterested in is industrials. Industrials have

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Speaker 1: done really well since Trump's election, and um in your

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Speaker 1: notes you said that that's one area that you're actually

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Speaker 1: bullish on going forward. What's the risk, especially at trade

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Speaker 1: negotiations hit a heat up with China among other nations.

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Speaker 1: What's the risk that perhaps the industrial rally has gotten

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Speaker 1: a little bit ahead of itself, especially with companies like Caterpillar,

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Speaker 1: for example, which export quite a bit of goods to

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Speaker 1: China and could potentially suffer from trade a trade board there. Yeah,

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Speaker 1: it's a it's a big risk. So if there's a

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Speaker 1: big risk that we're not it's very difficult to quantify

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Speaker 1: that that faces us in two thousand seventeen, and I

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Speaker 1: might add two thousand eighteen, is is a whole risk

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Speaker 1: of trade. And anytime you're talking about a large multinational company,

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Speaker 1: you're really talking about trade. You ask yourself the question,

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Speaker 1: will geez you? Small and mid sized stock stocks that

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Speaker 1: are not big multinationals have done really well performance wise

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Speaker 1: since the election. Large cap stocks is to some extent

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Speaker 1: lagged a little bit. A lot of that is because

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Speaker 1: of the concern about what the direction that trade is

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Speaker 1: gonna go. So you've really got to be careful based

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Speaker 1: on a couple of things. A big move up that

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Speaker 1: we've seen since the election, So we've got a couple

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Speaker 1: of valuation problems, some rhetoric coming out of a Trump

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Speaker 1: campaign saying that to look at the costs are too

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Speaker 1: high by a lot of defense companies, for example, and

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Speaker 1: so that that's a little bit of a problem, that's

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Speaker 1: a policy problem, and then the trade issue is is

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Speaker 1: could be a problem to all of this. When you're

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Speaker 1: looking at financials, when you're looking at healthcare, when you're

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Speaker 1: looking at technology, when you're looking at industrials, especially industrial infrastructure,

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Speaker 1: play be a little bit careful because we've had a

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Speaker 1: big move on the upside and we've got valuation problems

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Speaker 1: in my mind right now, and unless we see a

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Speaker 1: big outbreak in speculation, and that could that could occur.

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Speaker 1: Uh in my judgment, you've got to be a little

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Speaker 1: bit if you're gonna be sensible, you've got to be

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Speaker 1: a little bit careful here and again be a good

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Speaker 1: stock picker and a good entry point picker. Well, I

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Speaker 1: guess if everyone could do that, everyone would have your job.

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Speaker 1: You Wouldn't that be great? I'd be great if I

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Speaker 1: could do it that. Well, Well, I think trying to

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Speaker 1: match a ten eleven present per and a challenge for anyone.

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Speaker 1: Thanks very much. Hugh Johnson. He is the chairman and

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Speaker 1: the chief investment officer of Hugh Johnson Advisers. They're based

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Speaker 1: in Albany, New York, and he helps to manage over

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Speaker 1: one point two billion dollars of customer assets. We've heard

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Speaker 1: a lot about some big businesses that are having some

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Speaker 1: direct contact President elect Donald Trump, But what about the

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Speaker 1: smaller companies out there? To get a sense of what

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Speaker 1: the landscape is for smaller businesses under a Trump presidency,

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Speaker 1: I want to bring in Karen Mills, Senior Fellow at

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Speaker 1: Harvard Business School and former Small Business Administrator Administration Administrator.

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Speaker 1: Karen Mills, thank you for joining us. So what is

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Speaker 1: your base case outlook for small businesses under a Trump president? Well,

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Speaker 1: President elect Trump really has to step up his game

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Speaker 1: on small businesses because, as you said, there's been a

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Speaker 1: lot of big business personalities coming in and out of

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Speaker 1: his um realm right now, and he is appointing a

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Speaker 1: lot of folks that really have the big business sensibility.

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Speaker 1: So what we want to make sure is that there's

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Speaker 1: somebody at the table to represent small business. And he

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Speaker 1: has appointed a new s b A Administrator, but the

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Speaker 1: real trick is going to be to make sure that

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Speaker 1: that person has a voice in all the White House

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Speaker 1: economic discussions. Well, you're talking about Linda McMahon, right, and

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Speaker 1: Lynda McMahon, co founder former chief executive of the professional

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Speaker 1: wrestling franchise w w E. I mean she doesn't seem

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Speaker 1: like a lightweight. Uh is that? Well done to second?

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Speaker 1: But but the s b A, right, I mean, it

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Speaker 1: has an office in just about like every state. I

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Speaker 1: think it's at least in more than one. UM. Do

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Speaker 1: you think that Linda McMahon and her business background will

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Speaker 1: be an asset to the people that depend on the

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Speaker 1: s b A. Well. The good news is that the

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Speaker 1: President elect kept the s b A in the cabinet

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Speaker 1: and having a seat at the table is a really

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Speaker 1: important um role for the Small Business Administration. Every single

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Speaker 1: new piece of legislation that's going to come up in

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Speaker 1: this administration has an impact on small business. Whether it's

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Speaker 1: taxes or healthcare, or infrastructure or anything to do with trade.

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Speaker 1: Those things are really part of the life blood of

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Speaker 1: small business. And financial reform, you have to make sure

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Speaker 1: that they still have access to loans. Karen, what's the difference?

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Speaker 1: I mean, this is a very basic question, but can

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Speaker 1: you give us a specific example of one area where

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Speaker 1: a policy for small business would be different than a

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Speaker 1: policy that would benefit big business. Well, it's actually true

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Speaker 1: all the way across the board. So let's start with healthcare.

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Speaker 1: In fact, there are a bunch of things in the

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Speaker 1: healthcare law that small businesses want. They actually want to

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Speaker 1: provide healthcare for their employees, but the problem was that

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Speaker 1: they can't really even get a quote. If you have

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Speaker 1: five people and somebody gets sick, that's a big risk

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Speaker 1: for an insurance company. So they put new exchanges. You

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Speaker 1: can actually go to a shop exchange and get a

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Speaker 1: quote where your risk is pooled with everybody else's small business.

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Speaker 1: So it's not five people, it's many thousands, millions of people,

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Speaker 1: and that should give you a cheaper price. We don't

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Speaker 1: want to throw that out in healthcare reform. In fact,

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Speaker 1: that was put in by I think Olympius Snow was

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Speaker 1: put in by the Republicans. So we want to make

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Speaker 1: sure that somebody's got that I on what small businesses

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Speaker 1: need as things get done in this next congressional session.

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Speaker 1: Right the Olympius know the Republican senator from from the

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Speaker 1: state of Maine. It's s b A also a big lender. Right,

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Speaker 1: You've got the general small business loans, Uh, you've got

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Speaker 1: disaster loans, the micro loan project, and you've also got

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Speaker 1: real estate and equipment loans. You've got a big package.

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Speaker 1: There is that something that the administrator directly oversees or

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Speaker 1: what role would they have in some kind of program

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Speaker 1: that oversees the loan program. The sp A has a

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Speaker 1: portfolio of over a hundred billion dollars of loan guarantees.

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Speaker 1: They're not loans. The banks make the loans. It's actually

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Speaker 1: kind of the perfect public private partnership Fannie Man Freddy

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Speaker 1: Mac a little bit a little bit, and the guarantees

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Speaker 1: are made by the s b A in a case

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Speaker 1: where the bank can't quite make that loan. So this

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Speaker 1: means lots of people have access to credit who wouldn't

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Speaker 1: otherwise in the banking system. Well, this is absolutely critical

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Speaker 1: for small businesses. And the gap and access to credit

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Speaker 1: right now is in the smaller dollar loans under a

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Speaker 1: hundred thousand. So when they go and look at Dodd Frank,

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Speaker 1: let's make sure to also keep the small business hat

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Speaker 1: on and make sure that whatever is done benefits those

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Speaker 1: who are going to make loans to the people who

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Speaker 1: need something under a hundred thousand dollars, because that's where

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Speaker 1: the credit squeeze is real quick. Do you think that

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Speaker 1: the rate hike that we're expecting tomorrow is going to

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Speaker 1: have any specific effect on small businesses? Well, it's going

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Speaker 1: to be more expensive tomorrow, and that's always a cost

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Speaker 1: for small businesses. Um. I know they're all looking for

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Speaker 1: now tax reductions coming what which might offset it? And

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Speaker 1: the real important thing for small businesses is that the

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Speaker 1: economy keep going. So if they're spending an infrastructure, that's

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Speaker 1: good for small business and construction. But if the economy

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Speaker 1: UH doesn't do well in this next administration, that people

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Speaker 1: who get or the small business owners. Thank you for

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Speaker 1: being with us and coming in. Karen Mills is the

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Speaker 1: former administrator of the SPA of the Small Business Administration

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Speaker 1: and also a senior fellow at the Harvard Business School.

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Speaker 1: Thank you very much for giving us your time. Thanks

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Speaker 1: for listening to the Bloomberg P and L podcast. You

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Speaker 1: can subscribe and listen to interviews at iTunes, SoundCloud, or

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Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm out

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Speaker 1: there on Twitter at pim Fox. I'm out there on

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Speaker 1: Twitter at Lisa Abramo. It's one before the podcast. You

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Speaker 1: can always catch us worldwide on Bloomberg Radio.