Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you,
Speaker 1: along with my co host Lisa Brahma wits. Each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money, whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
Speaker 1: podcast or wherever you listen to podcasts, as well as
Speaker 1: that Bloomberg dot com. We have our good friend Leland Miller,
Speaker 1: CEO of the BA Shop China Basebook International. He'll give
Speaker 1: us very informed thoughts on kind of what this means
Speaker 1: for China. Should we get some informed thoughts from him,
Speaker 1: Let's do it. I mean, I think that might be
Speaker 1: better than me pretending it. I could. I'm happy to pretending.
Speaker 1: Willam Mill are here in studio with us. What are
Speaker 1: you looking for today? You know, I I don't think
Speaker 1: that there's a chance of a breakdown. I think that
Speaker 1: we're you know, the the deal is UH is pretty
Speaker 1: much spelled out. It's a purse agreement. Not many people
Speaker 1: are expecting big things on I P or other issues.
Speaker 1: So look, I think you're you're looking for a lot
Speaker 1: of CEOs clicking CHAMPAGEO US is and saying, you know,
Speaker 1: we're gonna be friends for the next year, all right,
Speaker 1: but you are you skeptical that this is a material
Speaker 1: deal or I mean, is there anything it's a really
Speaker 1: meat here? How are you kind of viewing this? The
Speaker 1: meat is the purchases beyond what the Chinese have provided
Speaker 1: are talking about buying. Uh No, there really isn't There
Speaker 1: really isn't a core deal. The Chinese are putting in
Speaker 1: certain I p uh measures, some of them they have
Speaker 1: announced previously six months ago or longer. Uh So, look
Speaker 1: this this the reason there's not a bigger deal is
Speaker 1: that the two sides just decided that they couldn't come
Speaker 1: to terms with either rolling back a ton of a
Speaker 1: ton of terroiffs in order to get the big I
Speaker 1: p forced tech stuff. And so they said, look, the
Speaker 1: best way to do it is to is to go
Speaker 1: right on in and and and just do buys. I'm
Speaker 1: a big questions has been uh sort of the overlap
Speaker 1: between between the w t O agreement that the fact
Speaker 1: that the US, UH, the UK, or rather the U, S,
Speaker 1: the E, and Japan have all teamed up to try
Speaker 1: to pressure China to reduce their industrial subsidies at the
Speaker 1: same time that we're signing this Phase one agreement. How
Speaker 1: are these multilateral and bilateral tracks overlapping or not? Well,
Speaker 1: I think that the administration realized early, well it realized
Speaker 1: recently that it's better to have friends, and so at
Speaker 1: the beginning, everything was bilateral, We're gonna get a Bilattal
Speaker 1: trade deal, We're gonna get bilateral agreement from the Chinese.
Speaker 1: Did not not to do this or to do that.
Speaker 1: And they've come around to the idea that it's it's
Speaker 1: it's an easier process if you get the rest of
Speaker 1: the world on board. Is that true? I mean, so
Speaker 1: the Trans Pacific Partnership would would be the arguably the
Speaker 1: epitome of a multilateral group negotiating. They're not that, they're
Speaker 1: still not supportive of those types of agreements, are they not? Yet?
Speaker 1: But the t p P is very closely associated with Obama.
Speaker 1: So if you, you know, you rename TPP Trump Pacific
Speaker 1: Partnership three years from now, then is there a chance
Speaker 1: that they come around to it. It's I've I've discussed
Speaker 1: it with administration officials, ingest who knows. Look, there's a
Speaker 1: there was a desire by the Trump White House to
Speaker 1: break from everything Obama. Uh, some things are good, some
Speaker 1: things are more controversial. But t p P was was
Speaker 1: was not gonna work under Trump, but a revised version
Speaker 1: of it in the future, who knows. So what precipitate
Speaker 1: did this come to Jesus moment for the administration multilateralism? Well,
Speaker 1: I think they wanted to continue to claim that that
Speaker 1: they're pushing the Chinese on odd subsidies. So if you're
Speaker 1: if it's not part of Phase one, and you don't
Speaker 1: have Phase two coming about, then why not go with
Speaker 1: your allies, the w t O and and then get
Speaker 1: the Europeans and Japanese animated about Chinese subsidies which they
Speaker 1: care about as well. So this is this is not
Speaker 1: really a come to Jesus so much as if they're
Speaker 1: not getting progress on this now, why not utilize the
Speaker 1: other tools in the toolbox to to push China. And
Speaker 1: this the shift of of course done been done by
Speaker 1: from the beginning, but it's it's it's making its way
Speaker 1: back there. President Trump also mentioned at one point that
Speaker 1: once this is one deal assigned that he I believe said,
Speaker 1: would go to China to begin negotiating a phase two.
Speaker 1: Is there any reason to believe that that will occur,
Speaker 1: and will we have any success If you have a
Speaker 1: second Trump term, then yeah, there will be a continuation
Speaker 1: of of of the trade war trade negotiations. Then, Uh,
Speaker 1: there's nothing contemplated right now now. The one asterist I
Speaker 1: would put on that is if the economy starts to
Speaker 1: really slide, if stock markets start to tank, they have
Speaker 1: they have created this phased uh sequencing uh for the
Speaker 1: ability for for for the President simply to jump into
Speaker 1: and say, I'm going to start negotiating again and We're
Speaker 1: going to do more tariff bullback. So we're gonna grant
Speaker 1: some other concessions and we're gonna get more in return.
Speaker 1: And so it will allow him, if he finds it
Speaker 1: politically necessary to do so, to jump back in in
Speaker 1: two thousand twenty. But that's not the game play. And
Speaker 1: right now I still have struggling with this idea that
Speaker 1: we're bilaterally negotiating, that the US and China are bilaterally
Speaker 1: negotiating while there's a multilateral push on another level. I'm
Speaker 1: just wondering, does that mean that Phase two is going
Speaker 1: to be a multilateral Phase two or does that mean
Speaker 1: that Phase two will continue with added pressure from allies
Speaker 1: and others. I think I think what Phase two has
Speaker 1: always been sold as is, we're going to do the
Speaker 1: big moves next, So don't don't hold us to this now,
Speaker 1: but we're gonna do it next time. And look, anyone
Speaker 1: who's dealt with the Chinese uh for for years will realize,
Speaker 1: like like the administration now has. They'll realize that the
Speaker 1: Chinese are very savvy negotiators, and they'll string this out
Speaker 1: and they're not going to give up core things that
Speaker 1: are important to them without a lot of pain. So
Speaker 1: I think this is more of a situation where, uh,
Speaker 1: you know, the White House realized that its administration was
Speaker 1: divided on on what to go after. The President had
Speaker 1: different priorities and some of his some of his other principles,
Speaker 1: and they would go after agricultural purchases first, try to
Speaker 1: get the trade deficit in order as much as possible.
Speaker 1: And while they're waiting that out, they'll they'll start to
Speaker 1: to maybe go back and and and utilize again these
Speaker 1: other tools which involve using Europeans and Japanese and everyone
Speaker 1: else to try to push back on the Chinese model.
Speaker 1: I'm not even sure I even buy off on the
Speaker 1: whole agricultural aspect of this phase one, weren't they They
Speaker 1: were buying agriculture and soybeans and stuff before. Now it's
Speaker 1: gone a year, they haven't been buying. Now they're gonna
Speaker 1: start buying again. I'm not sure what's incremental here. Well,
Speaker 1: the big question is can they hit any of these
Speaker 1: targets that are that are quite big that they claim
Speaker 1: to be able to do over two years. So the
Speaker 1: promise is that they're not going to just get the
Speaker 1: number back up to two billion, that they're going to
Speaker 1: get another two hundred billion on top of that. So
Speaker 1: if by some miracle of math they're able to do that,
Speaker 1: then there would be a real DNT in the Bilottal
Speaker 1: trade deficit. The problem is is that this is really
Speaker 1: a one year trade deal because the administration and the
Speaker 1: Chinese are both motivated to get through the election. Uh,
Speaker 1: at frontloads some of those purchases. Keep keep the keep
Speaker 1: the guns the guns and ammo dry and try to
Speaker 1: get into see where the situation is there. But look,
Speaker 1: these targets are extremely bold. Uh they're they're almost mathematically
Speaker 1: impossible to hit, the agriculture not being the most difficult
Speaker 1: to hit, and so you're gonna you're You're gonna see
Speaker 1: a lot of challenging things here. And if the Chinese
Speaker 1: are actually getting close to me those targets, they're gonna
Speaker 1: really irritate all their other trading partners who they're no
Speaker 1: longer buying from. So the Chinese are trying to thread
Speaker 1: this needle. It's probably not possible, but what they want
Speaker 1: to do is get through this year first, and then
Speaker 1: they're gonna worry about it here too. Lela Miller is
Speaker 1: the person joining us right now, chief executive officer of
Speaker 1: China Beige Book International, as we await the signing of
Speaker 1: this trade deal between the US and China at the
Speaker 1: White House. It's been widely anticipated, but no one's actually read,
Speaker 1: at least in the public, the eighties six page document.
Speaker 1: A lot of questions remain about the details, in particular
Speaker 1: any concessions that China gave aside from making these agricultural purchases.
Speaker 1: That's been one question raised. Do we know anything about
Speaker 1: further concessions that China might have made. No, uh, we don't,
Speaker 1: um look that. Here's here's the difficulty. A lot of
Speaker 1: the things that that has been talked about in terms
Speaker 1: of I P have been things that the Chinese have
Speaker 1: announced domestically over the last several months. Uh So, one
Speaker 1: of the things that was recently touted was the fact
Speaker 1: that you know, there will be heavier criminal penalties for
Speaker 1: i P infringers. Okay, but we knew that months ago.
Speaker 1: So what they're doing right now is they're trying to
Speaker 1: scoop in all the developments that have happened in the
Speaker 1: Chinese economy and Chinese corporate landscape for the last you know,
Speaker 1: three six, nine months and say these are part of
Speaker 1: the i P changes that the administration is pushing about. Um,
Speaker 1: we're not going to try to quantify them. We're more
Speaker 1: worried about the purchases. But this is more than just purchases.
Speaker 1: Uh this is this is us really moving the system.
Speaker 1: So thet the lack of clarity is something it's it's
Speaker 1: sort of hard to get around. And Leland, I know
Speaker 1: in the past, when you've been in our studios talking
Speaker 1: to us about China, you said to us, it's about enforcement.
Speaker 1: We have to be able to enforce this, and that's
Speaker 1: been a challenge in the past. Is there any reason
Speaker 1: to believe that this agreement will include some provisions for
Speaker 1: proper enforcement, so so I have and others have been
Speaker 1: very critical the idea of snapback tariffs or some sort
Speaker 1: of automatic mechanism for the simple fact that nothing's automatic
Speaker 1: if you've got a president who will be weighing the
Speaker 1: political ups and downs of throwing tariffs back on. So
Speaker 1: there's nothing automatic about an enforcement mechanism, and that was
Speaker 1: always oversold. However, this deal in some ways was done
Speaker 1: very cleverly because the Chinese are very motivated to do
Speaker 1: the purchases for the first year. If they can get
Speaker 1: the numbers up and the numbers to where President Trump
Speaker 1: likes it, then after November, sometime in the November to
Speaker 1: January period, they have been promised behind the scenes that
Speaker 1: they will get a tariff rollback. So they have to
Speaker 1: get President Trump elected. They have to honor their commitments,
Speaker 1: and if they do, then you're gonna see a tariff
Speaker 1: rollback in the first few months of a Trump second term. Meanwhile,
Speaker 1: the trade agreement has yet to be seen, and we
Speaker 1: will be getting the document and perhaps passed through it
Speaker 1: in real time as we get the text of it.
Speaker 1: There is a question about China's underlying economy, particularly how
Speaker 1: they've adjusted to the ongoing trade tensions. We got some
Speaker 1: trade data that was kind of interesting showing how they've
Speaker 1: shifted some of their uh, their channels. Um. But also
Speaker 1: what remains to be seen is supply chains getting truly
Speaker 1: rejiggered and the impact on China. How much have we
Speaker 1: seen that already go into effect. How much more are
Speaker 1: we going to see supply chains move away from that nation? Plenty? Uh,
Speaker 1: But the question is you know in what areas? So
Speaker 1: if you're if you're a tech company and you're trying
Speaker 1: to figure out how to uh to to play the
Speaker 1: US China game, you're gonna have to make a decision.
Speaker 1: It looks it looks like they're gonna be cracking down
Speaker 1: more and more and more as things go by. You're
Speaker 1: not gonna be able to supply Huawei if you're supplying
Speaker 1: you know, US firms and and US government um. And
Speaker 1: this is going to continue from there. On the manufacturing side,
Speaker 1: I think there is also going to be more and
Speaker 1: more of a concerted effort to separate the supply chains.
Speaker 1: They're gonna have even foreign companies developing inside China for
Speaker 1: the China's China market, and that's going to be separate
Speaker 1: from where other firms are supplying the United States the
Speaker 1: rest of the world, so a lot of this supply chain, uh,
Speaker 1: decoupling is happening. Um. It doesn't mean that decoupling overall
Speaker 1: has to happen in some sort of scary sense, but
Speaker 1: there's no question things are going in this direction. And
Speaker 1: on the tech side, this is going to be the
Speaker 1: battle that people fight, you know, for the next five
Speaker 1: fifteen years. You know what, while we have you here,
Speaker 1: just give us kind of an update on how things
Speaker 1: are in China broadly speaking from an economic perspective. Well,
Speaker 1: it's it's it's interesting because people are less worried about
Speaker 1: the Chinese economy right now than they were, say three
Speaker 1: months ago or six months ago. Uh, and fair enough
Speaker 1: because our fourth quarter data were an improvement on Q three,
Speaker 1: their improvement on year from a very very weak Q
Speaker 1: four of last year. But you know, it's it's it's
Speaker 1: more of a temporary stability, I think, Um, we when
Speaker 1: we talk to firms, they are investing more and they
Speaker 1: are hiring more. So so the fourth quarter again beyond
Speaker 1: even the top line look better than than the third quarter.
Speaker 1: But why are they doing this? If you look at
Speaker 1: new orders, new orders are weaker for the second quarter
Speaker 1: in a row. You look at cash flow, cash flow
Speaker 1: is the weakest we've seen in the entire history of
Speaker 1: China Beige Book for the fourth quarter of two thousand nineteen. Now,
Speaker 1: why are they investing then? Why are they hiring it? Well?
Speaker 1: Are they? Are they just looking at trade war headlines
Speaker 1: and seeing a truce and investing blindly. That's what we're
Speaker 1: going to see in early We're gonna see whether this
Speaker 1: is a refusal of companies to listen to their customers
Speaker 1: who are or they invest more because the government tells
Speaker 1: them to invest more to make the numbers look good
Speaker 1: because we're going to Washington negotiating. Historically the answers yes,
Speaker 1: and it's historically with state firms the answer is a
Speaker 1: double yes. So we're gonna see how much of that
Speaker 1: is is the government saying, look, improve conditions. But you
Speaker 1: can't do that forever. You can you can order a
Speaker 1: temporary tick up, but you know, economics are economics. So
Speaker 1: I think early twenty will be a a look to
Speaker 1: the government to see how much slower growth it's willing
Speaker 1: to accept now that the trade wars is going to
Speaker 1: be temporary. Out of the headlines, what do we look
Speaker 1: at now. A lot of people say, well, you know,
Speaker 1: this all sounds problematic, but there's such a fire hose
Speaker 1: that the PBOC has to release to the market to
Speaker 1: sort of prop everything up that it doesn't matter. How
Speaker 1: long can that be true? Well, the big argument we've
Speaker 1: had with the consensus over the past years, we think
Speaker 1: the PBOC and the China's credit environment overall are very
Speaker 1: active right now. Now. The pushback usually is, well, we
Speaker 1: don't see all the building we saw in that is correct.
Speaker 1: We are not seeing a style stimulus where it's you know, build,
Speaker 1: build it and they will come. Uh, this is not
Speaker 1: heavy infrastructure spending right now. Our transportation construction indicators sharply weaker,
Speaker 1: commodities are weaker. Uh so we're not seeing a build out.
Speaker 1: But we are seeing is tremendous provision of credit to
Speaker 1: corporates are are borrowing numbers are sky high. Our bond
Speaker 1: sales numbers have gone up six consecutive quarters. We're seeing
Speaker 1: a resurgence in shadow finance, which has not yet been
Speaker 1: publicly admitted by Beijing. So that the PBOC has already
Speaker 1: been very very active. And what is the result. Well,
Speaker 1: they've got a stable economy. Now, things aren't falling, but
Speaker 1: they're not getting a jolt. So it's a little bit
Speaker 1: disconcerting that the PBOC is as active as it is
Speaker 1: right now and they're not seeing a surgeon growth. They're
Speaker 1: simply avoiding a much worse outcome. I want to bring
Speaker 1: in Andy Brown right now. Andy's editorial director of the
Speaker 1: New Economy Forum at Bloomberg, And you were reading the
Speaker 1: signing of the trade agreement, the Phase one trade agreement
Speaker 1: between the US and China. What does it mean to
Speaker 1: you this trade agreement. Less in this trade agreement than
Speaker 1: meets the eye that's always been saying for quite some time.
Speaker 1: Uh So, the tariffs on most Chinese imports into the
Speaker 1: United States remain okay. And the concessions that the Chinese
Speaker 1: side of making have been on the table or they
Speaker 1: were working on them long before this trade will began,
Speaker 1: which includes concessions on intellectual property, which includes apparently concessions
Speaker 1: on currency manipulations. In fact, China hasn't been manipulating its
Speaker 1: currency now for many years, has been propping it up
Speaker 1: rather than allowing it to depreciate. Um And the reason
Speaker 1: that China has been proceeding with these reforms is not
Speaker 1: because of pressure from the White House, but because it's
Speaker 1: good for the Chinese economy. Andy, we heard from the
Speaker 1: Democratic candidates last night and they made clear in their
Speaker 1: discussions about trade they weren't necessarily going to take a
Speaker 1: softer line with China. How much is that kind of
Speaker 1: weighing on the Chinese delegation's minds at this idea that
Speaker 1: you know, it's not just about waiting it out and
Speaker 1: waiting until President Trump if he gets reelected, and then
Speaker 1: figuring it out from there. That you know is picking
Speaker 1: you know, the lesser of evils and just to sort
Speaker 1: of go with it. You know, I think that the
Speaker 1: Chinese side are about as confused as everybody is over
Speaker 1: a central contradiction which is at the heart of US
Speaker 1: training policy to China, that the White House cannot cannot
Speaker 1: figure out what it is it wants to get out
Speaker 1: of this trading relationship. What we're all waiting for, of course,
Speaker 1: is the Phase two deal. Now, this phase to deal
Speaker 1: is the about the rolling back of state owned enterprise
Speaker 1: privilege and power in the Chinese economy to level the
Speaker 1: playing field for foreign investors, including US investors, now to
Speaker 1: the extent that that succeeds, it will actually open the
Speaker 1: door for more foreign investment, more US investment in the
Speaker 1: Chinese economy, which is apparently precisely the opposite of what
Speaker 1: some in the Trump White House want, which is to
Speaker 1: bring jobs and bring manufacturing back to the United States
Speaker 1: with the unstated goal, of course, of economically weakening and
Speaker 1: economic and security competitor. So both Democrats and Republicans need
Speaker 1: to really get to grips with this issue. What is
Speaker 1: it that the US wants out of the trading relationship? Lelan?
Speaker 1: What do you think the Chinese government? How do you
Speaker 1: think the Chinese government is going to portray this phase
Speaker 1: one deal? Is at a great victory for China economically
Speaker 1: or is it just it's a step along the way
Speaker 1: and it's not that big a deal. Well, I think
Speaker 1: at the very beginning you didn't hear much in the
Speaker 1: Chinese press about this because they couldn't figure that out.
Speaker 1: And now that they are convinced that President Trump is
Speaker 1: serious about having this done, we'll see in a few minutes.
Speaker 1: Uh they are. They are conveying a sense of victory,
Speaker 1: but this is just a small step on the road.
Speaker 1: So you know, there there are many disagreements. The fact
Speaker 1: we came together on this and found compromises is healthy.
Speaker 1: But let's not pretend that this is the end of
Speaker 1: the road for the trade war. They've They've made sure
Speaker 1: to add that in quite often when discussing this in
Speaker 1: the in the Chinese press. So I think that they
Speaker 1: see this as a temporary truce. It is just a
Speaker 1: temporary truce and uh, and they're waiting for the other
Speaker 1: shoe to drop, all right. We're just to reiterate we
Speaker 1: are waiting this trade agreement to be signed. And we
Speaker 1: are speaking currently with Leland Miller, CEO of China beige
Speaker 1: Book International, as well as Andy Brown, who runs a
Speaker 1: New Economy forum here at Bloomberg for US, and we
Speaker 1: really appreciate both of your perspectives. One question I have
Speaker 1: is we're coming out about a delay of ten months
Speaker 1: before the tariffs get ruled back that the US has
Speaker 1: put on China, And this is sort of differ This
Speaker 1: just differs from what we've heard earlier where these tariffs
Speaker 1: would be rolled back as as China sort of agreed
Speaker 1: with or sort of complied with certain requirements. Is this
Speaker 1: a big deal, Andy, I think it is a big deal.
Speaker 1: I mean you know, you've you've got tariffs on three
Speaker 1: sixty billion dollars of Chinese exports to the US. That's
Speaker 1: two covers two thirds of all of the exports. So um,
Speaker 1: you know you you this hasn't this, This isn't the end,
Speaker 1: of course, is not the end of the trade. Well,
Speaker 1: this this represents at best a truce. And then you
Speaker 1: have to look at what the Chinese need to do
Speaker 1: in order to get these tariffs. Now they have to
Speaker 1: comply with this purchase agreement two billion dollars, which includes
Speaker 1: something like eighty billion dollars of manufacturers from the United States.
Speaker 1: This is not going to be easy for the unit
Speaker 1: either for the United States to fulfill. Uh, you know,
Speaker 1: where where is this? Where is this additional industrial capacity
Speaker 1: going to come from to supply the Chinese market? In
Speaker 1: two billion dollars, by the way, implies something like increase
Speaker 1: annual increase in US exports to China over what they
Speaker 1: were in two thousand and seventeen before the trade war started.
Speaker 1: How's that going to happen? So Leland within China itself?
Speaker 1: Did you in your data at the China Bage book,
Speaker 1: did you see data? Are you seeing data that the
Speaker 1: trade war. The trade uncertainty has caused Chinese companies to
Speaker 1: pull back on maybe some of their investment and growth
Speaker 1: and you know, building new plants and so on. It's
Speaker 1: had an effect. It's not the reason the Chinese economy
Speaker 1: is descellering. It it it has had an effect. What you
Speaker 1: saw in the early early tranches of tariffs was a
Speaker 1: Chinese counter reaction. You know, they would there would there
Speaker 1: was a devaluation, depreciation of the currency. There were some
Speaker 1: backdoor subsidies to basically counteract the effects of the first
Speaker 1: waves of tariff UH, and then you saw a bit
Speaker 1: of pain come from the next wave. But I think
Speaker 1: that the real fear has always been the nightmare scenario,
Speaker 1: which is putting tariffs, probably very high tariffs on all
Speaker 1: five billion plus of Chinese of Chinese imports and keeping
Speaker 1: them on there, and that would cause significant pain to
Speaker 1: the Chinese economy. And that is why this entire trade
Speaker 1: war UH, as animated as has been, has come to
Speaker 1: the point we are today, which the Phase one signing.
Speaker 1: The Chinese realized that we're not here to win, We're
Speaker 1: here to avoid worst case scenarios, and that's what they're
Speaker 1: doing by settling for a Phase one deal that's not
Speaker 1: great for them, but it's it's far from far from terrible.
Speaker 1: Right now, just in the market, we're seeing record highs
Speaker 1: for the NASTAC and the SMP five hundred as people
Speaker 1: look at earnings and see that the companies are still
Speaker 1: coming in strong, as they look to this trade agreement
Speaker 1: and see tensions easing. Meanwhile, basically flat on the treasury
Speaker 1: curve here. And meanwhile gold and this is where I
Speaker 1: really wanted to go. Gold getting another bid up to
Speaker 1: one thousand, five hundred and fifty dollars per ounce, and
Speaker 1: it comes as we have Bridgewater, one of their co
Speaker 1: c io is saying that he expects it to go
Speaker 1: to two thousand dollars per ounce, a record high. And
Speaker 1: this comes as we talk about d dollarization, and we
Speaker 1: talk about in particular China and Essential Bank buying a
Speaker 1: lot more gold and leland. I'm wondering how serious is
Speaker 1: this and how much do we expect this to gain
Speaker 1: steam as tensions persist between the U S and China. Well,
Speaker 1: the Chinese have been buying loads of gold as of
Speaker 1: as of others like Russia for for for years now. UM,
Speaker 1: I don't think that that's what's what's moving the gold
Speaker 1: price right now. I think people have had some visibility
Speaker 1: on that for years. Um, look, it's it. There's most
Speaker 1: people have wanted to take their cash and throw it
Speaker 1: in the market because the market keeps going up and
Speaker 1: up and up. And if you're doing that, then putting
Speaker 1: your money in gold is is a much uh you know,
Speaker 1: it is a much more depressing investment. But now as
Speaker 1: I think you get a little more uncertainty, um, goal
Speaker 1: becomes more interesting. And I think we're gonna have to
Speaker 1: see how the markets markets react this year. And you know,
Speaker 1: this trade negotiation with China has been unlike anything we've seen,
Speaker 1: the Red arc as much at a much higher level,
Speaker 1: tariffs going on coming down. Is this the new way
Speaker 1: to negotiate with China and with other major trade partners
Speaker 1: or is this just the Trump administration way? Do you think? No?
Speaker 1: I think this is very much a new era in
Speaker 1: global trade. Multilateral trade negotiations, UH, deals and institutions are
Speaker 1: collapsing UH very very significantly. In the middle of this
Speaker 1: whole trade war, you had the Trump White House essentially
Speaker 1: crippling UH the w t O. It's now all about
Speaker 1: these big bilateral deals in which log economies, UM will
Speaker 1: have the upper hand over smaller ones. This is managed trade.
Speaker 1: This isn't free trade. There's managed trade. I mean two
Speaker 1: billion dollars, very clear target, broken down into categories, so
Speaker 1: much gas, so much agricultural production, so much UH manufactured production.
Speaker 1: And in fact, they haven't even released a schedule of
Speaker 1: this because they say that it's going to influence as
Speaker 1: would of course it would influence the markets. UM. So
Speaker 1: you know this is a this isn't an anti free
Speaker 1: trade and anti free market arrangement that these two countries
Speaker 1: are putting together going forward. I'm wondering, is this, though,
Speaker 1: a beginning at least that we are going to get
Speaker 1: some meeting of minds? I mean, is this an encouraging
Speaker 1: sign to you on some level? I know you're saying
Speaker 1: it's underwhelming, but on some level that there has been
Speaker 1: something done? I mean, are we sort of blowing over
Speaker 1: that a little bit too much? Well? The question is
Speaker 1: was it worth it? You know? I mean all of
Speaker 1: the disruption that we've seen over the last you know,
Speaker 1: a year or so of of of trade tensions. UM,
Speaker 1: you know, has all that pain been worth the game
Speaker 1: that we're going to get out of this? Trade deal today,
Speaker 1: I'm skeptical. However, I think what I am relatively positive
Speaker 1: about is that it has, in a sense, but a
Speaker 1: flaw underneath the U S China relationship um and I
Speaker 1: think that is what the Chinese will be celebrating more
Speaker 1: than anything else. They do not want this, and neither
Speaker 1: side does want this relationship to fall off a cliff.
Speaker 1: There's too much at stake these two countries, of too
Speaker 1: much mutual interest. So leland do the Chinese people to
Speaker 1: get a sense that the Chinese people support this? I
Speaker 1: guess heightened kind of back and forth between China and
Speaker 1: the US on traders. Is there a perception within China
Speaker 1: that it's it's not balanced and maybe the US has
Speaker 1: taken advantage of US, or they're or they're not supporting us.
Speaker 1: What's the feeling within China? You know, it's very hard
Speaker 1: to pinpoint a monolithic feeling coming out of China. I'd
Speaker 1: say there's certainly is a sentiment within China that the
Speaker 1: US is attacking it in certain ways, attacking Huawei, attacking
Speaker 1: national champions. On the other hand, there's also a very
Speaker 1: noisy minority that is uh that is very uh positive
Speaker 1: about what Trump is doing and saying the only time
Speaker 1: the Chinese system is going to change in a material
Speaker 1: way as if it's pushed on the outside. That's the
Speaker 1: lesson of Chinese history. That's a lesson uh that that
Speaker 1: that we're taking now. So I don't think you have
Speaker 1: any type of strong uh sentiment that's just in one direction.
Speaker 1: But this is certainly something that to the extent that
Speaker 1: Chinese citizens have have optics on what's actually going on,
Speaker 1: I think they're they're very much of two minds about this.
Speaker 1: Can we talk about the defaults in China, how much
Speaker 1: we were worried about the corporate defaults that have been
Speaker 1: picking up. They're still pretty pretty small, But this is
Speaker 1: unchartered territory because it's the first time that China has
Speaker 1: allowed companies to default in this manner. Right, well, I
Speaker 1: think China watchers should be rooting for more defaults, not
Speaker 1: that it won't cause some rough times in the short term,
Speaker 1: but because the only way that they're going to fix
Speaker 1: the financial system and fix the financial the economic model
Speaker 1: is by allowing risk to be injected in the system.
Speaker 1: If people think that they're financial products can't go bust,
Speaker 1: if they think that companies can't go bankrupt. If they
Speaker 1: think that investments can't default, then there's no way you're
Speaker 1: going to ever have a model that allows for a
Speaker 1: for for for rejiggering of of what has always been
Speaker 1: a government backstopped economy. That's that's that's in real problems
Speaker 1: right now. The real issue has been that as the
Speaker 1: Chinese government has been unwilling to allow companies to go bankrupt,
Speaker 1: they just keep throwing good money after bad and that
Speaker 1: means that you're gonna have slower You're gonna slower growth
Speaker 1: over time because you're constantly putting good money in the
Speaker 1: economy after bad investments, and it just stagnates the economy
Speaker 1: and into a zombie economy over time. Are deep deep
Speaker 1: thanks to both of you, Lilan Miller and Andy Brown.
Speaker 1: We really appreciate all of your perspectives here. H Leland
Speaker 1: Miller is the executive the head of China Beige Book International,
Speaker 1: Andy Brown, editorial director of the New Economy Forum at Bloomberg.
Speaker 1: We are less than an hour away from the signing
Speaker 1: of a six page trade agreement, the Phase one deal
Speaker 1: between the US and China that we have not seen yet,
Speaker 1: but evidently when they sign it it does exist and
Speaker 1: evidently they are going to release it, so we will
Speaker 1: be passing through that. It has a lot to do
Speaker 1: with agg purchases, agricultural purchases. So we are so pleased
Speaker 1: to say sal GILBERTI joining us now President, chief investment
Speaker 1: officer and co founder of two Trading UH in Brattleboro, Vermont.
Speaker 1: So just give us a sense of what we do
Speaker 1: know about the agricultural purchase agreement here within this trade pact,
Speaker 1: that UM, China will be buying aggs again from the US,
Speaker 1: and that that's about it. We don't have many more details, unfortunately,
Speaker 1: but what we what we can assume pretty confidently is
Speaker 1: that China will buy as much agricultural product as they
Speaker 1: need from the United States. Whatever number is is or
Speaker 1: is not stated in the agreement really doesn't matter. UM.
Speaker 1: We think that using seen is a baseline. That's the
Speaker 1: last time we didn't have trade war implications between the
Speaker 1: two nations. In their trade, UM China brought about four
Speaker 1: billion worth of US agricultural product. If you just take
Speaker 1: their rate of GDP growth and agricultural usage is probably
Speaker 1: a little faster. UM, that means they need about billion
Speaker 1: right now. UM, we're here at two Green projecting about
Speaker 1: thirty one billion in that they'll that they'll buy and
Speaker 1: they're going to meet come in and buy pork, beef,
Speaker 1: and soybeans. There's no question because they need those things. Um,
Speaker 1: how much more they buy of other things is up
Speaker 1: for debate, but we do have have some projections for
Speaker 1: that which we've published a sal I'm looking at your
Speaker 1: research and it's just amazing that looking at those numbers
Speaker 1: you just were discussing, we're really talking about soybeans here
Speaker 1: we talk about what China imports from the US. Is
Speaker 1: there a sense that across the commodity spectrum, uh, that
Speaker 1: China needs to maybe rebuild or restock their inventory and
Speaker 1: say that you could see maybe some unusual surge and
Speaker 1: demand over the first you know, six eighteen months. Yes, absolutely,
Speaker 1: they they they've drawn down their soybean stocks. They've drawn
Speaker 1: down their soy stocks, uh, they of all kinds, and
Speaker 1: they've drawn down their corn stocks. They've also, you know,
Speaker 1: massively drawn down their pork stocks. And so they'll come
Speaker 1: in and immediately buy soybeans to rebuild. They'll buy some
Speaker 1: corn to rebuild and freshen up what they had because
Speaker 1: they had old inventory. They were they were stockpiling for
Speaker 1: quite a while. Um, they've almost run out of pork
Speaker 1: ifew will they really tight the releasing supplies for the
Speaker 1: holiday coming up a week from Saturday when their new
Speaker 1: year starts, where they have enormous pork usage, so they've
Speaker 1: got to replenish their soybeans. They've got to repunish their pork.
Speaker 1: They've also they're supplementing their their meat based protein with beef,
Speaker 1: and so they'll they'll come in and buy beef quite
Speaker 1: a bit too, as well as poultry. Chicken and eggs
Speaker 1: um are are a small part of it, but they've
Speaker 1: just been freed up to buy chicken feet in the
Speaker 1: parts that the Chinese use where we just send their
Speaker 1: rendering plants. So we think, um, soybeans, we think pork,
Speaker 1: we think beef, we think no question poultry. Those will
Speaker 1: be the things they come in and buy immediately. How
Speaker 1: much are we gonna expect these increased purchases to uh
Speaker 1: suspect the price here or to increase the price in
Speaker 1: the US. That's the magic question. I think we can
Speaker 1: expect the floor. I think I think there's no doubt
Speaker 1: that it's reasonable to assume that there could be a
Speaker 1: floor in prices, and understand, we've been trading soybeans and
Speaker 1: corn in particular right near their cost of production anyway,
Speaker 1: and they do trade for quite long periods of time
Speaker 1: at their cost of production. That's the natural thing they do.
Speaker 1: Then when there's a supply disruption, because demand is continually
Speaker 1: growing um, you know, you often see pretty pretty good
Speaker 1: spikes upward in the price. Historically, corns doubled twice in
Speaker 1: the past thirteen years from right where it's trading now,
Speaker 1: So you know, people are starting to layer in acid allocate.
Speaker 1: We think once they signed and it's confirmed that they'll
Speaker 1: be buying, and they will be buying because they need
Speaker 1: our agricultural products, there's no question that there should be
Speaker 1: a floor under the price. How much it goes up,
Speaker 1: it remains to be seen. Depends how fast they buy.
Speaker 1: It depends of course on the weather, and it depends
Speaker 1: on some insight into um what the Chimes will be
Speaker 1: doing in their economy, including ethanol. They are blending ethanol
Speaker 1: into their fuel, and while they've um they were going
Speaker 1: to enforce a ten percent mandate, they realized their infrastructure
Speaker 1: is not capable of that. They're not abandoning ethanol in
Speaker 1: any way, shape or form, and that's gonna put some
Speaker 1: big demand on corn globally. And remember this is the
Speaker 1: seventh year in a row that corn demand globally will
Speaker 1: break a record. It's the third year in a row
Speaker 1: the horn demand globally will outpace demand global production. Uh
Speaker 1: this year, soybean demand globally will outpace production. So the
Speaker 1: price is sitting where they are now. You know, you
Speaker 1: can reasonably assume there's certainly for or how high they go,
Speaker 1: we'll say odd question, is there enough inventory? Are the
Speaker 1: American farmers can they meet the surgeon demand? Is there
Speaker 1: a bunch of inventory in the Midwest and the farm
Speaker 1: belt to get meet this surgeon demand? Yes, there is, um,
Speaker 1: there's enough inventory certainly for this year. Um. You know
Speaker 1: that's the interesting part about aggs. That's why prices you know,
Speaker 1: in corn have doubled from these same levels place in
Speaker 1: the past thirteen years. What happens is year to year
Speaker 1: you can replace it. But the one year when you fail,
Speaker 1: you're using eggs, they grow, you harvest them, there's a
Speaker 1: big pile. You're using that pile until the following year's harvest.
Speaker 1: And if the following year has a problem with harvest.
Speaker 1: That's when the issue comes in. And so that's why
Speaker 1: agg markets they always trade kind of at their cost
Speaker 1: of production, and then they explode higher when you get
Speaker 1: that blip and product because remember, demand just keeps going on.
Speaker 1: That's just a steady bad SalCo birt day. Thank you
Speaker 1: so much for joining a sales president and c I
Speaker 1: O and co founder of Two Cream Trading Limited, based
Speaker 1: in Brattleboro, Vermont, targ The shares are down over seven
Speaker 1: percent this morning. The company posted a rare stumble on
Speaker 1: holiday sales came in a week er than expected. To
Speaker 1: help us dig into the details, we welcome our good
Speaker 1: friend Jen Bartashes, senior US retail staples and a restaurant
Speaker 1: analyst for Bloomberg Intelligence. He joins us on the phone
Speaker 1: from bi's headquarters in Princeton, New Jersey. So, Jen, kind
Speaker 1: of a rare stumble for Target. I seem to be
Speaker 1: calling quarter after quarters some pretty solid top line numbers.
Speaker 1: What happened? Yeah, good morning. UM. So Target has had
Speaker 1: a stellar year thus far. Um, but really going into holiday,
Speaker 1: it seems that perhaps there was a little bit of
Speaker 1: a miscalculation with regards to the shorter selling season, but
Speaker 1: they really underperformed in critical categories for holiday, which included toys, electronics,
Speaker 1: and parts of the home decre part part of the store.
Speaker 1: So we've had a bunch of hours to digest the
Speaker 1: release and some of the possible explanations for it. Has
Speaker 1: anything become clear in terms of how much this is
Speaker 1: a Target specific issue and how much this is a
Speaker 1: widespread likely disappointment for all retailers and the last holiday season, right,
Speaker 1: So to put that into context, you know, you know, Target,
Speaker 1: you know still posted positive same store sales growth, it
Speaker 1: was just below expectations. Some of this seems to be
Speaker 1: Targets specific because in certain categories at Target they did
Speaker 1: very well. Apparel was up five percent, Beauty was up
Speaker 1: seven um. And so it seems that there were some
Speaker 1: miscalculations specific to Target in a couple of those critical areas.
Speaker 1: But when you look at the broader retail landscape, you know,
Speaker 1: it's been a really mixed holiday season, and so even
Speaker 1: though consumer spending has been up, especially online spending um,
Speaker 1: different retailers have really had posted mixed results. So, Jen,
Speaker 1: I know from reading your research over the years, I
Speaker 1: can't just look at top line same store sales also
Speaker 1: have to look at promotion activities that goes right the
Speaker 1: profit Margins did. What did we learn from target ors
Speaker 1: maybe some of the other retailers you follow about the
Speaker 1: promotional activity to drop those holiday sales. Yeah, so, so
Speaker 1: one of the categories that we tracked very closely is toys,
Speaker 1: and we tracked toy prices throughout the holiday season, and
Speaker 1: Target consistently was more expensive than both Amazon and Walmart.
Speaker 1: So that may be playing into some of the results
Speaker 1: in toys that they had. UM With regards to promotions
Speaker 1: over Black Friday and and Cyber Monday, UM, Targets promotions
Speaker 1: were different this year. So last year on Cyber Monday
Speaker 1: they gave fifteen percent off on everything on their site.
Speaker 1: This year it was very strategic specific UM discounts. And
Speaker 1: so even though that may be better for Margins overall,
Speaker 1: it seems that it did have a definite impact on
Speaker 1: top line sales going forward. Do we have a sense
Speaker 1: of Walmart. We know that their shares also fell in
Speaker 1: sympathy with Target, Are they going to face some of
Speaker 1: the same issues, well, you know, with regards to specifically toys, UM,
Speaker 1: you know, we think that they may have fared a
Speaker 1: little bit better just because they were more price competitive
Speaker 1: and they're out of stocks Rose, which implies that they
Speaker 1: ran through their inventory at a little bit of a
Speaker 1: faster pace than Target did across the season. Um, across
Speaker 1: the broader store. UM, it's hard to say. Um. They
Speaker 1: also had a strong holiday last year. UM. And so
Speaker 1: it could well be that they did well in certain
Speaker 1: categories and less well in other category as much as
Speaker 1: Target did. JEN what do we learn from the e
Speaker 1: commerce side of Target? I remember, you know, last four
Speaker 1: quarters really strong e commerce reven or growth kind of
Speaker 1: led me to believe that the Targets and the Walmarts
Speaker 1: of the world have kind of figured out how to
Speaker 1: compete against Amazon. Well, what was interesting about the revenue
Speaker 1: growth and and the percentage it was for Target over
Speaker 1: the holiday season, which is not bad, um, But what
Speaker 1: we're really seeing is that a big portion of that
Speaker 1: overall growth came from same day fulfillment options. So that's
Speaker 1: where you order it Neither you pick it up at
Speaker 1: the store, um, delivered to your car, or you go
Speaker 1: in the store to pick it up. And that actually
Speaker 1: is the part that is interesting with regards to competition
Speaker 1: against Amazon, because even though Amazon has free next Days,
Speaker 1: you know, shipping and in some markets free same day shipping.
Speaker 1: UM it's still very difficult to compete with UM a
Speaker 1: Target or a Walmart who can offer that same service
Speaker 1: and you know that you're going to have it in
Speaker 1: hand by the end of the day. Just real quick here, Jed.
Speaker 1: Earlier you're speaking about the target experience. What is the
Speaker 1: target experience? Well, when you know, when when their their
Speaker 1: core customers go in and they expect to be delighted,
Speaker 1: and a lot of the they do. I mean, you know,
Speaker 1: when when you go in, you're a lot of the
Speaker 1: target core customers are into looking for that new piece
Speaker 1: of fashion, that new accessory, the new beauty product. Um
Speaker 1: And and a lot of the Turket has made in
Speaker 1: their stores has really been to reformat the stores to
Speaker 1: make it easier to you know, access and to be
Speaker 1: inspired by the products that they have their UM and
Speaker 1: that has really bolstered same store sales over the last year.
Speaker 1: Now they're coming to where they've done a lot of
Speaker 1: those remodels, so it'll be interesting to see going forward
Speaker 1: whether they're able to sustain that same amount of traffic
Speaker 1: into their stores that they were able to generate off
Speaker 1: the heels of those renovations. Jen Bratashes, thank you so
Speaker 1: much of Bloomberg Intelligence. Paul literally turning my mic off
Speaker 1: and saying, don't do it. Whatever you're gonna say, don't
Speaker 1: do it, and I gotta say my My only point
Speaker 1: is the big box stores. The whole design of them
Speaker 1: was to make it look like you're going to get
Speaker 1: a deal, not an experience, right, I mean that was
Speaker 1: sort of the idea. I understand going in and being
Speaker 1: excited about getting something that you can get, but delighted.
Speaker 1: I mean, yes, I guess that's what the millennials and
Speaker 1: the gen xers want. They want experiences. I don't disagree
Speaker 1: with that, but I'm just I think people just want
Speaker 1: a good deal. Okay, thanks for listening to the Bloomberg
Speaker 1: pen L podcast. You can subscribe and listen to interviews
Speaker 1: at Apple Podcasts or whatever podcast platform you prefer. I'm
Speaker 1: Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa Bramwoyits.
Speaker 1: I'm on Twitter at Lisa Bramwoyits one before the podcast.
Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio