WEBVTT - U.S. Middle Class' Income is Frozen, Aulette Says 0:00:06.320 --> 0:00:12.960 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jay Leye. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:33.400 Bloomberg dot Com, and of course on the Bloomberg. We're 0:00:33.400 --> 0:00:36.479 beginning them with a story of volatility. The volatility appears 0:00:36.479 --> 0:00:38.239 to be on the front pages of most of the 0:00:38.280 --> 0:00:41.760 international newspapers. You don't really see it in the market. 0:00:41.840 --> 0:00:45.199 In the United States, the VIX index very briefly traded 0:00:45.280 --> 0:00:48.240 with an eleven handle this morning. So where is the vault? 0:00:48.320 --> 0:00:50.680 I feel like it's seen again. Let's bring into Bias 0:00:50.760 --> 0:00:54.000 Left Kovic, City Chief US equity strategist. Good morning to Bias, 0:00:54.040 --> 0:00:57.160 Good morning, I'm very well the front pages of most 0:00:57.160 --> 0:00:59.600 of the newspapers freaking out as they usually do. To Bias. 0:01:00.040 --> 0:01:02.720 Don't see it in the market, do you not? Really? Um? 0:01:03.160 --> 0:01:05.759 You mentioned the VIX. We we track our Panicky four 0:01:05.760 --> 0:01:08.560 a model, which is more a proprietary model looking at positioning, 0:01:08.920 --> 0:01:10.880 and we're seeing kind of neutral levels. Back if you 0:01:10.880 --> 0:01:14.040 went to January, everybody was really excited and that's kind 0:01:14.040 --> 0:01:16.640 of fallen off with some inflation fears back in February, 0:01:17.040 --> 0:01:19.680 and investors now are getting buffetted, if you like, by 0:01:19.959 --> 0:01:22.280 concerns on let's say trade. But on the other side, 0:01:22.319 --> 0:01:24.800 they're saying, hey, earnings are pretty good, buybacks are pretty good, 0:01:25.040 --> 0:01:26.920 so they're not that rattled. No, so we have this 0:01:27.000 --> 0:01:29.960 story where the secular growth story holds up. You see 0:01:29.959 --> 0:01:32.080 that in tech, where the earnings have been terrific. Text 0:01:32.080 --> 0:01:35.080 stocks all time highs, and that's that record high small 0:01:35.120 --> 0:01:37.280 caps in the United States off the back of a 0:01:37.280 --> 0:01:40.240 stronger domestic economy that russell at all time high. So 0:01:40.280 --> 0:01:42.319 set me up for summer. To b us your note 0:01:42.400 --> 0:01:45.520 this morning, tourists often head out for summer. I read 0:01:45.520 --> 0:01:48.120 that earlier in the week. Yeah, a lot of that 0:01:48.120 --> 0:01:50.240 had to do with we got this little fear last 0:01:50.240 --> 0:01:53.680 week around Italy and everybody kind of bolted from cyclicals. 0:01:54.080 --> 0:01:56.920 They backed off their financials as bond yields moved in 0:01:57.240 --> 0:01:59.240 kind of as a as a function of the safe 0:01:59.240 --> 0:02:02.840 have and trade. So investors don't have great conviction in 0:02:03.120 --> 0:02:06.240 their positions. The one area they do is intact where 0:02:06.280 --> 0:02:08.200 they feel very comfortab about the long term growth story. 0:02:08.280 --> 0:02:12.240 But my only argument there would be everybody knows that already. 0:02:12.360 --> 0:02:14.120 You know, what's your incremental piece of good news. It's 0:02:14.120 --> 0:02:16.640 going to drive those stocks even higher. You mentioned small 0:02:16.680 --> 0:02:19.160 caps wasn't a risk trade, it was a dollar trade. 0:02:19.480 --> 0:02:21.239 As the dollar went up, it kind of dragged the 0:02:21.320 --> 0:02:24.120 small caps up with them. They're they're very sensitive to 0:02:24.240 --> 0:02:26.720 those currency moves. So it's not even that people are 0:02:26.720 --> 0:02:29.799 that excited about the small cap growth domestic economy story, 0:02:29.800 --> 0:02:32.120 because I could have made that argument three or four 0:02:32.160 --> 0:02:33.959 or five months ago and they weren't participating in the 0:02:34.040 --> 0:02:39.040 same way. So it's more a currency issue. In general, 0:02:39.120 --> 0:02:42.880 investors have been kind of looking for something that's going 0:02:42.919 --> 0:02:46.040 to get them really excited. You can't cough until John coughs, 0:02:46.080 --> 0:02:48.639 and he can't cough till I cough. Well, I think 0:02:48.680 --> 0:02:53.760 everybody will ever again. If you can find me good 0:02:53.800 --> 0:02:57.880 allergy medicine, I'm buying that stock. Tom Tom Kane has 0:02:57.880 --> 0:03:01.160 got some good meds I have, And you know it's 0:03:01.280 --> 0:03:09.040 it's it's shaking forever um Tobias. When we look at 0:03:09.240 --> 0:03:11.600 the spirit of the equity markets, there's got to be 0:03:11.600 --> 0:03:14.240 an opportunity, it's got to be a value. Which sector 0:03:14.840 --> 0:03:16.560 is the one where you go? You know this hasn't 0:03:16.600 --> 0:03:20.519 moved like Amazon. There's a real opportunity here either to 0:03:20.760 --> 0:03:24.040 make a total return or to protect myself of things 0:03:24.120 --> 0:03:26.080 fall apart, which is that sector. So if I have 0:03:26.120 --> 0:03:27.919 to think about protect they're a little different. If I 0:03:28.000 --> 0:03:30.359 have to think about protection, it's it's things like farm 0:03:30.440 --> 0:03:33.360 in biotech where they really drive to beat of a 0:03:33.360 --> 0:03:38.560 different drummer, and it's a function of pipelines, FDA approval, 0:03:38.720 --> 0:03:42.440 those kind of factors. Um. They're they're defensive and in 0:03:42.480 --> 0:03:44.560 the in the generic sense, but they also have this 0:03:44.640 --> 0:03:49.040 kind of relationship to increase volatility if we get it um. 0:03:49.120 --> 0:03:51.080 On the other side, I think areas like energy have 0:03:51.120 --> 0:03:53.680 been left a bit in the dust here. People have 0:03:53.680 --> 0:03:56.480 have very low conviction in the ability for the industry 0:03:56.520 --> 0:03:59.680 to maintain profitability and at the same time that the 0:04:00.000 --> 0:04:03.800 industry can't actually put in more production in the premium 0:04:03.800 --> 0:04:07.440 basin right now because there's all these pipeline bottlenecks. I mean, 0:04:07.880 --> 0:04:09.880 all Street Journal had a great charter lumber. Today, I 0:04:09.920 --> 0:04:13.760 took it off the Bloomberg terminal and did inflation adjusted lumber, 0:04:14.240 --> 0:04:17.120 and we're really very peaky. Are we seeing a commodity 0:04:17.200 --> 0:04:21.479 turn including oil, including lumber, etcetera. So I know that 0:04:21.480 --> 0:04:24.240 you followed Morse's work pretty closely at City, and they 0:04:24.240 --> 0:04:27.400 do believe that commodities are are probably an interesting area 0:04:27.440 --> 0:04:30.640 to go. The one risk would be very powerful dollar 0:04:30.760 --> 0:04:33.760 that would hurt commodities. UM, we don't see the reason 0:04:33.880 --> 0:04:36.440 for a very powerful dollars. I don't see a particularly 0:04:36.440 --> 0:04:39.080 great reason for for a horrible dollar either. So we're 0:04:39.080 --> 0:04:41.320 gonna kind of trade around here, and that gives commodities 0:04:41.320 --> 0:04:44.359 the ability to UH to continue moving higher. So we 0:04:44.400 --> 0:04:46.640 do like material stocks as well, but energies one where 0:04:46.680 --> 0:04:50.040 I think investors have extremely low belief in the disciplined 0:04:50.080 --> 0:04:54.200 industry UM, which almost can't get undisciplined in its capital 0:04:54.279 --> 0:04:58.000 spending activity in midwestern Texas simply because they can't move 0:04:58.040 --> 0:04:59.919 the oil right now, can we spend a little bit 0:04:59.920 --> 0:05:03.279 a on talking about another convictions right? Um sector convictions 0:05:03.360 --> 0:05:05.240 right for a lot of people, financials, and it just 0:05:05.600 --> 0:05:07.800 isn't delivering. Um. You spend a little bit of time 0:05:07.800 --> 0:05:10.280 researching this over the last week, and I mentioned the 0:05:10.400 --> 0:05:12.640 last few years as well, just why isn't that delivering? 0:05:12.640 --> 0:05:14.480 Why is it a story of seven seen and the 0:05:14.600 --> 0:05:16.919 eight seen? So so I think part of the reason 0:05:16.960 --> 0:05:19.560 for financials, and I can't necessarily tell you what everybody thinks, 0:05:19.600 --> 0:05:21.359 but I think part of the reason for financials is 0:05:21.400 --> 0:05:24.760 that UM it's viewed as an industry potentially under attack, 0:05:25.200 --> 0:05:29.640 similarly retail, similar to energy with technology changes, so fintech 0:05:29.720 --> 0:05:32.640 the idea that you could, you know, pay without using 0:05:32.680 --> 0:05:36.119 your credit card and some other system for whatever product 0:05:36.200 --> 0:05:38.560 you want to buy, that they're being bypassed. The same 0:05:38.600 --> 0:05:40.080 thing on the lending side, if you go to some 0:05:40.120 --> 0:05:45.240 of the you know, crowdfunding lending UM alternatives. We think 0:05:45.279 --> 0:05:47.960 that's all fair and dandy and that people who have 0:05:48.000 --> 0:05:50.640 this perspective, But the big story in our mind is 0:05:50.640 --> 0:05:54.839 a pickup that's coming in in commercial industrial lending. That 0:05:55.040 --> 0:05:57.599 usually has about a six quarter lag from when you 0:05:57.640 --> 0:06:00.080 see change and lending standards. So if you were all 0:06:00.120 --> 0:06:02.880 back in late in early twenty six rather there was 0:06:02.920 --> 0:06:05.680 a lot of pressure around the energy sector causing disruption 0:06:05.680 --> 0:06:09.280 in credit markets, and that showed up in terms of 0:06:09.360 --> 0:06:11.960 learning activity in the latter part of last year. Six 0:06:12.040 --> 0:06:15.359 quarters later. That started inflecting in the first quarter, and 0:06:15.400 --> 0:06:19.520 we would expect a meaningful improvement in the next couple 0:06:19.520 --> 0:06:22.640 of three quarters in learning activity for commercial industrial loans. 0:06:23.000 --> 0:06:24.760 That's a function of M and A. It's a function 0:06:24.800 --> 0:06:28.520 of of major capital aspenditures that you can't go out 0:06:28.520 --> 0:06:32.640 and borrow ten billion dollars in some crowdfunding aspect, you 0:06:32.680 --> 0:06:34.440 have to go to the syndicates of the banks. It's 0:06:34.440 --> 0:06:38.559 the tax plan a big factor. It helps at the margin. 0:06:38.640 --> 0:06:41.720 So one of the really distinctive and divergent trends, as 0:06:41.760 --> 0:06:44.560 we saw in May, the Senior Loan Officer survey from 0:06:44.600 --> 0:06:47.320 the Followerserve Board come out showing further easing and credit 0:06:47.400 --> 0:06:50.120 standards in an environment where we're seeing Wait a minute, 0:06:50.160 --> 0:06:53.320 but the feather raising rates bonules are higher, credit spreads 0:06:53.320 --> 0:06:56.320 of widened some degree. Um. Isn't that kind of the 0:06:56.360 --> 0:07:00.839 exact opposite direction. Um. So what a lot of banks 0:07:00.839 --> 0:07:03.240 told you when they got the tax cuts was that 0:07:03.279 --> 0:07:05.240 they would use about half of the savings and the 0:07:05.279 --> 0:07:08.919 tax cuts to be more competitive and provide better terms 0:07:08.920 --> 0:07:12.000 to corporate lenders. And that's exactly what they seem to 0:07:12.040 --> 0:07:15.040 be doing. Levich Greta can't shop me this morning. Cities 0:07:15.120 --> 0:07:18.320 chief US equity strategist with a cough like the rest 0:07:18.320 --> 0:07:34.400 of us with us John Taft, he is vice chairman 0:07:34.440 --> 0:07:38.400 of Baird among other services, working with RBC and Mini 0:07:38.480 --> 0:07:42.280 Eppo shops before that, but much more. Also on his 0:07:42.400 --> 0:07:46.720 important book of X number of years ago called Stewardship, which, 0:07:46.800 --> 0:07:51.320 to give you a perspective, Taft the Republican at a 0:07:51.320 --> 0:07:54.720 blurb from one B. Frank Barney Frank. How did that 0:07:54.840 --> 0:07:57.320 come about? How did Barney Frank? You know, you look 0:07:57.320 --> 0:07:58.720 at the back of the book and you go Barney 0:07:58.720 --> 0:08:01.800 Frank's telling us shot up and read John Taft, how 0:08:01.840 --> 0:08:04.760 did that happen? Yeah? And he wrote about how surprised 0:08:04.800 --> 0:08:08.560 it was that John Taft had something he felt worth endorsing. 0:08:08.960 --> 0:08:13.600 Actually it came about because during the financial crisis, I 0:08:13.680 --> 0:08:19.080 testified to his committee in favor of a fiduciary standard 0:08:19.080 --> 0:08:22.880 of care for financial advisors providing advice to individual investors. 0:08:23.600 --> 0:08:26.800 And uh, well, you say, what a shock. But Tom, today, 0:08:26.880 --> 0:08:31.520 almost ten years later, we're still debating whether that's a 0:08:31.560 --> 0:08:34.720 good idea. Why do we need a fiduciary care act? 0:08:34.840 --> 0:08:37.200 If we have prudent man rule from Mr Putnam a 0:08:37.200 --> 0:08:40.640 few years before the test And this has been the 0:08:40.720 --> 0:08:44.880 debate going on for the last ten years. Here's what's 0:08:44.960 --> 0:08:47.440 what's happening today. Though we're in a good place anyway, 0:08:47.520 --> 0:08:50.000 that's how Barney Frank came to came to normally around 0:08:50.000 --> 0:08:53.600 the fiduciary standard. But what's happened is the SEC was 0:08:53.679 --> 0:08:56.760 given by Barney Frank and his committee the authority to 0:08:56.840 --> 0:09:01.960 write a fiduciary rule. They didn't. Then the Department of 0:09:02.040 --> 0:09:04.520 Labor under Tom Perez came in and wrote a rule 0:09:04.559 --> 0:09:06.320 that quite frankly, I would think was one of the 0:09:06.400 --> 0:09:09.040 worst pieces of financial regulation to come out of the 0:09:09.040 --> 0:09:12.720 financial crisis that now has been thrown out by a court. 0:09:12.920 --> 0:09:17.680 And mercifully, the SEC under Jay Clayton is stepping through 0:09:17.679 --> 0:09:22.199 the four and there and they've proposed regulation best interest 0:09:22.280 --> 0:09:25.959 exactly what you're talking about, the Putnam formulation. Why do 0:09:26.000 --> 0:09:29.040 you need a financial finucier rule If there's a regulation 0:09:29.120 --> 0:09:32.319 saying you have to put clients interests first without regard 0:09:32.400 --> 0:09:35.840 to your own financial situation, that's what the SEC is doing. 0:09:36.120 --> 0:09:39.520 The SEC knows what he's doing. And finally we may 0:09:39.559 --> 0:09:43.160 get a rule that has a uniform and higher level 0:09:43.480 --> 0:09:46.480 of investor protection than we've had in the past. That'll 0:09:46.520 --> 0:09:48.760 be good for everybody, good for the industry, and good 0:09:48.800 --> 0:09:52.000 for clients. And you mentioned Jake Clayton and he's we've 0:09:52.000 --> 0:09:54.199 had him in for interviews and also of course his 0:09:54.240 --> 0:09:56.360 work at the Economic Club of New York. And I 0:09:56.400 --> 0:09:59.680 would mention the chairman Levitt is a fan of what 0:09:59.720 --> 0:10:03.360 he's seas in Germany, Clayton, and that speaks to normalcy 0:10:03.679 --> 0:10:07.760 within regulation, normalcy within Washington, and it speaks to a 0:10:07.800 --> 0:10:11.240 normalcy which is the fabric of the Taft family going 0:10:11.320 --> 0:10:14.960 back to President and Chief Justice taff and frankly long 0:10:15.000 --> 0:10:18.439 before that as well. Do you see a normalcy out 0:10:18.520 --> 0:10:23.120 there within political and financial America right now? I so 0:10:23.120 --> 0:10:26.920 I'm gonna answer the question yes, but I mean yes 0:10:26.960 --> 0:10:29.880 and no. So here's what I mean. If you look 0:10:30.000 --> 0:10:38.000 at the political UH dialogue, the process, the dysfunctionality UH 0:10:38.160 --> 0:10:41.760 at the highest levels of our political leadership, you would say, no, 0:10:42.000 --> 0:10:46.080 we're as far away from what my family represented in 0:10:46.120 --> 0:10:49.439 their six decades of public services you can get. On 0:10:49.480 --> 0:10:53.439 the other hand, if you look at the actual policies 0:10:53.640 --> 0:10:57.560 coming out, in particular in the financial sector. So a 0:10:57.640 --> 0:11:01.079 year ago, Secretary of Treasury and the new oution signaled 0:11:01.200 --> 0:11:04.040 what the Trump Administration's going to do, and they've been 0:11:04.120 --> 0:11:08.720 executing it. And guess what, it actually makes sense. It's 0:11:08.800 --> 0:11:16.080 reasonable and appropriate. The pendulum of financial regulation swung much 0:11:16.240 --> 0:11:21.040 too far to the excessive side of the equations to 0:11:21.080 --> 0:11:24.480 financial crisis, and now we're just correcting it back to 0:11:24.600 --> 0:11:27.160 a level that's appropriate. But you listen to the Elizabeth 0:11:27.160 --> 0:11:29.480 Warrens of the Earth world and it's like the end 0:11:29.559 --> 0:11:32.679 of Western humanity. I want to go back to incentives here, 0:11:32.679 --> 0:11:35.240 which is something you've had to deal with across wealth 0:11:35.280 --> 0:11:38.559 management at over we C and with your stewardship Bart. 0:11:38.640 --> 0:11:41.600 And that is the idea that I hear this from 0:11:41.679 --> 0:11:44.520 people all the time, and that executives today are so 0:11:44.600 --> 0:11:50.319 incentivized off of their income statement and off of profit 0:11:50.880 --> 0:11:53.880 that labor is not getting their fair share. If we 0:11:54.000 --> 0:11:57.400 gone is a pendulum gone so far that executives are 0:11:57.440 --> 0:12:02.080 only representing themselves. The issue greater good, the issue that 0:12:02.559 --> 0:12:08.520 financial institutions have been dealing with since the partnership model 0:12:09.440 --> 0:12:14.720 went away, since people who own and ran financial services 0:12:14.760 --> 0:12:17.840 firm no longer had their own capital at risk, is 0:12:17.880 --> 0:12:22.160 the agency problem. There's an asymmetric ward system, i e. 0:12:22.480 --> 0:12:24.720 The chance to make lots of money if things go well, 0:12:24.880 --> 0:12:28.240 but you lose nothing if things go poorly. That is 0:12:28.520 --> 0:12:32.240 the asymmetric compensation system that prevails today at Wall Street. 0:12:33.400 --> 0:12:36.240 One of the things that I've experienced recently, Tom, since 0:12:36.240 --> 0:12:38.640 I went back to work at Robert W. Beard, which 0:12:38.640 --> 0:12:44.160 is a hundred percent owned by its employees, is having 0:12:44.160 --> 0:12:46.200 your own capital at risk again. And you know what, 0:12:46.240 --> 0:12:49.960 it makes a complete difference. Um, it's not reasonable to 0:12:50.040 --> 0:12:54.400 expect that today, but we need incentive systems that recreate 0:12:54.480 --> 0:12:57.640 that with this. John Taft of Minneapolis, of course, and 0:12:58.480 --> 0:13:01.920 his good work. John Ferrell, my colleague, really doesn't understand 0:13:02.000 --> 0:13:04.559 the Minnesota vikings, so we have them reading I Did 0:13:04.600 --> 0:13:06.640 It my Way, A remarkable journey to the Hall of 0:13:06.640 --> 0:13:10.760 Fame by Bud Grant. But within that, John, is the idea, 0:13:11.000 --> 0:13:15.800 John Farrell, that that London global Wall Street is different. 0:13:15.840 --> 0:13:19.240 Do you do, John Taft, do you distinguished between how 0:13:19.240 --> 0:13:22.480 we're doing this in America between what we're seeing in 0:13:22.480 --> 0:13:25.720 the city in London. I don't. I don't know the 0:13:25.800 --> 0:13:28.960 London environment. I can tell you that how you do 0:13:29.040 --> 0:13:32.959 things in New York is different from the heartland. How 0:13:33.000 --> 0:13:34.760 you do things in the Heartland. You asked me that 0:13:34.840 --> 0:13:39.559 question on on your show earlier today. In other words, uh, 0:13:39.679 --> 0:13:43.240 we keep focusing on a half dozen financial institutions based 0:13:43.280 --> 0:13:45.679 here in New York or in a major financial system guilt. 0:13:45.760 --> 0:13:49.600 There are tens of thousands of financial institutions across the 0:13:49.600 --> 0:13:54.080 country who have their own capital at risk and who 0:13:54.120 --> 0:13:59.520 serve middle market and individual clients. And that's the Wall 0:13:59.559 --> 0:14:01.960 Street that we don't pay attention to. Is that true 0:14:01.960 --> 0:14:05.200 in England? Is that? Is it a London focus or 0:14:05.240 --> 0:14:08.200 is it just like Canada more consolidate And there's very 0:14:08.240 --> 0:14:10.720 much London focus in the UK across the board, and 0:14:10.760 --> 0:14:13.400 not just in finance. That's been the accusation against the 0:14:13.520 --> 0:14:15.680 UK for ages. Just to wrap things up with you, John, 0:14:15.760 --> 0:14:18.800 you mentioned Senator Warren and her pushing back against a 0:14:18.840 --> 0:14:21.480 little bit of deregulation to what extent is there still 0:14:21.520 --> 0:14:24.800 just a political football and about points scoring. I think 0:14:24.880 --> 0:14:27.880 it's entirely a political football and about point scoring, because 0:14:27.920 --> 0:14:31.560 if you look at what's going on in deregulation, honestly done, 0:14:31.840 --> 0:14:35.400 it is tweaking. It is not whole scale scaling back 0:14:35.480 --> 0:14:38.480 do Frank and the tweaks are appropriate, and the tweaks 0:14:38.520 --> 0:14:43.040 will remove irritance and impediments to financial institution in tuitions 0:14:43.120 --> 0:14:45.359 doing what they're supposed to do, which is to facilitate 0:14:45.440 --> 0:14:48.160 economic growth. John' taft. Great to have a bit of 0:14:48.160 --> 0:14:52.040 presidential blood around the table in New York City, great 0:14:52.080 --> 0:14:56.080 great grandfather John. Yes, amazing, And it was also Chief 0:14:56.120 --> 0:14:59.320 Justice John Ferro. This is a real distinguishing feature. Yeah, 0:14:59.400 --> 0:15:01.840 that's what he really wanted to do, but he did 0:15:01.880 --> 0:15:06.000 the the the political band first. Right to have you 0:15:06.000 --> 0:15:08.480 with us, Bunce, Chairman of BET, Thank you very much. 0:15:20.880 --> 0:15:25.560 Shannon O'Neil has been wonderful and Latin American studies on Mexico, 0:15:25.640 --> 0:15:29.280 but much more on overall Latin America on some of 0:15:29.320 --> 0:15:32.720 the dynamics here. She's at the Council on Foreign Relations 0:15:32.720 --> 0:15:37.120 where she is the Nelson and David Rockefeller Senior Fellow 0:15:37.160 --> 0:15:40.320 for Latin American Studies, and we're honored that she can 0:15:40.400 --> 0:15:43.880 join us now this morning. Shannon, is Brazil just simply 0:15:43.920 --> 0:15:47.280 the usual Brazilian politics or is there something else going 0:15:47.360 --> 0:15:51.800 on this time? Well, good morning, Tom, nice to join you. 0:15:51.800 --> 0:15:53.880 You know, it makes a bit of both. There are 0:15:54.160 --> 0:15:56.800 particular things that are happening right now. We have seen 0:15:57.280 --> 0:16:01.280 some very serious strikes go nationwide. Truckers pull over and 0:16:01.320 --> 0:16:04.600 stop delivering goods, to the point where millions of chickens 0:16:04.600 --> 0:16:07.480 were dying because there was no feed. Airplanes weren't taking 0:16:07.480 --> 0:16:09.400 off because there was no fuel. So we've seen some 0:16:09.800 --> 0:16:13.760 immediate disruptions in the economy, but it's also these bigger 0:16:13.800 --> 0:16:16.480 fundamental issues that I think investors are finally looking at 0:16:16.480 --> 0:16:19.840 the ones you mentioned. And Brazil has incredibly high debt 0:16:19.880 --> 0:16:23.040 to GDP ratio, so as people look to rising interest 0:16:23.120 --> 0:16:25.360 rates the United States and more globally, this is a 0:16:25.400 --> 0:16:28.000 country that's going to get hit hard. Well, Shannon, I 0:16:28.040 --> 0:16:30.120 think you bring up an important point because a lot 0:16:30.160 --> 0:16:32.680 of people look at Brazil. I think that the story 0:16:32.720 --> 0:16:34.800 of the last ten years was a commodity story, but 0:16:35.040 --> 0:16:36.800 actually a lot of the growth came off the back 0:16:36.800 --> 0:16:40.080 of credit, didn't it, Shannon. It did. Credit was a 0:16:40.080 --> 0:16:42.640 big part of a consumption was a real engine for 0:16:42.760 --> 0:16:45.320 Brazil for many of these years. We saw through that 0:16:45.440 --> 0:16:48.600 the two thousands, you know, thirty million people come into 0:16:48.600 --> 0:16:51.720 the middle class, start buying those first refrigerators and cars 0:16:51.760 --> 0:16:54.920 and other kinds of appliances and the like. And now 0:16:55.040 --> 0:16:58.760 that has been fading. Um. So that engine um was 0:16:59.240 --> 0:17:01.640 that dying part of the recessions they've gone through, and 0:17:01.680 --> 0:17:04.159 the real question is can they pull back out of it, um, 0:17:04.200 --> 0:17:07.720 and can they really restart that engine. His Trump trade 0:17:08.000 --> 0:17:14.520 action and discourse allowed an entree for China into Brazil, 0:17:14.760 --> 0:17:19.280 or at the margin, a greater China investment into Brazil. 0:17:21.359 --> 0:17:25.160 China has been investing in Brazil all along, but primarily 0:17:25.359 --> 0:17:29.120 in their natural resources, both in the actual resources themselves 0:17:29.440 --> 0:17:32.240 and then somewhat in the logistics to get those resources 0:17:32.280 --> 0:17:35.840 out of Brazil and to China. So you know, energy 0:17:36.080 --> 0:17:39.400 and soy and beef and all sorts of things to 0:17:39.400 --> 0:17:43.200 to provide for the Chinese people, but in also their market. 0:17:43.240 --> 0:17:46.359 So that's really where they are thinking about investing. But 0:17:46.400 --> 0:17:49.359 the fact of the United States is closing itself and 0:17:49.480 --> 0:17:53.040 go into more protection stands means Brazil has been looking elsewhere. 0:17:53.040 --> 0:17:55.119 They first have been looking towards their neighbors and to 0:17:55.280 --> 0:17:58.199 the EU. But if those countries don't respond, and they 0:17:58.200 --> 0:18:00.439 will look to China. Okay, But you know not that 0:18:00.480 --> 0:18:02.399 you're looking at the currency day to day on your 0:18:02.400 --> 0:18:06.639 Bloomberg gap on your cell phone, Shannon. But M and 0:18:06.720 --> 0:18:11.119 I see some dynamics in Argentina. We see the horror true, 0:18:11.119 --> 0:18:15.200 you know, no jokes. I mean of Venezuela. The stability 0:18:15.280 --> 0:18:18.879 of the region is suspect to say the least, is 0:18:18.880 --> 0:18:22.440 it business is usual in Latin America. Are we really 0:18:22.480 --> 0:18:27.439 waiting here for some exogenous or endogenous shock to upset 0:18:27.520 --> 0:18:32.440 this very large nation of Brazil. Well, this year in 0:18:32.520 --> 0:18:35.480 Latin America, two out of every three voters is going 0:18:35.480 --> 0:18:38.240 to the polls to elect a new president. And most 0:18:38.280 --> 0:18:40.359 of these are not going to be incumbents. There's not 0:18:40.480 --> 0:18:42.480 re election, so the new people coming in. So this 0:18:42.720 --> 0:18:45.680 is a really pivotal moment in the region. And as 0:18:45.720 --> 0:18:49.119 you mentioned, there are these big problems. Most voters are 0:18:49.119 --> 0:18:51.480 going to go to the poll for domestic reasons. So 0:18:51.520 --> 0:18:53.879 when you think about Brazil, they are going to go 0:18:54.000 --> 0:18:57.600 because they're tired of recession, They're tired of the corruption 0:18:57.680 --> 0:19:00.680 of their political class. They're going quite angry, and they're 0:19:00.720 --> 0:19:03.760 looking for someone to vote for as an outsider. And 0:19:03.840 --> 0:19:06.919 that is really the challenge because Brazil in order to 0:19:06.960 --> 0:19:09.240 manage it, in order to work with Congress to get 0:19:09.240 --> 0:19:12.800 the structural reforms that Brazil needs and investors want things 0:19:12.800 --> 0:19:15.159 like pension reform, and they're like, you have to have 0:19:15.200 --> 0:19:17.679 this compromise. I think that too, is why we're seeing 0:19:17.720 --> 0:19:20.600 the rail being hit. People are looking towards two thousand 0:19:20.680 --> 0:19:24.080 eighteen for Brazil, and they're seeing more paralysis on the 0:19:24.119 --> 0:19:27.359 policy side. Shannon, with us with the Console Foreign Relations 0:19:27.400 --> 0:19:30.240 and and for briefings on so many of these topics. 0:19:30.240 --> 0:19:32.600 You can really start with the website of Mr Hassa's 0:19:33.200 --> 0:19:36.679 Council on Foreign Relations. Shannon, you wrote a definitive post 0:19:37.240 --> 0:19:40.400 literally within the last forty eight hours. Mexico knows how 0:19:40.440 --> 0:19:43.080 to fight a trade war. Does Mr Trump know that? 0:19:43.240 --> 0:19:46.720 Is he aware that Mexico and their brethren to the north, 0:19:46.800 --> 0:19:51.359 the Canadians, actually may have a cogent in organized response 0:19:51.800 --> 0:19:55.720 to Trump's NAFTA discussions. I don't know if he was 0:19:55.760 --> 0:19:57.520 prepared for it, but I can tell you that the 0:19:57.560 --> 0:20:00.480 Midwest farmers and they act businesses, they definitelyly know that 0:20:00.640 --> 0:20:03.560 Mexico and Canada have a few cards up their sleeve. 0:20:03.680 --> 0:20:07.920 And already we've seen Mexico step forward and and targets 0:20:08.000 --> 0:20:13.000 specific congressional district and specific products. So it's potatoes and 0:20:13.080 --> 0:20:18.280 apples and cheese and pork and specific products. So we're 0:20:18.280 --> 0:20:20.040 starting to see that, and you're going to see members 0:20:20.040 --> 0:20:23.640 of Congress already their constituents start calling them saying, look, 0:20:23.680 --> 0:20:25.680 we we have these big tariffs on our product. Can 0:20:25.680 --> 0:20:28.320 you do something. I mean, I mean within this is 0:20:28.760 --> 0:20:32.880 the age old question of now versus when you were 0:20:32.880 --> 0:20:35.879 first studying this years ago. And I go back again, 0:20:35.960 --> 0:20:38.320 folks to a piece on mercatilism a few days ago 0:20:38.359 --> 0:20:42.560 from Katherine Rample and the Washington Post. And Katherine Rample 0:20:42.600 --> 0:20:49.000 makes a distinction of Finnish goods policies versus inputs policies. 0:20:49.480 --> 0:20:52.240 Describe your expertise, and you've written about this in your 0:20:52.280 --> 0:20:56.840 books of the input back and forth at the Mexican border. 0:20:58.760 --> 0:21:01.320 But one of the interesting things that nafta broad about, 0:21:01.320 --> 0:21:03.640 which we don't talk a lot about, but it's not 0:21:03.800 --> 0:21:06.000 just that we import and export to each other, but 0:21:06.320 --> 0:21:08.320 what we're sending back and forth are what are called 0:21:08.359 --> 0:21:10.840 intermediate goods. So the pieces and parts that will come 0:21:10.880 --> 0:21:14.199 together to make a car or a plane or medical 0:21:14.200 --> 0:21:17.400 devices are a whole host of things. And that has 0:21:17.440 --> 0:21:20.320 allowed companies off in US companies but off on Mexican 0:21:20.400 --> 0:21:24.159 companies to create things that are better and cheaper and 0:21:24.200 --> 0:21:27.240 able to compete with goods from China or the Europe 0:21:27.320 --> 0:21:30.040 or anywhere else in the world. And these terrorists that 0:21:30.080 --> 0:21:32.720 Trump is putting in on steel and aluminum, and perhaps 0:21:32.760 --> 0:21:36.000 the ones that come after. That is disrupting this process. 0:21:36.040 --> 0:21:39.359 And the challenge is it's going to make US companies 0:21:39.840 --> 0:21:43.040 less competitive visa v the products that are made in 0:21:43.080 --> 0:21:46.359 places like Asia, and that is what is breaking down 0:21:46.480 --> 0:21:50.840 with these beginning parrats. Your classic Two Nations Indivisible ends 0:21:50.880 --> 0:21:55.360 with a chapter which is deciding our mutual future. I'm 0:21:55.400 --> 0:21:58.600 not sure that the president administration is a mutual future 0:21:58.680 --> 0:22:03.160 with Mexico. Let's flip it. Does Mexico have a mutual 0:22:03.280 --> 0:22:05.919 future with the United States of America or is it 0:22:05.960 --> 0:22:11.000 just simply they don't have a choice. There is destiny 0:22:11.000 --> 0:22:14.000 and geography, so they will always be tied to the 0:22:14.040 --> 0:22:17.520 United States. But they will begin to pivot away from 0:22:17.560 --> 0:22:20.040 the United States, and we have will start seeing that. 0:22:20.119 --> 0:22:24.480 On trade, they just revamped and modernize their trade agreement 0:22:24.520 --> 0:22:27.880 with the European Union. Um they will start looking towards China. 0:22:27.920 --> 0:22:31.560 They'll start looking more broadly if we don't treat them well. 0:22:31.600 --> 0:22:34.240 And they too, are going about to go through an 0:22:34.240 --> 0:22:36.640 election in their country, and we could see a very 0:22:36.760 --> 0:22:41.040 different slate of bureaucrats and others that will not be 0:22:41.160 --> 0:22:43.520 quite as forgiving of the United States and some of 0:22:43.560 --> 0:22:47.440 our eccentricities. Recently, in terms of rhetoric towards that nation. 0:22:47.480 --> 0:22:49.439 So I think we're gonna see a real change in 0:22:49.600 --> 0:22:52.280 US Mexico relations going forward. Shannon, thank you so much. 0:22:52.920 --> 0:22:56.879