Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm term Keene jay Leie.
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Speaker 1: October eleventh, the United States signal did it had a
Speaker 1: Phase one trade deal with China. This was the President
Speaker 1: of the United States in the Oval Office with the
Speaker 1: Chinese delegation. He said, we have come to a deal
Speaker 1: pretty much subject to getting it written. It will take
Speaker 1: probably three weeks, four weeks or five weeks. That was
Speaker 1: five weeks ago. Five weeks later, and the Financial Times
Speaker 1: is reporting that both sides are still struggling to close
Speaker 1: the gap. They write that, according to people close to
Speaker 1: the talks, Trump administration officials are frustrated that China has
Speaker 1: not offered enough concessions to justify reduction in US tariffs
Speaker 1: on Chinese goods, along ending demand from Beijing that has
Speaker 1: become further entrenched in recent weeks. And yet, just as
Speaker 1: Larry Cudlow insist, we are coming down to the short strokes,
Speaker 1: we are in communication with them every single day, right
Speaker 1: now apparently that is enough to keep us at all
Speaker 1: time high school. But there was a news of the
Speaker 1: in the last dare too that they still haven't even
Speaker 1: agreed upon soybeans. I thought soybeans was the easy part
Speaker 1: of the deal. I thought intellectual property and other big
Speaker 1: issues were there going to be the really tough parts.
Speaker 1: But soybeans. The optimistic view of this market is unbelissable,
Speaker 1: isn't it? Here in New York City? I'm police to say,
Speaker 1: Howard Ward, give Belly Funds, Sea Hio of Growth Equities,
Speaker 1: a man that you were struggle to find on Wall
Speaker 1: Street at the moment, a man that doesn't believe in
Speaker 1: much of this and isn't getting behind the recent risk
Speaker 1: on rally. Howard, what's going on? Well, I think you've
Speaker 1: described the recent market action very accurately, But I do
Speaker 1: I think it's time for Larry Cover when the White House,
Speaker 1: to put up or shut up and stop manipulating the
Speaker 1: market by tweet and comment about how how good the
Speaker 1: talks are going. When the talks are done, tell us
Speaker 1: what you have. In the meantime, please keep quiet. This
Speaker 1: is really not, I think a professional way to be
Speaker 1: handling this situation. So is it sits here the market.
Speaker 1: It seems to be pricing in a phase one type
Speaker 1: of deal. We're not even sure what a phase one
Speaker 1: type of deal really will look like. So in the interim,
Speaker 1: how are you positioning yourself in the market? So um
Speaker 1: on the growth side, really, we've been pretty defensively positioned
Speaker 1: for the last year, and actually for all but the
Speaker 1: last five weeks or so. That's been a very good
Speaker 1: place to be on the last five weeks. So really
Speaker 1: going back to the announcement of the phase one deal
Speaker 1: that so seems so imminent five weeks ago. Uh. Since then,
Speaker 1: the defensives have underperformed. In the more cyclical stocks have
Speaker 1: done well. But I think we're at a point now
Speaker 1: where the pro cyclical rally over the last five six
Speaker 1: weeks is probably premature. I don't think the economics slow
Speaker 1: down has bottomed. I think we're we're looking at slower
Speaker 1: growth in the United States, in Japan, and Europe for
Speaker 1: next year. That's actually the consensus forecast, and earnings have
Speaker 1: stalled out. Earnings have contracted for the last couple of quarters.
Speaker 1: They're probably going to be flat to down this quarter.
Speaker 1: We're in an earnings recession. Meanwhile, the stocks are priced
Speaker 1: at seventeen eighteen times earnings, which is pretty full and
Speaker 1: market capp as a percentage of GDP is that an
Speaker 1: all time high, higher than it was at the peak
Speaker 1: in two thousand, which was the strongest bull market in history.
Speaker 1: With all that in mind, how and how do you
Speaker 1: position your staff gun into them. We've had so many
Speaker 1: people talking about buying the rest of the world load
Speaker 1: up on beta, by Europe, by Asia, by e M.
Speaker 1: What do you say back to them? What do you so?
Speaker 1: I think that you know, as a general rule, when
Speaker 1: the p M s and I want to say p
Speaker 1: M I s, I'm talking about the manufacturing p M
Speaker 1: I s because that they're the ones that give you
Speaker 1: the value added as an indicator, as a leading indicator.
Speaker 1: They create the beta in the economy and earnings and
Speaker 1: have been very helpful leading indicators when they're below fifty
Speaker 1: as they are and in downtrends. Okay, so maybe you
Speaker 1: had a minor uptick in the last month or two,
Speaker 1: there's still below fifty in down trends, and when earnings installed,
Speaker 1: this tends to be a dangerous time for stocks. So
Speaker 1: I would recommend that people not go after beta because
Speaker 1: when the p m izer declining, for example, the JP
Speaker 1: Morgan or Market m A r k I T Global
Speaker 1: Manufacturing p m I, when it's in a downtrend and
Speaker 1: below fifty, you tend to get pe compression. You tend
Speaker 1: to have stocks go down, and you want lower beta.
Speaker 1: You don't want higher beta when that when that indicator
Speaker 1: and is a downtrend, UH low beta tends to outperform.
Speaker 1: So I would stick with the low beta. And you know,
Speaker 1: all year long the emerging markets have underperformed, I wouldn't
Speaker 1: go after that. I wouldn't chase that. Particularly with what's
Speaker 1: going on in Hong Kong and China right now, we
Speaker 1: don't know how that's going to play out. China start
Speaker 1: up between a rock and a hard place. If they
Speaker 1: really clamped down in a military way with Hong Kong,
Speaker 1: that's gonna send a really chilling message to the world
Speaker 1: about doing business in Hong Kong. And if they back
Speaker 1: off and a seed to the demands of the demonstrators,
Speaker 1: well that sends perhaps a sets them up for some
Speaker 1: trouble in mainland China, which they don't want to invite.
Speaker 1: So they're in a really difficult situation. They're a little
Speaker 1: bit of a tight rope walk. We'll see how that
Speaker 1: plays out. So hard. I'm glad you brought up the
Speaker 1: p M s and the weakening p M e s.
Speaker 1: It kind of goes right back to the consumer puts
Speaker 1: more and more pressure on the consumer in this economy
Speaker 1: to keep things going. What's your view of the consumer
Speaker 1: right now? Well, the consumer has been a source of strength,
Speaker 1: and as you know, the labor market has been strong.
Speaker 1: It's been we've we've seen the unemployment rate it's sixty
Speaker 1: year lows, and the weekly unemployment claims have been bouncing
Speaker 1: along the bottom for several months. I do think it's
Speaker 1: it's it's exactly the time in this cycle, based on
Speaker 1: an analysis of the Fed funds rate with a two
Speaker 1: and a half year advance. That's because as the interest
Speaker 1: rate lags as considerable here in the market, we are
Speaker 1: exactly at the point in time when we should see
Speaker 1: an increase in weekly unemployment claims and right on q
Speaker 1: in the last two weeks we've seen increase five thousand
Speaker 1: two weeks ago, ten thousand or more this week, and
Speaker 1: the reading this week was the high reading since late June.
Speaker 1: It's a bit of a breakout in four week moving
Speaker 1: average technically bottomed in April but hasn't had much of
Speaker 1: an increase incident, but it is beginning to move higher now.
Speaker 1: If that number continues to advance, that is a real
Speaker 1: red flag for stocks because there's a strong negative correlation
Speaker 1: between weekly unemployment claims and the stock market. How would
Speaker 1: you think, and this would be a very contrarian cool
Speaker 1: at this point, that we might have seen a cyclical
Speaker 1: peak in the labor market in the United States of America.
Speaker 1: Oh absolutely, I think we're forming that as we speak,
Speaker 1: and look at the JOLTS data. Job opening data again
Speaker 1: is consistent with what would be arise and claims because
Speaker 1: the numbers for job openings have rolled over in recent weeks,
Speaker 1: consistent with full employment or a cyclical peak in the
Speaker 1: labor market, because those two things can be quite different. Well,
Speaker 1: full employment, of course is tricky because that gets you know,
Speaker 1: what is real full employment? When? When do you want
Speaker 1: to look at the labor participation rate which has been
Speaker 1: very sticky around seemingly forever. Uh, it has not increase
Speaker 1: the way you would have expected it to, you know,
Speaker 1: this far into an economic expansion, So cyclical peak, I
Speaker 1: think in employment is probably what we're a fun A
Speaker 1: word from you, then, Howard conviction call going into what
Speaker 1: do you do if you want to stay defensive the
Speaker 1: risk reward looking at the price of that story at
Speaker 1: the moment over the last six months or so, that
Speaker 1: story got quite expensive. What do you do? It's healthy.
Speaker 1: I think the healthcare sector, particularly the parts of health
Speaker 1: care that lagged this year, uh for political reasons HMS
Speaker 1: for example, and pharma fear of medicare for all. I
Speaker 1: don't think that's going to happen. And therefore I think
Speaker 1: there is some very good value in the United health
Speaker 1: cares and the humans and the Bristol Myers of the world.
Speaker 1: Howard would always great set thoughts, really thoughtful stuff as
Speaker 1: always get Ballly fund seat io of growth equities a
Speaker 1: test on equity market. But one man there, Paul Sweeney,
Speaker 1: the things you should still remain defensive because it's a
Speaker 1: little too premature to call the end of this global slump.
Speaker 1: Very very reasonable points Howard made, and uh, you know, clearly,
Speaker 1: I think it kind of comes down to the summer here.
Speaker 1: We know where the FED is, we know where earnings
Speaker 1: are um and you know, barring some major move on
Speaker 1: the trade front. Um, you know, it comes down to
Speaker 1: what can the you know this really this trade talks
Speaker 1: really deliver for the market. Do you remember the auto
Speaker 1: tariffs on Europe? What happened to them? We were meant
Speaker 1: to get an announcement on that this week. I haven't
Speaker 1: seen an announcement whatsoever. In fact, I've seen several reports
Speaker 1: that suggests the United States may well delay any decision
Speaker 1: on it. But I've seen nothing official from the administration.
Speaker 1: Not in the market for a new car, so I'm
Speaker 1: on that. Letby Cantroll, not on the market for a
Speaker 1: new car, Pimco's head of public policy. Let's be very
Speaker 1: little clarity on anything over the last five weeks except
Speaker 1: we're getting closer. We're getting closer, and we have heard that.
Speaker 1: We've heard that before. I mean, if you remember back
Speaker 1: in the spring, we were there to a to a
Speaker 1: much bigger and more comprehensive deal. Now we're just talking
Speaker 1: about a much skinnier deal. But even then, and this
Speaker 1: is what I've told our our clients that the things
Speaker 1: that we're asking China to do, even in sort of
Speaker 1: this scale down deal, are things that they've been very
Speaker 1: resistant to do. And um, I think it's a bit
Speaker 1: naive to think that they're going to change that posture,
Speaker 1: especially given that at least their perception is of the
Speaker 1: president that he's he's weaker domestically. They want to sort
Speaker 1: of wait this out, so they don't really have any
Speaker 1: incentive to give on these bigger structural issues. And it's
Speaker 1: those issues. I mean, there's a lot of press about
Speaker 1: the soybeans, but it's about i P enforcement, It's about
Speaker 1: forced technology transfer. It's these big things that have been
Speaker 1: the hang ups to to previous deals, um, that are
Speaker 1: still continue to be outstanding. Let me just take at
Speaker 1: each how those client conversations are going at the moment.
Speaker 1: For me, either investors thinking agreement with still materializes, or
Speaker 1: they just think that global growth bottoming. Isn't that dependent
Speaker 1: on a trade truce. What do they sink back to
Speaker 1: you in those conversation. Yeah, and you know, I think
Speaker 1: we would probably take issue with this idea that global
Speaker 1: growth is bottoming. Um. I mean, we think we still
Speaker 1: continue to see a deceleration. I think our view, at
Speaker 1: least in the US is that growth will probably bottom
Speaker 1: uh more in the first half of next year than
Speaker 1: it is now. But um, you know, with that with
Speaker 1: that aside. You know, I think I think the expectation
Speaker 1: right now, and I think where the market is priced
Speaker 1: is that we will get some sort of Phase one deal. Now,
Speaker 1: the way that I'm characterizing this with our clients is
Speaker 1: this is much more a reprieve from escalation than a
Speaker 1: de escalation. I mean, remember, we still have tariffs on
Speaker 1: three hundred sixty billion dollars of goods that is still
Speaker 1: impacting the real economic growth um and probably will continue
Speaker 1: to be a source of uncertainty for the markets as well.
Speaker 1: So even if we get a Phase one deal, I
Speaker 1: don't think uncertainty and tensions with China going away anytime soon,
Speaker 1: certainly not with this president, but even with a democratic president.
Speaker 1: So I think what we're saying is, yeah, this is
Speaker 1: you know, might be welcomed in terms of again a
Speaker 1: reprieve of escalation, but it still doesn't do anything, most
Speaker 1: likely about those you know, existing tariffs on that huge
Speaker 1: bulk of Chinese imports oliby. We still see these jarring
Speaker 1: in images coming out of Hong Kong, the unrested there.
Speaker 1: It seems to be not only not going away, but
Speaker 1: maybe even escalating. What does that do for China and
Speaker 1: their view of a trade deals. I gotta think it
Speaker 1: makes it maybe a little bit more pressure on them
Speaker 1: and maybe get something done. Yeah, And I think it's
Speaker 1: a it's a great point. And honestly, you know, I
Speaker 1: don't know how much the market has been focused on it.
Speaker 1: I think the market should be more focused on it,
Speaker 1: because this feels like, you know, a possible source of
Speaker 1: disruption honestly in terms of getting to the phase one deal,
Speaker 1: only because there's a bill that's making its way through Congress.
Speaker 1: It's already past the House. It's now something called you know,
Speaker 1: it's hotlined in the senate's expedited in the Senate for consideration.
Speaker 1: And and the reason why this is important is because
Speaker 1: the Chinese have said that they will retaliate if the
Speaker 1: you know, if Congress does pass this um. But to
Speaker 1: your point, does this make you know, President she you know,
Speaker 1: even more inclined for a deal. Maybe. But I also
Speaker 1: think it makes him probably more inclined not to look
Speaker 1: weak on the world stage. And I think that's actually
Speaker 1: attention for President Trump as well. I think they're both
Speaker 1: having some ways the same kind of domestic, you know,
Speaker 1: political pressures that they want sort of a deal for
Speaker 1: their both kind of economic purposes and their political purposes,
Speaker 1: but that neither of them can a forelooking weak either.
Speaker 1: Is there recognition on the China side though, that if
Speaker 1: they do go in, they send the troops into Hong Kong,
Speaker 1: that it blows up the prospect of getting a face
Speaker 1: one to temperate China's approach, that this trade truce is
Speaker 1: still lingering, that we don't have it yet, does it
Speaker 1: temper their approach? And you know from our folks who
Speaker 1: are on the ground and in Hong Kong, I mean
Speaker 1: they they've said that. I think you know they said that. Also,
Speaker 1: she has you know, a different set of um, you know,
Speaker 1: pressures not to go into from a fam military perspective
Speaker 1: as well. So it's not just because of the US
Speaker 1: China trade discussions, but I'm sure that is absolutely a factor.
Speaker 1: Let me super smart as always and always great to
Speaker 1: catch out with you. Let me cancel their pimpco head
Speaker 1: of public policy on the latest in Hong Kong, wrapping
Speaker 1: up all the numbers for us on places to say
Speaker 1: do you want to go stay in New York City?
Speaker 1: Blinberg corporate finance reporter and Molly Smith, what a wait
Speaker 1: we've had? We have, and it's not just investment grade,
Speaker 1: it's high yield too. It's the busiest weekend two months
Speaker 1: in the high yield market. And I think a lot
Speaker 1: of this goes to show that, uh, you know, it's
Speaker 1: just comes into all in borrowing costs at the end
Speaker 1: of the day, of course, and that you can say
Speaker 1: all that you want to, like companies have too much debt,
Speaker 1: leverage is so high, but when it's so cheap, like
Speaker 1: you kind of have to look at a corporate treasure
Speaker 1: of the CFO and say, why not can we talk
Speaker 1: about Emvy thirty billion dollars worth? Just how wow did
Speaker 1: that price? How big was that order? But what were
Speaker 1: your thoughts on that particular issue. So when we see
Speaker 1: these M and A deals come now, they're so well
Speaker 1: telegraphed that everyone and their moms knows this is coming.
Speaker 1: So we've been ready for Abby since last week and
Speaker 1: the orders definitely definitely reflected that and the price talk
Speaker 1: as well. So I think a lot of us were
Speaker 1: thinking that price talk at the onset was pretty tight actually,
Speaker 1: and I would say the order book fairly reflected that.
Speaker 1: We saw that it was about two and a half
Speaker 1: times oversubscribed, which seems pretty good, right, seventy seven billion
Speaker 1: dollars of orders on a thirty billion dollar offering, But
Speaker 1: we've seen some of these go way way higher, usually
Speaker 1: when the price talk comes with a lot bit more
Speaker 1: of a premium to investors. So I think this one
Speaker 1: was well telegraphed from the beginning, and that's why you
Speaker 1: didn't see the book blow up the way you see
Speaker 1: some of the other ones do. Who's buying this stuff?
Speaker 1: So this is, uh, I mean, pretty widely bought. When
Speaker 1: you see a huge issuance like this, there's so much
Speaker 1: pressure for the investment community to own it, especially if
Speaker 1: you're an index buyer, that this is going to make
Speaker 1: up however much percent of your benchmark now, and if
Speaker 1: you're not in it, I mean you're really missing out.
Speaker 1: So you have to be in on these orders. Somewhat
Speaker 1: counterintuitive for people outside of the market, isn't it that
Speaker 1: when a big issue with like this comes through the
Speaker 1: Molday issue, typically the more demand they will get. Molly, Yes, definitely,
Speaker 1: and it especially helps as well that this is a
Speaker 1: very high quality issue and also a mergery that makes
Speaker 1: sense to a lot of people. When we see a
Speaker 1: lot of these acquisition financing. A lot of people will
Speaker 1: roll their eyes and be like, you know, does this
Speaker 1: combination really makes sense? Should this one company be buying another?
Speaker 1: Are these expected synergies and cost cuts really going to
Speaker 1: be realized? And there's kind there can be a lot
Speaker 1: of doubt, but I think on this one, you know,
Speaker 1: I saw a lot of people in the investor community
Speaker 1: and the rating side as well, there's a lot of
Speaker 1: confidence that this is a really good tie up for
Speaker 1: Abby and Allergan, that it makes sense for both of them.
Speaker 1: If you've ever heard me on Bloomberg TV or Bloomberg
Speaker 1: Radio talk about the triple bs and break down a
Speaker 1: load of numbers, I stole those numbers from Molly Smith. Molly,
Speaker 1: you did some fantastic work in the last couple of
Speaker 1: years talking about how big that particular area the market
Speaker 1: has become. Was an interesting year for much of the
Speaker 1: year because many people turned around and said, at least
Speaker 1: the Waltons in the market turned around and said, you
Speaker 1: know what, there's no worry here. They'll get this sorted,
Speaker 1: they'll address it. And we started to talk about what
Speaker 1: people cheer of academy security is called a debt diet.
Speaker 1: What happened to the debt diet in the back half
Speaker 1: of this year, so it's a little mixed. And the
Speaker 1: main companies that needed to go on this diet have
Speaker 1: the biggest issuers in the index, the ones that have
Speaker 1: taken on the most amount of debt in the last
Speaker 1: several years, exactly A T and T InBev, Verizon, uh CVS,
Speaker 1: all of these ones. They're doing it. They are absolutely
Speaker 1: cutting their debt levels, getting leverage down. Being incredibly communicative
Speaker 1: of that, and a lot of that also coming because
Speaker 1: shareholders of all people are asking these companies to cut
Speaker 1: their debt levels. So a nice rare time when shareholder
Speaker 1: and bond interests are aligned. Do you never see this happen?
Speaker 1: The bond holders love it. But and but the thing
Speaker 1: is is that while these guys are kind of like
Speaker 1: Bellweathers for the whole index because they are just so huge,
Speaker 1: the index at a larger level, leverage is still broadly
Speaker 1: unchanged from a year ago. And that's when we look at, well, yes,
Speaker 1: we are still seeing all this issuance because rates are
Speaker 1: still so low, and why not keep issuing debt? Why
Speaker 1: not keep refinancing? So you mentioned the hield market in
Speaker 1: another big strong week here, So investors in that market,
Speaker 1: I guess they're pretty constructive on the economy because if
Speaker 1: if we do see an economy rollover next year, those
Speaker 1: are the kinds of companies that are going to be
Speaker 1: impacted first, higher leverage, less room. Right. Well, that's why
Speaker 1: we've definitely seen an up and quality trade and high
Speaker 1: yield for sure, and that double Bees that's the highest
Speaker 1: ratings tier in high yield, has been so rich and
Speaker 1: a lot of people would say it's just very overpriced
Speaker 1: right now, a really crowded trade. So that's getting a
Speaker 1: little bit tight right now. And I think you see
Speaker 1: more people looking for value in single Bees, which is
Speaker 1: that next ratings tier down. You see fewer people though,
Speaker 1: going for triple c's, that's the lowest ratings bucket in
Speaker 1: high yield. But as we were just talking about, we
Speaker 1: were speaking with Colin Robertson of Northern Trusts this week
Speaker 1: and he's saying, look, if you think the economy still
Speaker 1: got room to run, which he does, this is a
Speaker 1: great time to buy triple c's, that the weakest credits
Speaker 1: should be boosted by an economy that's still running. He's
Speaker 1: had some pretty contribuing cols over in the last couple
Speaker 1: of years. Remember, we came on one of the problegrams
Speaker 1: with me maybe about eighteen months ago, said one fifty
Speaker 1: US ten year, and we were in and around three
Speaker 1: percent at the time, and we came down to one fifty.
Speaker 1: So I want to how his credit call turns out. Molly,
Speaker 1: great to catch up. Whether your great workouts are always
Speaker 1: always making us all smarter here at Bloomberg, Bloomberg Corporate
Speaker 1: Finance reporter Molly Smith there line for the Bloomberg Interactive
Speaker 1: BROCA studios here in New York City. And let's get
Speaker 1: you some Bloomberg opinion, shall we? The only word you
Speaker 1: need to explain emerging markets China. It's fear of a
Speaker 1: Minsky moment is driving a tectonic shift in the availability
Speaker 1: of money. And how about this for a lead, Let's
Speaker 1: get liquid. Isn't that fantastic? John Author's Bloomberg Opinion columnists
Speaker 1: joining us on the phone. I'm pleased to say, John,
Speaker 1: talk to me about it, explore it a little bit
Speaker 1: further for us. Right, What is very interesting, given how
Speaker 1: much time we spent talking about geo politics, treat wars
Speaker 1: and stuff, is that, in fact, if you just look
Speaker 1: at straightforward provision of liquidity across the world. It's that's
Speaker 1: very obviously complained, explains the great majority of everything that
Speaker 1: we've been seeing in markets this year. In a NUTSHELLUS
Speaker 1: we generally know developed markets, you've seen a big turnaround,
Speaker 1: a huge extra turning on of the tap of liquidity
Speaker 1: in the last few months. What is less appreciated is
Speaker 1: that you're seeing the exact reverse in emerging markets. And
Speaker 1: the critical thing here is China. At the beginning of
Speaker 1: the year, there was this strong belief over strong bet
Speaker 1: that the p VOC, the People's Bank of China, was
Speaker 1: going to turn on the taps again, as it's done
Speaker 1: several times since the crisis. Instead, it's actually, it's not
Speaker 1: really interested at this point in macro economic stimulus. It's
Speaker 1: interest in macrew prudential avoidance of a Lehman disaster. The
Speaker 1: they are working very hard to get to help local
Speaker 1: governments get the various off balance sheet that they had
Speaker 1: taken on back onto the books. They're trying to clean
Speaker 1: things up to avert the risk of a disaster, I
Speaker 1: think quite knowingly taking the risk at the in the
Speaker 1: process that we're going to get slower Chinese growth as
Speaker 1: a result, and Chinese growth, the basically effects flows to
Speaker 1: the entire of the rest of the emerging market complex,
Speaker 1: and that ends up with this situation where you have
Speaker 1: a very strong dollar and still a very risky situation
Speaker 1: across across the emerging world. So Chinas, you talk to
Speaker 1: and think about emerging markets, you talk to people in
Speaker 1: the emerging market space. Is there just an overall sense
Speaker 1: that if China doesn't work, emerging markets as an asset
Speaker 1: class not work, and I make can I make it
Speaker 1: that simple? I think you probably can at this point,
Speaker 1: I mean you could. The other thing you could very
Speaker 1: reasonably suggest is that emerging markets as an asset class
Speaker 1: is something we should we should begin to give up on.
Speaker 1: But that's a that's another, very very much bigger story. Ultimately,
Speaker 1: either the number of emerging market countries that either provides
Speaker 1: stuff to China, which is basically the business model for
Speaker 1: more as the whole of South America, or have intimate
Speaker 1: links with it in terms of supply changes the rest
Speaker 1: of Asia, and also the to a great extent, Eastern Europe,
Speaker 1: which is involved with creating creasing cars and so on.
Speaker 1: For the German industry, which exports a lots of China. Ultimately,
Speaker 1: so much of the rest of um the emerging world
Speaker 1: is economically tied to China, and then thanks to the
Speaker 1: growth of passive investing and the treatment of them as
Speaker 1: an asset class, it's financially tighter the China. Yes, yes, China,
Speaker 1: this point really dominates the entire e ms at cars. So, John,
Speaker 1: I have to compliment you on this column here about
Speaker 1: the emerging markets. You're charting game and graphics. Game is
Speaker 1: very very good right here. There's a lot of great
Speaker 1: stuff in here. And one of the things that really
Speaker 1: jumped out of me is that China is really slowing down.
Speaker 1: You cite the Bloomberg's China Real Activity Index, gives your
Speaker 1: sense of what's going on there, because the China is
Speaker 1: still the government is still saying six six and a
Speaker 1: half percent debt. Yes, growth GDP growth, Yes, that's slower,
Speaker 1: but it's still pretty good growth. What do you think, well,
Speaker 1: that that much is true, that China lives by different
Speaker 1: standards from the from the rest of us. From memory,
Speaker 1: I don't have the number in front of me. With
Speaker 1: the our own Bloomberg's own Chinese activity gauge is still
Speaker 1: something like five percent which most of us would kill for,
Speaker 1: but is still if you look at the context of
Speaker 1: Chinese growth up over the last thy years, is dramatically lower.
Speaker 1: We've known for years that China needs to manage a
Speaker 1: transition that Hi Jimping has obviously been quite keen to
Speaker 1: grasp the nettle of managing the transition trying to move
Speaker 1: away from an export lead economy. They are very painfully
Speaker 1: trying to do that. Whether they succeed, I suspect remains
Speaker 1: a much bigger question than you know than the trade war,
Speaker 1: the trade board. The trade boards plainly will feed feed
Speaker 1: into that. But the question is, can China really manage
Speaker 1: its transition move on from a middle income country without
Speaker 1: having one major crisis, one major stop or reverse along
Speaker 1: the way. It's there are truly no other examples of
Speaker 1: countries that have managed that. Even the Nine the U,
Speaker 1: the U S and the late century is in many
Speaker 1: ways very similar to the China now and had depressions
Speaker 1: and panics every few years. Um Korea and Japan both
Speaker 1: had their their moments of sharp economic and market problems.
Speaker 1: Can China somehow or other avoid that, given that so
Speaker 1: much of the rest of the world relies on them,
Speaker 1: very uncomfortably to keep growing for us. Hey, John, let's
Speaker 1: switch gears quickly. You had earnings, we had. You had
Speaker 1: another column out yesterday talking about earnings. And you know,
Speaker 1: it's interesting, it doesn't the earnings period I woul characterize
Speaker 1: in the third quarter was okay, lackluster. So so yet
Speaker 1: the market grinds higher every day. Does the market not
Speaker 1: really care about earnings right now? I'm inclined to say
Speaker 1: that it doesn't. Yes. I mean the research I was
Speaker 1: highlighting was from b c A which BC Research, which
Speaker 1: showed that if you actually look at whether you look
Speaker 1: at how much a quarter and aggregate surprised compared to
Speaker 1: prior expectation, or if you looked at how good it
Speaker 1: was in absolute terms, you really couldn't make that to
Speaker 1: have the stock market was performing at all. Um I mean, obviously,
Speaker 1: if you take a nice long chant over fifty or
Speaker 1: sixty years, there's a very close relationship between earnings in
Speaker 1: the stock market. But in the short term it's just
Speaker 1: not there. And I think that is in large part
Speaker 1: because rates at this point are so central to UM,
Speaker 1: to what we would expect from EPs, because of because
Speaker 1: of the matter of of share buy backs, because of
Speaker 1: the impact of credit costs, because the economy is seen
Speaker 1: as so driven by by credit that the the interest
Speaker 1: the interest rates effect swamps the earnings effect, or an
Speaker 1: even greater extent than it normally does. John Author's thanks
Speaker 1: so much for joining us, too, really interesting accounts done.
Speaker 1: Author's Bloomberg Opinion calms joining us on the phone. You
Speaker 1: can read John's work and all the great work from
Speaker 1: Bloomberg Opinion on our website Bloomberg dot com dot com,
Speaker 1: slash opinion, and on the terminal typing in O P
Speaker 1: I n go some really really great work that dig
Speaker 1: deep into some really key issues. Countries across the globe
Speaker 1: face a mounting challenge. That's how to offer adequate financial
Speaker 1: security for retirees today and sustainably into the future. To
Speaker 1: help us dig into this topic, we welcome Lord Adair
Speaker 1: Turner UH Lord Turners, the Institute for New Economic Thinking,
Speaker 1: Senior Fellow. He's a House of Lords member, Group of
Speaker 1: Thirty member and former UK Financial Services Authority Chair. Lord Adair,
Speaker 1: thank you so much for joining us. This is a
Speaker 1: crucial topic, not just in develop markets, but increasingly in
Speaker 1: developing markets. You can just scope out for us the
Speaker 1: issue well at one level of the issue rises because
Speaker 1: of a result of two thoroughly good things. People are
Speaker 1: living longer. Life expectancy is going up across most of
Speaker 1: the world, and they also have fewer children. We end
Speaker 1: up with population stabilization, and that's a pretty good thing
Speaker 1: as well, because it makes it easier to deal with
Speaker 1: environmental challenges, etcetera. But those two good things, living longer
Speaker 1: and having population stabilization, they create a challenge because if
Speaker 1: you don't do something to your pension or your lifetime
Speaker 1: security system in the face of those changes, you are
Speaker 1: just going to have, you know, more retirees per worker,
Speaker 1: which either means that workers are going to have to
Speaker 1: put in significantly more savings or taxation to support longer
Speaker 1: years in retirement, or retirees are going to be poorer.
Speaker 1: And I'm afraid there is a sort of relentless mathematical
Speaker 1: triangular logic here which is faced with these developments, either
Speaker 1: retirement ages have to go up, or people have to
Speaker 1: put in more money in some way or another depension systems,
Speaker 1: or on average they will be worse off. And the
Speaker 1: crucial thing that we're saying in this group of thirty
Speaker 1: report that we've just published is to set out that logic,
Speaker 1: to illustrate it in multiple countries, and to say there
Speaker 1: has to be a more robust engagement with this by
Speaker 1: policymakers throughout the world. What you can't propose is what
Speaker 1: is the single perfect solution to be you know, pursued
Speaker 1: in each country, because the solution in each country has
Speaker 1: to reflect its own political dynamics it's starting point. But
Speaker 1: the fundamental nature of the challenge and the three possible
Speaker 1: solutions at the most generic level, they are common across
Speaker 1: the world. So the issue seems to be common across
Speaker 1: the world. As you mentioned, do we have any examples
Speaker 1: of any countries that are actually tackling this issue with
Speaker 1: some success. Well, um, I would say that Sweden has
Speaker 1: made some sensible policies. What it has done is it
Speaker 1: has a tier of its state system which it caused
Speaker 1: a notional defined contribution system, so it's still a payers
Speaker 1: who you go is paid for by compulsory contribution system.
Speaker 1: But within that it said, look, we're not going to
Speaker 1: tell you in advance what your retirement age is going
Speaker 1: to be. Your future retirement age is going to reflect
Speaker 1: the increases in life expectancy which occur between now and
Speaker 1: when you get to retirement, and by the way, we'll
Speaker 1: give you some trade offs. You can take retirement a
Speaker 1: bit earlier, but you know you'll have to face a
Speaker 1: lower cost there, or delay it a few years and
Speaker 1: you'll get a higher pension. So that's quite a sensible idea.
Speaker 1: My own country, the UK, as a result of a
Speaker 1: pench And commission which I cheered ten years ago, is
Speaker 1: now committed to increasing the state pension age within our
Speaker 1: state pension system. We are going to take that up
Speaker 1: from sixty ten. It will be sixty six by next
Speaker 1: year and it will reach by the midties. And that
Speaker 1: has actually enabled us to provide a slightly more generous pension,
Speaker 1: but at a later date. And then there are other
Speaker 1: countries around the world. I would say Singapore, with its
Speaker 1: large form of compulsory savings, has provided a significant amount
Speaker 1: of a security for many of its citizens. And I
Speaker 1: think what intelligent policymakers do is not believed that they
Speaker 1: can go to any one country and say let me
Speaker 1: copy that, but look around the world at different examples
Speaker 1: of how different countries have addressed particular parts of the issue,
Speaker 1: and then try to work out what is the best
Speaker 1: combination of solutions given one's particular national starting point. So,
Speaker 1: Lord Turner, the in the United States, this country is
Speaker 1: you are I'm sure well well aware has moved away
Speaker 1: from a defined benefit pensions that were kind of my
Speaker 1: parents generation, if you will, and more towards you know,
Speaker 1: kind of user savings, whether it's four one case or
Speaker 1: or something along those lines, individual savings. Where is a
Speaker 1: country like the United States in terms of this global
Speaker 1: issue of we're living longer, we might not have enough money. Well, you,
Speaker 1: of course do have a social security system. And unlike,
Speaker 1: for instance, in healthcare, where you have an extremely limited
Speaker 1: state private market solution, social security is actually, you know,
Speaker 1: a very robust um state driven, government driven, federal government
Speaker 1: driven system. And I think actually you know the absolutely
Speaker 1: inch pin of your system because it provides a baseload
Speaker 1: for many people of low and modest income to at
Speaker 1: least get up to adequacy. And I certainly wouldn't move
Speaker 1: away from that. And you have taken some moves to
Speaker 1: overtime in future, increase the effective retirement age within that
Speaker 1: if you go to the private space of how people
Speaker 1: then provide additional pension provision on top of the basic
Speaker 1: social security. Of course, you're quite right. You have seen,
Speaker 1: like many other countries, have seen a very significant move
Speaker 1: away from defined benefits schemes provided by employers. And I
Speaker 1: think that was bound to occur in the way that
Speaker 1: defined benefits schemes were designed in the past, because they
Speaker 1: just placed too much risk on the employee. The employer
Speaker 1: took all of the risk of what was the market
Speaker 1: rate of return on the investments, because the pension that
Speaker 1: got paid out was independent of that return, and the
Speaker 1: employer took all of the risks of where the life
Speaker 1: expectancy went up a faster than was anticipated when somebody
Speaker 1: originally joined the scheme, and so and it's a bit
Speaker 1: tragic what has happened across the world is that as
Speaker 1: it were, over gold plated employer private defined benefit schemes
Speaker 1: had tended to close. And in a sense, we've moved
Speaker 1: to the other extreme, where individuals take all of the risk.
Speaker 1: You know, if their life expectancy rises, they're going to
Speaker 1: have to deal with all of that. If the investment
Speaker 1: returns are less than they anticipated, they will have to
Speaker 1: deal with that. What one of the points we make
Speaker 1: in the report is that one could think of hybrid solutions.
Speaker 1: One could think of forms of employer provided pensions which
Speaker 1: provide an element, a sort of guaranteed bit of design benefit,
Speaker 1: but where the amount that you get on top of
Speaker 1: that depends upon the investment return on the funded assets,
Speaker 1: or cut it short there. We could talk about this
Speaker 1: for a long time, a looming issue pensions across the world.
Speaker 1: Lord Adair Turner, UH Institute for New Economic Thinking, Senior
Speaker 1: Fellow Group of thirty member, former UK Financial Services Authority Chair,
Speaker 1: talking to us about long term pensions. Thanks for listening
Speaker 1: to the Bloomberg Surveillance podcast. Subscribe and listen to interviews
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Speaker 1: I'm on Twitter at Tom Keane before the podcast. You
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