WEBVTT - It’s Too Late For Smaller Asset Managers To Scale Up 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg P and L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.600 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg P M L 0:00:20.840 --> 0:00:27.280 Podcast on Apple Podcasts, SoundCloud and Bloomberg dot Com. Him 0:00:27.320 --> 0:00:31.040 In the news recently has been consolidation among asset managers, 0:00:31.240 --> 0:00:35.080 one after another after another. The latest UBS is looking 0:00:35.080 --> 0:00:39.080 to possibly buy another asset manager, either in the US 0:00:39.280 --> 0:00:42.520 or Europe in order to get scale. And this raises 0:00:42.560 --> 0:00:45.040 a question what is the right size for an asset 0:00:45.080 --> 0:00:49.960 manager in two And we have someone who's going to 0:00:49.960 --> 0:00:53.400 answer that question with precision. Eric Baltunis has the answer. 0:00:53.440 --> 0:00:55.080 He has all the answers. He's been predicting this for 0:00:55.080 --> 0:00:58.560 a while. Eric a senior et f analyst for Bloomberg Intelligence. 0:00:58.600 --> 0:01:02.160 So Eric, what do you make of this UBS announcement 0:01:02.360 --> 0:01:05.720 and how big is the right size? Uh? Well, look, 0:01:05.959 --> 0:01:07.600 this is not a surprise to me, and I'm not 0:01:07.640 --> 0:01:10.400 sure that the right size the way I've always seen 0:01:10.440 --> 0:01:14.880 it is. Look, I mean, the data is there of 0:01:14.920 --> 0:01:17.880 the net cash that's invested in funds goes to products 0:01:17.880 --> 0:01:22.800 that charge less than twenty basis points UM, and that 0:01:22.840 --> 0:01:26.000 goes to less than ten So who's holding those funds 0:01:26.080 --> 0:01:28.240 is Vangarden black Rock. They're taking in two thirds of 0:01:28.280 --> 0:01:31.200 all net dollars invested in the United States. So this 0:01:31.280 --> 0:01:34.160 is only going to get bigger. The reason hasn't been 0:01:34.200 --> 0:01:38.240 bigger yet is the market performance growth has built the 0:01:38.240 --> 0:01:40.039 assets up of some of these people who have seen 0:01:40.160 --> 0:01:43.160 organic outflows. But I would imagine after a bear market, 0:01:43.200 --> 0:01:45.280 you could be looking at something more kin to the airlines. 0:01:45.319 --> 0:01:47.360 You know how there's like three big airlines that control 0:01:47.400 --> 0:01:50.760 about of the market, and then you have UM, you know, 0:01:50.840 --> 0:01:55.080 smaller airlines like Alaska Air or something that does local trips, 0:01:55.080 --> 0:01:57.640 something more exotic. I wouldn't be surprised if you see 0:01:57.680 --> 0:02:00.760 the middle just clear out and get consolidated. So just 0:02:00.800 --> 0:02:03.840 like other things that grow big, right other industries, Uh, 0:02:03.840 --> 0:02:06.800 there's three or four big ones, and then there's a 0:02:06.840 --> 0:02:09.040 lot of little ones that do specialty things. In that case, 0:02:09.080 --> 0:02:14.200 I think UM quants, hedge funds, alternatives. Uh, there's this 0:02:14.560 --> 0:02:17.880 emerging market specialists UM. And we were actually talking to 0:02:18.440 --> 0:02:21.440 John Bogel for the podcast we do called trillions shameless 0:02:21.440 --> 0:02:25.960 plug um And he said, actually, consolidation is probably gonna happen, 0:02:25.960 --> 0:02:27.760 but it won't be enough. He thinks a lot of 0:02:27.760 --> 0:02:30.000 these firms are going to have to convert to Vanguard's 0:02:30.080 --> 0:02:33.320 mutual ownership structure to survive, because and I'll tell you, 0:02:33.360 --> 0:02:35.440 even some of these ones that do consolidate and lower 0:02:35.440 --> 0:02:38.799 their fees, it's almost feels too late, you can tell, 0:02:38.840 --> 0:02:41.800 because the flows still are largely going to two companies, 0:02:41.840 --> 0:02:44.680 black Rock and Vanguard, even if another firm might go 0:02:44.720 --> 0:02:49.760 a little cheaper. Eric, is this a race to the bottom. Yeah, 0:02:49.800 --> 0:02:52.840 and we're here. I mean Fidelity wanted, which is ironic 0:02:52.840 --> 0:02:56.600 because Fidelity they offered, they offered that. That was why 0:02:56.680 --> 0:03:00.480 that was such a Yeah, Fidelity an ounce that they're 0:03:00.520 --> 0:03:03.160 going to offer index mutual funds for a fee of zero. 0:03:03.720 --> 0:03:06.040 Now keep in mind they already had index mutual funds 0:03:06.080 --> 0:03:09.000 that charged one point five basis points. So it's a 0:03:09.040 --> 0:03:13.280 formality really, but the symbolism of going to zero, it 0:03:13.360 --> 0:03:15.760 was it was almost like a climax. We've been building 0:03:15.840 --> 0:03:18.399 up to this point for fifteen years and now we're here. 0:03:18.760 --> 0:03:21.160 But let's face it, you can get a whole portfolio 0:03:21.200 --> 0:03:24.440 of everything you want for a combined fee of under 0:03:24.480 --> 0:03:27.880 five basis points at this point, so it's already basically 0:03:27.919 --> 0:03:30.320 free and that's where all the money goes. So you 0:03:30.400 --> 0:03:34.079 said that for big asset managers that just now are 0:03:34.160 --> 0:03:37.120 trying to really plow in and compete with the black Rocks, 0:03:37.560 --> 0:03:40.320 uh and the Van Guards, it's too late. What does 0:03:40.360 --> 0:03:42.040 that mean? Does that mean that they're going to be acquired, 0:03:42.080 --> 0:03:45.760 go out of business? You know, I don't know, probably acquired, 0:03:45.800 --> 0:03:48.480 probably merged with other companies. I think. You look at Investco, 0:03:48.800 --> 0:03:50.840 they've been doing a lot of acquisitions. It has brought 0:03:50.920 --> 0:03:55.640 them up to Oppenheimer Appenheimer UM. But the active mutual 0:03:55.680 --> 0:03:58.520 fund space is alive and well remember active mutual funds 0:03:58.560 --> 0:04:02.480 have two thirds more as sets then passive. The reason, though, 0:04:02.600 --> 0:04:05.400 is not the problem is organic growth, market returns. The 0:04:05.440 --> 0:04:08.800 markets of what in five years, so all the assets 0:04:08.800 --> 0:04:11.040 have more than doubled for these active mutual funds. So 0:04:11.040 --> 0:04:13.560 they're getting paid. You know, the revenue is great right now. 0:04:14.000 --> 0:04:16.000 What these people are starting to see is the writing 0:04:16.000 --> 0:04:19.040 on the wall. If the market stops being a money 0:04:19.040 --> 0:04:21.359 printing machine for you is an active mutual fund and 0:04:21.400 --> 0:04:24.120 you're down to organic growth, you're in trouble because there 0:04:24.200 --> 0:04:26.760 is no organic growth. Plus you're probably gonna have panicked 0:04:26.800 --> 0:04:29.359 investors pulling out anyway. So I think that's sort of 0:04:29.360 --> 0:04:31.560 what they're trying to prepare for, is when a bear 0:04:31.680 --> 0:04:35.520 market or a market that's more flat makes organic growth 0:04:35.839 --> 0:04:38.479 more of a big deal. They're like, well, we're in 0:04:38.520 --> 0:04:40.880 big trouble there because really only two or three firms 0:04:40.920 --> 0:04:43.560 taken all the money. What are we gonna do? And 0:04:43.600 --> 0:04:45.480 I think that's where you have them trying to figure 0:04:45.480 --> 0:04:48.920 out what it's going to look like. Eric. Does this 0:04:49.200 --> 0:04:54.960 then create a situation where the companies behind these ets, 0:04:55.000 --> 0:05:00.200 whether it's Vanguard or Black Croc, they become utilities. Yes, 0:05:00.279 --> 0:05:02.599 some people have talked about that. Someone actually had said 0:05:02.640 --> 0:05:04.520 that the government long time ago, should it just come 0:05:04.560 --> 0:05:07.320 out with a couple index funds for the regular public 0:05:07.360 --> 0:05:10.920 and just charge nothing. Vanguard kind of did it for him. Vanguard. Look, 0:05:11.000 --> 0:05:14.080 Vanguard is kind of utility. We gotta remember, Vanguard is 0:05:14.120 --> 0:05:17.039 owned by the investors. It's like a co op. It 0:05:17.200 --> 0:05:20.560 is a it is a whole different animal. Credit union. Yes, 0:05:20.600 --> 0:05:23.840 it's like a credit union, and so it doesn't have 0:05:23.880 --> 0:05:26.800 a profit motive. So it is almost like a utility. 0:05:26.960 --> 0:05:29.920 And Vanguard takes in the most money of any asset 0:05:29.960 --> 0:05:33.360 manager every year, uh, you know, for the past five years. 0:05:33.400 --> 0:05:36.080 So it is affecting the other companies. That's why I 0:05:36.120 --> 0:05:39.360 called it the Vanguard effect is the real story. Vanguard's 0:05:39.360 --> 0:05:41.520 a story, but the real story is the effect that's 0:05:41.560 --> 0:05:44.400 having on everyone else. Okay, but not all markets are 0:05:44.440 --> 0:05:47.599 investible through index funds, and that's what we're seeing with 0:05:47.680 --> 0:05:50.480 PIMCO and other big gas managers trying to get more 0:05:50.520 --> 0:05:54.599 into direct lending and alternative credit, alternative credit and equities 0:05:54.600 --> 0:05:57.640 and other strategies. And I'm just wondering, I mean, is 0:05:57.720 --> 0:06:00.560 that the future, especially given the fact that the private 0:06:00.600 --> 0:06:04.480 markets have been growing much more quickly than the public markets. Yeah, 0:06:04.480 --> 0:06:07.839 it could be. However, I have noticed this trend, and 0:06:07.839 --> 0:06:10.599 because i've especially in the fund world, there are places 0:06:10.680 --> 0:06:13.680 Vanguard doesn't have a fund. What you've seen, though, is 0:06:13.720 --> 0:06:16.360 people copy them. I call it they you know, like this, 0:06:16.640 --> 0:06:19.920 like Goldman Vanguarded Factor Investing. They came out with an 0:06:19.920 --> 0:06:22.279 et F form nine basis points. Now Vanguard was nowhere 0:06:22.279 --> 0:06:25.040 to be found. They just saw what Vanguard was doing 0:06:25.120 --> 0:06:27.440 copy them. So I would not be surprised if you 0:06:27.480 --> 0:06:31.960 see people vanguarding private equity vanguarding hedge funds, but how 0:06:31.960 --> 0:06:34.599 do you how do you vanguard a strategy that owns 0:06:34.880 --> 0:06:38.320 a liquid stuff. Well, you just charged less for the exposure. 0:06:38.680 --> 0:06:40.360 So let's say you're a private equity fund. You could 0:06:40.400 --> 0:06:43.120 just charge half of what people are charging on the market. 0:06:43.400 --> 0:06:46.400 And you're realizing that you're tapping into this cost obsession, 0:06:46.440 --> 0:06:50.799 which isn't just for index funds. Advisors are feeling cost 0:06:50.839 --> 0:06:54.040 obsession to the biggest trend of our day is high 0:06:54.080 --> 0:06:57.040 cost to low cost. Active to passive is debatable. There 0:06:57.040 --> 0:06:59.680 are other trends that you see, you know us from 0:06:59.680 --> 0:07:02.800 merging markets. High cost to low cost seems to be 0:07:02.839 --> 0:07:06.120 the thread that that combines everything, and I do think 0:07:06.120 --> 0:07:08.760 you'll hedge funds are already under pressure. Some of them 0:07:08.800 --> 0:07:11.320 have already started doing fee rebates, offering it for free 0:07:11.880 --> 0:07:16.040 because the Vanguard effect goes beyond what Vanguard even offers. 0:07:16.080 --> 0:07:19.080 Just go ahead, give a ten second shameless plug for Trillions. 0:07:19.840 --> 0:07:21.880 Trillions is a podcast to deal with Joe Webber, the 0:07:21.960 --> 0:07:23.680 editor of Business Week. It's on E t f s 0:07:23.800 --> 0:07:26.240 and it's aimed at the regular retail investor. We try 0:07:26.240 --> 0:07:28.840 to simplify and make this stuff fun trillions. It's a 0:07:28.880 --> 0:07:32.080 great podcast. Thanks very much. Eric Baucun is our senior 0:07:32.200 --> 0:07:35.880 et F analyst for Bloomberg Intelligence, and you can follow 0:07:36.080 --> 0:07:42.120 Eric on Twitter as we all do at Eric Baltunas. 0:07:42.120 --> 0:07:45.480 Our topic now is Facebook, with the shares up a 0:07:45.480 --> 0:07:48.360 little bit more than five per cent. Our guest is 0:07:48.560 --> 0:07:51.960 Mark Douglass. He is the chief executive of steel House. 0:07:52.480 --> 0:07:59.800 Steelhouse is an artificial intelligence driven self service advertising software company. 0:08:00.240 --> 0:08:02.160 We're gonna find out what that is after he tells 0:08:02.240 --> 0:08:06.720 us all about Facebook, which is an advertising company. What 0:08:06.800 --> 0:08:09.560 did you make of the results? More? Um, I think 0:08:09.640 --> 0:08:12.440 that I'm surprised, let me say a different surprise of 0:08:12.480 --> 0:08:15.440 stock is up so much. But I think that people 0:08:15.480 --> 0:08:19.280 were very worried about Facebook engagement is really down. But 0:08:19.400 --> 0:08:22.960 Instagram is just doing phenomenally well right now, and that's that. 0:08:23.160 --> 0:08:25.560 I think that's what everyone's excited about. Well, let's home 0:08:25.560 --> 0:08:28.240 in on exactly what you started with that you're surprised 0:08:28.240 --> 0:08:30.400 that the shares are up as much as they are. Why. 0:08:30.880 --> 0:08:32.679 I mean, you just look at your friends, you look 0:08:32.720 --> 0:08:35.560 at your own usage. I just don't see people using 0:08:35.600 --> 0:08:38.680 Facebook as much as they used to and So the 0:08:38.880 --> 0:08:43.160 core Facebook platform seems to be declining, and I think 0:08:43.200 --> 0:08:47.440 investors are basically overlooking that because of the excitement around 0:08:47.520 --> 0:08:51.559 around Instagram. But I think that excitement is well warranted, 0:08:51.600 --> 0:08:55.360 but it seems slightly premature. Why is there such a 0:08:55.440 --> 0:08:59.560 popularity for Instagram? Do you believe, Well, Instagram, it's all 0:08:59.600 --> 0:09:04.560 about stories. Facebook basically copied stories from Snapchat and Stories 0:09:04.640 --> 0:09:08.000 just to make sure it's clear, is just basically streaming 0:09:08.000 --> 0:09:10.720 your life just wherever you go, whatever you do. Last 0:09:10.800 --> 0:09:13.760 night alone, that made five five Instagram stories while it 0:09:13.880 --> 0:09:18.280 was out, and stories are really popular and engagement on them, 0:09:18.280 --> 0:09:21.040 meaning how much time people spending you doing it, is 0:09:21.640 --> 0:09:24.480 just phenomenal. And so there's a lot of excitement about 0:09:24.520 --> 0:09:27.720 how that's essentially going to rescue Facebook. Let's talk about 0:09:27.800 --> 0:09:30.880 the idea that Instagram is growing rapidly and really is 0:09:30.920 --> 0:09:34.000 the heart of Facebook at this point, whereas Facebook is 0:09:34.120 --> 0:09:36.960 losing users. You know that my children do not use Facebook, 0:09:37.040 --> 0:09:40.000 and you know they do use Instagram. I'm just wondering, 0:09:41.080 --> 0:09:44.520 is the valuation of Facebook appropriate given the fact that 0:09:44.559 --> 0:09:47.920 its future is Instagram and not Facebook. Yeah, and I 0:09:47.960 --> 0:09:52.560 think the um investors are betting that that Facebook will 0:09:52.600 --> 0:09:56.800 figure out how to monetize, how to advertise against Instagram stories. 0:09:57.400 --> 0:10:00.920 I think that's a good bet. I think, frankly, Facebook 0:10:01.000 --> 0:10:03.880 is kind of sandbagging how easy it's going to be 0:10:04.120 --> 0:10:07.560 to to advertise against stories or to increase the average 0:10:07.880 --> 0:10:12.040 sizing on stories. So investors are excited about it. I 0:10:12.080 --> 0:10:15.840 think consumers excited about the feature. Investors are excited about 0:10:15.880 --> 0:10:19.600 the money and so. And the money is going, it's 0:10:19.640 --> 0:10:22.640 going to follow. It's over a billion users. And we 0:10:22.800 --> 0:10:27.160 say engagement. I'm talking hours a day people spending on Instagram. 0:10:27.160 --> 0:10:29.520 A lot of people are spending on Instagram. Now, the 0:10:29.600 --> 0:10:33.360 Instagram story can be tied this to the fashion industry. Um, 0:10:33.679 --> 0:10:37.160 Instagram stories are popular with fashion, but more importantly that 0:10:37.360 --> 0:10:39.680 just popular. No, I understand, But I'm trying to figure 0:10:39.640 --> 0:10:42.520 out how do they make money? Well, within the stories, 0:10:42.600 --> 0:10:45.240 some of the stories or ads. You click on a 0:10:45.280 --> 0:10:47.960 lot of those ads, Um, you swipe up on them. Yeah, 0:10:48.040 --> 0:10:50.600 and it's about discovery. You see products you might not 0:10:50.720 --> 0:10:55.120 have noticed before. Um, you see you're basically discovering new products. 0:10:55.160 --> 0:10:57.080 And there's actually a lot of interesting things in there. 0:10:57.280 --> 0:11:01.040 I have to wonder you talk about hours spent on Instagram. 0:11:01.480 --> 0:11:05.079 We're already talking about the use of data and addiction 0:11:05.160 --> 0:11:09.760 to technology. When with respect to Facebook and Twitter, what 0:11:09.840 --> 0:11:12.200 about Instagram? I mean, how concerned are you about some 0:11:12.240 --> 0:11:16.000 kind of backlash that could reduce growth materially. Well, here, 0:11:16.080 --> 0:11:18.880 here's actually bring up an interesting point in terms of data. 0:11:19.320 --> 0:11:23.120 They answer to questions. So one is Instagram doesn't have 0:11:23.320 --> 0:11:26.720 the data that Facebook has. You don't write on Instagram, 0:11:26.720 --> 0:11:29.760 you only post, you post photos, you post videos. There's 0:11:29.800 --> 0:11:32.920 not a lot of data associated with that. On Facebook, 0:11:32.960 --> 0:11:35.440 you actually can type, and so they learn a lot 0:11:35.440 --> 0:11:40.320 about you. But the the the the engagement, meaning how 0:11:40.400 --> 0:11:44.840 much time people are spending, seems to overcome how little 0:11:44.920 --> 0:11:47.920 data is on Instagram for consumers concerned about data, it's 0:11:47.920 --> 0:11:50.480 actually a good thing. Well except that there's facial recognition, 0:11:50.520 --> 0:11:52.960 their ways to sort of use images as data. Yeah, 0:11:53.040 --> 0:11:54.760 I mean they can tell who you're you're in a 0:11:54.800 --> 0:11:57.679 photo with for sure, they have over two billion people 0:11:57.679 --> 0:12:01.200 in their database. But the if you wanna you know, 0:12:01.520 --> 0:12:03.400 they have to guess. More like, if you want to 0:12:03.400 --> 0:12:06.280 go after motorcycle enthusiasts, you have to just notice that 0:12:06.559 --> 0:12:08.480 they can have algorithms that know this. There is a 0:12:08.520 --> 0:12:11.080 motorcycle in the photo, it's not like you're typing the 0:12:11.080 --> 0:12:14.240 word motorcycle is just not happening on Instagram. It's different, 0:12:14.320 --> 0:12:17.280 but the the user engagement is just so much higher. 0:12:17.760 --> 0:12:19.560 So if someone were to come to you and say, oh, 0:12:19.640 --> 0:12:24.160 I have a hundred thousand Instagram followers, that's a good thing. Um, 0:12:24.240 --> 0:12:27.680 that is a good thing. But it's that that's different. 0:12:27.800 --> 0:12:30.920 Like in other words, their bloggers who have audiences, they'll 0:12:30.960 --> 0:12:33.760 send out a post and they will attract interests. I 0:12:33.760 --> 0:12:35.920 don't think that's where the real money is being spent. 0:12:36.000 --> 0:12:38.920 There's just not enough volume there. The real volume is 0:12:39.000 --> 0:12:42.760 just within the stories. If I posted five stories last 0:12:42.880 --> 0:12:46.360 night alone too, so far today Facebook can throw one 0:12:46.440 --> 0:12:50.120 or two ads between my stories because the content is free. Yeah, 0:12:50.120 --> 0:12:53.640 the content is free to Facebook, and the more content, 0:12:53.720 --> 0:12:56.280 the more ads they can run. Although I have to 0:12:56.320 --> 0:12:59.400 wonder because with respect to Facebook, one reason why people 0:12:59.440 --> 0:13:02.200 liked it so much was why advertisers liked it so 0:13:02.280 --> 0:13:05.360 much was the data they could understand how to pinpoint 0:13:05.720 --> 0:13:09.520 consumers based on their interests. How does that equation change 0:13:09.559 --> 0:13:12.720 if the data isn't as easily accessible in Instagram? Yeah, 0:13:12.720 --> 0:13:15.280 so what likely is what's likely happened? Now, let's go 0:13:15.320 --> 0:13:17.959 to advertising, which is a business. I know, well, if 0:13:18.000 --> 0:13:20.520 the quality of the data is lower, chances are the 0:13:20.559 --> 0:13:24.160 ad rates are lower. So to make up for that, 0:13:24.200 --> 0:13:26.679 they make up literally make up for it in volume 0:13:27.240 --> 0:13:30.360 all the people posting stories. They'll be there's more volume 0:13:30.400 --> 0:13:33.560 to monetize, but probably at lower rates. And that's the 0:13:33.559 --> 0:13:35.679 case right now. The rates on Instagram are a bit 0:13:35.720 --> 0:13:38.400 lower than they are on Facebook. As an expert in 0:13:38.400 --> 0:13:41.160 the world of advertising, could we just shift to Google 0:13:41.200 --> 0:13:43.319 and alphabet for just a moment. I want to get 0:13:43.320 --> 0:13:46.480 your thoughts on YouTube and being able to turn that 0:13:46.559 --> 0:13:50.959 into an ad sponsored moneymaker. Yeah, I mean, I'm not 0:13:51.280 --> 0:13:54.800 personally bullish on YouTube. I don't see um a lot 0:13:54.880 --> 0:13:58.839 of advertising demand on YouTube from our customers. Our customers 0:13:59.160 --> 0:14:03.120 are a lot of large hundreds and hundreds of large retailers. 0:14:03.760 --> 0:14:06.360 UM YouTube is kind of sitting out in the middle 0:14:06.360 --> 0:14:10.600 of nowhere. Right now. You have connected television for monetizing 0:14:10.679 --> 0:14:15.320 TV digitally, and now you have social to monetize. You know, 0:14:15.360 --> 0:14:18.680 we were just talking about Instagram. YouTube is neither of those, 0:14:19.160 --> 0:14:21.920 and it doesn't have a lot of data, and it's 0:14:22.280 --> 0:14:25.760 kind of I don't I don't see a lot of 0:14:25.760 --> 0:14:29.520 growth from YouTube as they exist right now. Just real 0:14:29.600 --> 0:14:33.120 quick here, do you see regulatory headwinds for UH for 0:14:33.200 --> 0:14:35.160 Instagram or do you think that they're much less because 0:14:35.160 --> 0:14:38.160 of the data component here? Um, I don't see much 0:14:38.240 --> 0:14:43.800 regulatory um headwinds for either Instagram or Facebook. I think GDPR, 0:14:43.960 --> 0:14:47.240 which is the Global Privacy loil the EU is kind 0:14:47.240 --> 0:14:51.080 of the gold standard for privacy laws. It's relatively strict, 0:14:51.760 --> 0:14:55.520 and the companies are already figuring out how they accommodate it. 0:14:55.560 --> 0:14:58.680 I don't see more anything stricter than that coming in 0:14:58.720 --> 0:15:01.120 the United States, So I think it's already priced in. 0:15:01.600 --> 0:15:04.600 I think it's already been dealt with and and consumers 0:15:04.640 --> 0:15:07.440 are also pretty blind to this stuff. You know, once 0:15:07.760 --> 0:15:10.560 you get these laws that go so far, consumers at 0:15:10.600 --> 0:15:12.320 a certain point don't care. At the end of the day, 0:15:12.360 --> 0:15:14.800 consumers are dumb. Him that seems to be the Well, 0:15:14.840 --> 0:15:19.120 that's just play. That's not what he's saying. I'm absolutely 0:15:19.120 --> 0:15:22.240 butchering it. Happy Halloween. Mark Douglas, chief executive of Steelhouse 0:15:22.480 --> 0:15:25.360 talking about advertising. He was not saying that consumers are dumb, 0:15:25.560 --> 0:15:28.720 just that people are willing to give up their freedom 0:15:28.840 --> 0:15:32.080 with respect to being tracked in order for free access 0:15:32.280 --> 0:15:36.600 to all of these social media websites. That's absolutely a 0:15:36.600 --> 0:15:40.640 fair exchange. I'm Lisa Brownwood's butchering comments and this is 0:15:40.720 --> 0:15:47.200 pim Fox and this is Bloomberg. The topic now is 0:15:47.520 --> 0:15:50.920 China and it's slowing economy. Here to tell us all 0:15:50.920 --> 0:15:55.280 about it is Michael Mike McDonough, chief economist Financial Products 0:15:55.280 --> 0:15:58.720 for Bloomberg LP, and he joins us here in studio. 0:15:58.920 --> 0:16:01.680 All right, Mr mc on a, how bad is it 0:16:01.720 --> 0:16:05.520 in China. It's it's worse than I think the government 0:16:05.520 --> 0:16:09.120 officials had been anticipating, but it's not not necessarily because 0:16:09.120 --> 0:16:11.680 of the trade war. I think that's the important thing 0:16:11.760 --> 0:16:15.320 that the distinction here really. Um, what you had happened 0:16:15.360 --> 0:16:19.080 was you had the government undertaking a deleveraging agenda, which 0:16:19.160 --> 0:16:21.640 was on the surface working fairly well. You had some 0:16:21.880 --> 0:16:24.960 debt ratios going down, interest coverage was going up. But 0:16:25.160 --> 0:16:28.400 the problem was, Uh, the parts of the economy that 0:16:28.440 --> 0:16:31.520 really needed funding that would help boost growth, we're having 0:16:31.560 --> 0:16:34.760 issues getting it, primarily because these guys were being funded 0:16:34.800 --> 0:16:38.560 by the shadow banking sector, which took the brunt of 0:16:38.640 --> 0:16:42.680 the deleveraging agenda. And meanwhile, UM, areas of the economy 0:16:42.720 --> 0:16:46.160 that we're a little less productive, but still needed still 0:16:46.160 --> 0:16:48.280 needed debt to roll over their old their old debt, 0:16:48.760 --> 0:16:51.840 we're getting it. So what this cause was a sharper 0:16:51.840 --> 0:16:54.240 slowdown than people had been anticipating. And then you throw 0:16:54.320 --> 0:16:56.160 on top of that what's happening with the trade war, 0:16:56.400 --> 0:16:59.440 which hasn't really bit yet, will really start biting in 0:16:59.520 --> 0:17:01.840 twenty nine, Tina, and it's a problem. Well, okay, But 0:17:01.880 --> 0:17:03.880 then I guess this raise is a really important question 0:17:03.880 --> 0:17:06.840 because this morning we're getting news that China is considering 0:17:06.840 --> 0:17:09.520 adding even more stimulus, and we have seen signs that 0:17:09.600 --> 0:17:11.720 they are re leveraging in order to stave off some 0:17:11.800 --> 0:17:14.199 of the declines and the weakness that we've been reporting on. 0:17:14.720 --> 0:17:19.440 My question is if they saw deleveraging is so important 0:17:19.480 --> 0:17:21.439 that they actually went ahead with it, even though they 0:17:21.520 --> 0:17:23.960 knew it was going to slow the economy, what is 0:17:24.000 --> 0:17:27.240 the consequence going to be of them adding more debt 0:17:27.280 --> 0:17:30.800 to the already chinormous debt pile that China has. Well, 0:17:30.880 --> 0:17:35.200 if your choices continue deleveraging and have growth slow more 0:17:35.280 --> 0:17:37.800 meaningfully than you wanted to and far further below the 0:17:37.880 --> 0:17:41.840 official government target or stability, with some leverage at least 0:17:41.840 --> 0:17:44.840 short term, you're gonna go with stability, right, So I 0:17:44.880 --> 0:17:47.399 think you're certainly going to see more action from the 0:17:47.440 --> 0:17:50.000 government to spur growth. I think that some of it, 0:17:50.280 --> 0:17:53.200 a lot of it will be through um spurring infrastructure 0:17:53.200 --> 0:17:56.560 investment in some smaller cities. They need it, you know, 0:17:56.680 --> 0:18:00.240 they there we Yeah, actually if it needs to be 0:18:00.320 --> 0:18:02.200 very targeted. But if you think about it, you know, 0:18:02.280 --> 0:18:05.640 China's urbanization rate is about if you look at most 0:18:05.640 --> 0:18:10.000 developed countries, it's closer to so there is more room, 0:18:10.080 --> 0:18:12.520 but it needs to be done smartly, right. I think 0:18:12.680 --> 0:18:15.520 what caused the problem with the debt. The thing that 0:18:15.560 --> 0:18:18.120 really catalyzed it was during the two thousand and eight 0:18:18.119 --> 0:18:21.520 financial crisis when the government did a pretty big stimulus package, 0:18:21.800 --> 0:18:25.400 and that stimulus package was distributed through a broken capital 0:18:25.440 --> 0:18:29.440 transmission mechanism. So what that meant was and really short 0:18:30.160 --> 0:18:32.879 banks were guaranteed a three hundred basis points spread no 0:18:32.920 --> 0:18:35.240 matter who they lent to. So basically large s o 0:18:35.440 --> 0:18:37.640 s who didn't need money got it. Uh this late 0:18:38.560 --> 0:18:41.720 they don't enterprises, yes, uh, And this led to help 0:18:41.840 --> 0:18:45.040 fuel the overcapacity that we saw. The real estate sector 0:18:45.119 --> 0:18:48.679 was helped immensely. Uh. This led to the overcapacity on 0:18:48.720 --> 0:18:52.240 that side of things. So it's it's more they've they've 0:18:52.240 --> 0:18:54.679 done a lot to modernize the financial sector since then. 0:18:54.720 --> 0:18:56.520 It's not done, but they've done a lot, so it's 0:18:56.560 --> 0:18:59.720 not as broken. So it's trying to get the funds 0:18:59.800 --> 0:19:02.000 to the right areas. And I think another thing they 0:19:02.000 --> 0:19:05.240 want to do, as I mentioned, the sectors that really 0:19:05.320 --> 0:19:08.520 would would be boosting growth are are some of the 0:19:08.520 --> 0:19:11.680 private sectors and technology, healthcare, some of the consumer stuff. 0:19:11.720 --> 0:19:15.200 So trying to get those companies funds. Uh. So it's 0:19:15.200 --> 0:19:18.280 a balancing act. But the deleveraging agenda is shelves for 0:19:18.320 --> 0:19:21.320 now for sure. I think that's gone for the time being. Um. 0:19:21.400 --> 0:19:23.359 And you know, one thing to keep in mind, we 0:19:23.400 --> 0:19:25.840 may get a little bit of a false positive on 0:19:25.920 --> 0:19:28.840 China growth because you could see exports surprised to the 0:19:28.920 --> 0:19:31.600 upside again before the end of the year because if 0:19:31.600 --> 0:19:33.800 you look at what tariffs are in place now versus 0:19:33.880 --> 0:19:35.600 what could be in place next year, it goes up 0:19:35.640 --> 0:19:38.479 pretty substantially. So people want to front run that. You know, 0:19:38.760 --> 0:19:41.120 people want to buy Chinese products now before the cost 0:19:41.240 --> 0:19:43.400 goes up. So um, that's why I say you might 0:19:43.440 --> 0:19:46.880 not really see the bite until twenty nineteen, So that's 0:19:46.880 --> 0:19:48.680 something they want to They're gonna want to get ahead 0:19:48.720 --> 0:19:51.480 of the real risk though, if if you want to 0:19:51.520 --> 0:19:54.880 be worried, is what's going to happen with capital flows? Um, 0:19:54.920 --> 0:19:56.639 there's there's a lot of debt that needs to be 0:19:56.720 --> 0:19:58.719 rolled over in China. So if you start seeing like 0:19:58.760 --> 0:20:02.879 you did in strong out capital outflows from China, that 0:20:02.960 --> 0:20:05.280 could be rather dangerous, and that is certainly something the 0:20:05.280 --> 0:20:06.840 government is going to be keeping an eye on and 0:20:06.880 --> 0:20:10.199 try to get ahead of. Here's a quote from the 0:20:10.280 --> 0:20:14.760 economics professor who oversees a survey that is sort of 0:20:14.800 --> 0:20:18.399 like our p m I survey in China. The quote is, 0:20:18.960 --> 0:20:25.400 foremost business has never been worse. What do you make 0:20:25.440 --> 0:20:29.440 of that? And if you are predisposed to invest in China, 0:20:29.960 --> 0:20:32.240 isn't it better to invest now than it was a 0:20:32.320 --> 0:20:35.800 year ago? Well? I think that, you know, like I said, 0:20:35.800 --> 0:20:38.440 that de leveraging agenda has hurt a lot of companies 0:20:38.520 --> 0:20:42.280 ability to uh raise funds and it's also made it 0:20:42.320 --> 0:20:44.800 more costly. So if you're running a business that's certainly 0:20:45.320 --> 0:20:48.440 isn't great. Uh, it's better if you're an s OE 0:20:48.960 --> 0:20:51.359 for for for state and enterprise for certain reasons. And 0:20:51.359 --> 0:20:54.719 then if you look at the current outlook, right, you 0:20:54.840 --> 0:20:58.800 have the US threatening wider tariffs, uh you know, and 0:20:58.920 --> 0:21:01.720 you you you you not sure what's going to happen 0:21:01.760 --> 0:21:03.959 with this whole U. S. China relations, which is one 0:21:04.000 --> 0:21:06.920 of the most you know, the most important bilateral relationship 0:21:06.960 --> 0:21:09.199 in the world world. Right now, that gives you a 0:21:09.200 --> 0:21:12.320 lot of uncertainty because you're also seeing consumer spending slowing 0:21:12.359 --> 0:21:14.720 a bit in China, right This isn't just weakness in 0:21:14.760 --> 0:21:17.720 one isolated area. It's a slowdown, you know, broadly speaking 0:21:17.760 --> 0:21:20.000 across the economy. So I could see why people might 0:21:20.040 --> 0:21:24.240 be pessimistic in China US with especially with the added 0:21:24.320 --> 0:21:27.480 uncertainty of what happens with those US China relations. And 0:21:27.600 --> 0:21:30.040 of course, just sort of speaking to your point about 0:21:30.080 --> 0:21:33.480 the concern about capital outflows, We're looking at the U 0:21:33.640 --> 0:21:36.840 n which is currently the weakest versus the dollar since 0:21:36.920 --> 0:21:39.760