WEBVTT - Former Acting CIA Director Devine Is 'Very Concerned' About Korea 0:00:05.800 --> 0:00:08.360 Welcome to the Bloomberg p m L Podcast. I'm Pim 0:00:08.400 --> 0:00:11.440 Fox along with my co host Lisa Bramowitz. Each day 0:00:11.480 --> 0:00:15.000 we bring you the most important, noteworthy, and useful interviews 0:00:15.040 --> 0:00:17.520 for you and your money, whether you're at the grocery 0:00:17.560 --> 0:00:20.560 store or the trading floor. Find the Bloomberg p m 0:00:20.680 --> 0:00:32.040 L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. 0:00:32.080 --> 0:00:34.960 Over the weekend, we heard from a number of top 0:00:35.080 --> 0:00:38.560 US officials trying to dispel some of the tension around 0:00:38.560 --> 0:00:42.280 North Korea, saying we are not near a nuclear conflict 0:00:42.400 --> 0:00:45.040 with Korea. There's still with North Korea where there's still 0:00:45.080 --> 0:00:47.199 a lot of lovers that we can pull. Uh. You 0:00:47.320 --> 0:00:51.400 had the US is top general reassuring South Korean UH 0:00:51.640 --> 0:00:55.640 President that we are going to try to reach some 0:00:55.720 --> 0:00:58.520 kind of peaceful agreement To get us a better sense 0:00:58.600 --> 0:01:00.520 of where we are in all of this. I want 0:01:00.560 --> 0:01:03.200 to bring in Jack Divine, founding partner and president of 0:01:03.440 --> 0:01:05.839 the ark And Group. He also was a former Acting 0:01:05.880 --> 0:01:10.679 director of the CIA and founding partner of this security group. 0:01:10.720 --> 0:01:14.320 So Jack, I'd love to get your sense how close 0:01:14.360 --> 0:01:17.640 are we to a nuclear conflict with North Korea. I 0:01:17.640 --> 0:01:20.440 don't want to be alarming, But it's been a long 0:01:20.560 --> 0:01:25.000 long time since I thought we were in a situation 0:01:25.120 --> 0:01:31.200 where it's conceivable that we could have a military confrontation 0:01:31.240 --> 0:01:35.839 that could end up in and some sort of nuclear incident. Um. 0:01:35.880 --> 0:01:39.320 I think back to the Cuban missile crisis. Were not there, 0:01:40.319 --> 0:01:42.760 but you know, in Cuba they didn't have missiles on 0:01:42.840 --> 0:01:45.720 the I mean they did, that's not that's an accurate 0:01:45.760 --> 0:01:47.640 we didn't learn about them until a few years later. 0:01:48.360 --> 0:01:52.280 So I think this is a very serious and threatening situation. 0:01:52.400 --> 0:01:54.920 I'm hopeful that we'll be able to walk the dog back, 0:01:55.800 --> 0:01:59.640 but I think it's um. I wouldn't minimize this at all. 0:01:59.680 --> 0:02:02.400 I could do that in all candor. So how do 0:02:02.440 --> 0:02:07.640 we walk the dog back? Well, I think, first of all, uh, 0:02:07.760 --> 0:02:10.679 any rational person would not want to get into any 0:02:10.680 --> 0:02:15.440 sort of military engagement which could then lead to a 0:02:15.520 --> 0:02:17.959 nuclear incident. I mean, there's no way. I mean, we 0:02:18.000 --> 0:02:20.919 have the finest military in the world, finest intelligence people. 0:02:21.600 --> 0:02:23.920 But I've been the business long enough that even with 0:02:24.000 --> 0:02:28.000 all your preparation and the best equipment, things go wrong. 0:02:28.080 --> 0:02:31.440 I mean, even if the very successful been ladding one 0:02:31.480 --> 0:02:35.720 of the helicopters you know, crashed. I mean we had 0:02:35.760 --> 0:02:39.200 an operation to try and get our hostages out of 0:02:39.200 --> 0:02:42.400 Iran and three of them crashed into the desert. So 0:02:42.480 --> 0:02:45.160 there's no way you can have a military operation where 0:02:45.240 --> 0:02:48.600 general can say, I give you a security here that 0:02:48.639 --> 0:02:51.480 we're going to take out all their their missiles. So 0:02:51.560 --> 0:02:55.359 I don't see how the military confrontation can end up 0:02:55.360 --> 0:02:59.200 with anything but a catastrophe. So I think one way 0:02:59.280 --> 0:03:01.400 or the other, we have to go back to the table. 0:03:01.440 --> 0:03:03.919 And as you know, I I've been putting forth the 0:03:03.960 --> 0:03:06.280 idea they try and go back to the Six party talks. 0:03:06.280 --> 0:03:07.960 But one way or the other, if we're not going 0:03:08.000 --> 0:03:09.680 to have a confrontation, we have to get back to 0:03:09.720 --> 0:03:13.000 the table. And while things may be taking place in 0:03:13.120 --> 0:03:16.240 back rooms, and I'm sure they are, I haven't seen 0:03:16.280 --> 0:03:23.680 it other than uh the South Korea proposing direct talks 0:03:23.760 --> 0:03:26.079 with North Korea. So I think we have to get 0:03:26.120 --> 0:03:27.720 back to the table. I think we need to be 0:03:27.760 --> 0:03:31.960 strong demonstrating with our b twos in our military positioning, 0:03:31.960 --> 0:03:35.480 and I think Trump is right to speak tough to them. 0:03:35.600 --> 0:03:38.720 But I think all that aside, there's no way this 0:03:38.800 --> 0:03:42.800 ends without negotiations. So let's talk about who we're negotiating with. 0:03:42.840 --> 0:03:45.680 I mean, China has been pinpointed as the main sort 0:03:45.720 --> 0:03:49.120 of negotiator in this whole business just because they could 0:03:49.120 --> 0:03:53.600 potentially cut off all global economic ties with North Korea. 0:03:53.840 --> 0:03:55.800 They seem to be unwilling to do that. And then 0:03:55.840 --> 0:03:57.800 there's a question which I want to pose to you 0:03:58.040 --> 0:04:00.800 of how effective would that act really be? I mean, 0:04:00.880 --> 0:04:06.720 quit China conceivably, uh stop Kim Jong's efforts to build 0:04:06.720 --> 0:04:12.880 a nuclear arsenal. Remember, our our interests are not directly 0:04:12.920 --> 0:04:16.000 lined up with the Chinese. I mean, there's clearly some overlap. 0:04:16.400 --> 0:04:19.120 Neither of us want to see a nuclear confrontation, certainly 0:04:19.160 --> 0:04:22.200 don't want to see one in their area, but they 0:04:22.240 --> 0:04:24.880 don't want to see United career either. They don't want 0:04:24.880 --> 0:04:28.479 to destabilized career. You have to guarantee after whatever confrontation 0:04:28.560 --> 0:04:30.599 you have that you know what's going to happen the 0:04:30.640 --> 0:04:33.840 next day. So the Chinese are not and sync with 0:04:34.000 --> 0:04:36.880 our interest On the other hand, they have a lot 0:04:36.880 --> 0:04:41.080 of equities with us, and we with them. Historically, I 0:04:41.120 --> 0:04:44.520 think they've under underinvested in trying to be helpful here. 0:04:45.200 --> 0:04:48.000 I think too many people over the past several years, 0:04:48.000 --> 0:04:49.720 and many of the articles that are written today talk 0:04:49.760 --> 0:04:53.000 about how key China is, but they don't talk about 0:04:53.000 --> 0:04:56.760 how you get the Chinese to do something that they're 0:04:56.800 --> 0:04:59.240 not convinced as in their interests. So there has to 0:04:59.320 --> 0:05:01.760 be a great deal pressure put on the Chinese. And 0:05:02.600 --> 0:05:04.360 it's one of the reasons again I think it would 0:05:04.400 --> 0:05:07.440 be important to get a group of people at the table. 0:05:07.560 --> 0:05:10.440 Is easier, it's easier to make concessions when you're in 0:05:10.480 --> 0:05:14.000 a group than one on one in my view. And 0:05:14.080 --> 0:05:15.560 you have to have the world sort of with you. 0:05:15.560 --> 0:05:17.920 If you have the six major countries and for those 0:05:17.960 --> 0:05:21.039 that don't follow to be Russia, South Korea, United States, 0:05:21.120 --> 0:05:24.800 and North Korea South Korea, so you have, you know, 0:05:24.839 --> 0:05:28.400 the world sort of trying to resolve this problem. And uh, 0:05:28.720 --> 0:05:31.640 it's it's harder for everyone just to fold their hands. 0:05:32.440 --> 0:05:34.720 I do think now that the North Koreans have tested 0:05:34.760 --> 0:05:38.599 and they've gone a long way, they may be because 0:05:38.600 --> 0:05:42.080 of the economic pressures on them, might be more willing 0:05:42.200 --> 0:05:44.840 to They're not going to bend in the program. Anyone 0:05:44.880 --> 0:05:48.120 that's hoping for that good luck. Um. I think what 0:05:48.200 --> 0:05:50.239 we could hope for is that we freeze it about 0:05:50.320 --> 0:05:52.920 where it is. And you know, you can't take the 0:05:53.000 --> 0:05:55.680 word for it. You have to have a verifying system 0:05:55.720 --> 0:05:58.440 and you have to have an independent intelligence look at 0:05:58.480 --> 0:06:01.760 to make sure that the sticking with it. They made 0:06:01.920 --> 0:06:04.880 some progress in the last time, in fact, some substantial 0:06:04.920 --> 0:06:08.280 progress of the Six party talks, but the North Koreans violin, 0:06:08.360 --> 0:06:10.560 and that's why I fell apart. They may be in 0:06:10.560 --> 0:06:13.360 a different position there because they now have a much 0:06:13.440 --> 0:06:19.160 more um powerful nuclear capability now than they did when 0:06:19.160 --> 0:06:21.200 they walked away from the table. There may be some 0:06:21.320 --> 0:06:27.000 room here for smart negotiations, but I think we need 0:06:27.080 --> 0:06:29.760 everybody in the game. Well, talking about that, Jack, I 0:06:29.760 --> 0:06:32.800 want to get a sense of Russia, because I don't 0:06:32.839 --> 0:06:34.800 have a clear sense of where they come down on this. 0:06:34.839 --> 0:06:37.359 Would they be willing and eager to negotiate with the 0:06:37.360 --> 0:06:40.800 other five major parties. I think there's a couple of 0:06:40.839 --> 0:06:44.320 aspects of it, little bit like the Chinese. It's not 0:06:44.400 --> 0:06:48.160 a nearer interest to see a um, you know, an 0:06:48.160 --> 0:06:50.880 improvement of relations between North Korea, South Korean and the 0:06:50.960 --> 0:06:55.400 United States, because if it improves enough, I can actually 0:06:55.400 --> 0:06:57.960 find if there was ever unification to be unification in 0:06:58.000 --> 0:07:01.240 favor of the South. So and the fact that they're 0:07:01.279 --> 0:07:04.680 able that the North Koreans quosed so much commotion it 0:07:04.800 --> 0:07:07.880 keeps US distracted, tied up or military forces. So it's 0:07:07.920 --> 0:07:10.600 not immediately in their interest. However, they are part of 0:07:10.600 --> 0:07:14.320 the human race and nobody can afford to think casually 0:07:14.360 --> 0:07:18.480 about having a nuclear um, a nuclear event anywhere. So 0:07:18.880 --> 0:07:20.760 and they want to be a player. I mean, they 0:07:20.800 --> 0:07:23.520 are a they wouldn't like to hear this, but they're 0:07:23.560 --> 0:07:25.920 not a major economy force in the world. They're not 0:07:25.960 --> 0:07:28.600 even they're not on the ground the force that they 0:07:28.600 --> 0:07:31.960 were years ago. So um, but they want to be 0:07:32.000 --> 0:07:34.920 taken with with more respect at the table, so through 0:07:34.960 --> 0:07:37.840 at the table. If everyone else goes to the the table 0:07:37.840 --> 0:07:39.920 and they don't, I think they'll shrink a little bit 0:07:39.920 --> 0:07:42.760 so that you may get them to the table. Yeah, Jack, 0:07:42.800 --> 0:07:44.600 real quick, how much confidence do you have in the 0:07:44.640 --> 0:07:50.000 current team, the current US team that's negotiating this. Well, 0:07:50.040 --> 0:07:52.680 I think we haven't as well. Again, let me come back. 0:07:52.720 --> 0:07:55.120 I'm not sure what's going on. I mean, I think 0:07:55.120 --> 0:07:59.800 we have very competent diplomats and intelligence people. I just 0:08:00.040 --> 0:08:06.920 haven't seen much discussion about the negotiation aspect of it. 0:08:07.000 --> 0:08:10.880 I haven't seen anybody putting forth, let's meet here, let's 0:08:10.880 --> 0:08:13.760 do this now. Maybe it's going on in the back rooms. 0:08:13.760 --> 0:08:17.800 I'm hoping that it is um, but UM. The emphas 0:08:17.880 --> 0:08:21.960 seems to be more how do you bring the military 0:08:22.040 --> 0:08:24.320 presence and how do you threaten each side and then 0:08:24.400 --> 0:08:27.720 leaning on people. I don't see a format being constructed 0:08:28.680 --> 0:08:32.960 for for discussion, and I said, I'm willing to admit 0:08:32.960 --> 0:08:34.800 there may be something going on, but as sure as 0:08:34.840 --> 0:08:38.719 ILL isn't grabbing headlines. Chack Devine, thank you so much 0:08:38.760 --> 0:08:41.360 for joining us. Jack Devine is former acting director of 0:08:41.559 --> 0:08:44.920 the c i A and founding partner and president of 0:08:45.080 --> 0:08:48.800 the security firm the arcan It Group. Talking about why 0:08:48.960 --> 0:09:04.600 we need to start negotiating with other major powers right now. 0:09:04.640 --> 0:09:06.440 I want to talk about angry birds and just how 0:09:06.520 --> 0:09:08.600 valuable they are. I want to bring in Leonel Laurent. 0:09:08.720 --> 0:09:12.000 He's a calumnist for a Bloomberg gad flag covering finance 0:09:12.040 --> 0:09:15.920 and markets. And Leonel, Uh, do you think that angry 0:09:15.960 --> 0:09:21.200 birds are worth two billion dollars? I saw this today 0:09:21.240 --> 0:09:26.600 and the Angry Birds franchise owner Rovio Entertainment UH planning 0:09:26.600 --> 0:09:31.520 in I p O probably next month two billion dollars. 0:09:31.520 --> 0:09:34.040 They rely entirely on angry birds. What's up with this 0:09:34.760 --> 0:09:37.920 two billion dollars, which would be about ten times revenue, 0:09:37.960 --> 0:09:41.680 which would be substantially above where one of its rivals, 0:09:41.840 --> 0:09:45.880 Zinger trades. Um we shall see. I would just note 0:09:45.920 --> 0:09:50.800 that two billion was what the company reportedly rebuffed about 0:09:50.840 --> 0:09:53.760 five years ago when it was offered that for for 0:09:53.760 --> 0:09:56.520 an acquisition, So it wouldn't exactly be a be a 0:09:56.600 --> 0:09:59.920 huge victory, but it would still be a pretty toppy 0:10:00.080 --> 0:10:03.439 multiple for a company that's you know, they've they've proven 0:10:03.480 --> 0:10:05.640 people wrong. I think they've really milked a lot more 0:10:05.679 --> 0:10:08.680 money out of Angry Birds than anybody thought possible. Well 0:10:08.679 --> 0:10:11.520 this is but have they milked money out of anything else? 0:10:11.640 --> 0:10:14.320 Or is it all angry and all birds? It's it's 0:10:14.559 --> 0:10:17.280 I mean they've they've tried, and they have some of 0:10:17.280 --> 0:10:20.080 the games, but but nothing to match it. And I 0:10:20.120 --> 0:10:22.640 think that you could and they will probably make the 0:10:22.679 --> 0:10:25.520 case that this I p O if it happens, would 0:10:25.559 --> 0:10:29.080 help them fund other things. Right. I mean, they've they've 0:10:29.120 --> 0:10:32.080 had some tough, tough couple of years. The markets change 0:10:32.080 --> 0:10:35.040 a lot. They've adapted to that. They had to cut 0:10:35.040 --> 0:10:37.319 a lot of staff, so they had to sort of 0:10:37.360 --> 0:10:39.160 stand on their own two feet. Hold on a second, 0:10:39.200 --> 0:10:41.439 The markets changed a lot for Angry Birds or for 0:10:41.679 --> 0:10:43.880 entertainment or you know, where are they trying to branch out? 0:10:44.200 --> 0:10:47.280 So so I think mobile games, that's that's what's really 0:10:47.320 --> 0:10:50.679 changed these This is almost a decade old, right, so 0:10:50.720 --> 0:10:52.319 you have to put yourself back to what it was 0:10:52.360 --> 0:10:54.600 like when it first burst onto the scene. You sold 0:10:54.640 --> 0:10:58.160 your app for a price and that was it. Quickly 0:10:58.240 --> 0:11:01.240 with with other big hit it's like Handy crushed. The 0:11:01.280 --> 0:11:05.760 whole market moved towards micro transactions, free to play, the 0:11:05.800 --> 0:11:08.040 kind of situation where your kid grabs your credit card 0:11:08.400 --> 0:11:12.480 and essentially spends your your hard land salary on on 0:11:12.480 --> 0:11:15.600 on a little game. These these became billion dollar companies 0:11:15.880 --> 0:11:20.040 in dollar games, billion dollar companies, and Rothio never got 0:11:20.040 --> 0:11:24.239 to that stage. And it's it's definitely adapted and it survived, 0:11:24.720 --> 0:11:27.040 but I just wonder what it can show that's new 0:11:27.080 --> 0:11:29.920 in terms of the future outlook. So do you play 0:11:29.960 --> 0:11:34.559 Angry Birds? I used to? You know, I did. It 0:11:34.720 --> 0:11:37.520 came out. My whole vision of view is changed, really 0:11:37.840 --> 0:11:39.920 thousand and nine, two tho nine. I mean, you know, 0:11:39.960 --> 0:11:42.120 you can't read Proust all day long, right, You've got 0:11:42.160 --> 0:11:44.400 to unwind, I guess. So, I mean, do they have 0:11:44.440 --> 0:11:46.679 other games in the works or are they just basically 0:11:46.720 --> 0:11:49.760 trying to make more Birds that are that are varying 0:11:49.800 --> 0:11:53.040 stages of anger. They have other games. They put out 0:11:53.040 --> 0:11:55.160 a new game I think called Battle Bay earlier this year, 0:11:55.200 --> 0:11:57.880 and they have a new studio in London whose whole 0:11:57.880 --> 0:12:01.080 mission is to make new title that are not Angry Birds. 0:12:01.080 --> 0:12:03.320 But they're not expected to produce a new game till 0:12:04.520 --> 0:12:06.520 which is the year, as I'm sure you know that 0:12:06.600 --> 0:12:09.280 the new Angry Birds movie comes out Angry Birds too. 0:12:09.800 --> 0:12:13.000 We are still on this weird limbo where we are 0:12:13.040 --> 0:12:17.079 still waiting for this kind of new Rovio two to hatch, right, 0:12:17.160 --> 0:12:20.040 and it hasn't happened two billion dollars and the timing 0:12:20.080 --> 0:12:22.280 is sort of odd to me. So I'm wondering, you know, 0:12:23.040 --> 0:12:26.679 would this I p O be derailed if we see 0:12:26.720 --> 0:12:29.800 the weakness that we saw last week or the people 0:12:29.800 --> 0:12:31.360 you're talking to, I mean, is it is there are 0:12:31.360 --> 0:12:33.040 sense they're going to go ahead with this? They need 0:12:33.080 --> 0:12:37.520 to do something. I don't know. I think that that 0:12:37.720 --> 0:12:40.480 there there have been reports right of everything from ten 0:12:40.559 --> 0:12:44.320 Cent potentially buying the company to the company floating a 0:12:44.400 --> 0:12:47.760 small part of itself. You know, I think as usual 0:12:47.800 --> 0:12:50.800 with this kind of industry. I mean, people aren't dumb. 0:12:50.840 --> 0:12:52.480 They can look at the market and see that the 0:12:52.520 --> 0:12:56.760 stock prices of mobile game companies have underperformed post i 0:12:56.840 --> 0:13:00.880 p O. This is a volatile, tough hit of an industry. 0:13:01.280 --> 0:13:03.320 On the other hand, as we've seen from tech i 0:13:03.400 --> 0:13:05.240 p o s, that just seems to be demand even 0:13:05.280 --> 0:13:09.800 for crazy evaluations right like like Snap um and even 0:13:09.800 --> 0:13:12.440 with blue Aprons troubles. Who knows, there might just be 0:13:12.559 --> 0:13:15.000 enough happit site for this. There just might be. Of course, 0:13:15.080 --> 0:13:18.960 Snap is bouncing back after the earlier plunge, talking about 0:13:19.320 --> 0:13:22.360 uh Snap and one hit wonders. It seems like this 0:13:22.400 --> 0:13:25.200 one hit wonder is going to continue for longer, and 0:13:25.200 --> 0:13:27.640 now it shares her up more than seven percent. My god. 0:13:27.760 --> 0:13:31.440 They were down almost five percent earlier today after it 0:13:31.520 --> 0:13:37.040 was revealed that Tamasak of Singapore had offloaded it's holdings 0:13:37.200 --> 0:13:40.440 of this particular company. Leone Lauron, thank you so much 0:13:40.440 --> 0:13:44.360 for joining us, truly, I guess you know. Look Angry Birds, 0:13:44.559 --> 0:13:47.840 it is an appealing franchise. My kids loved Angry Birds, 0:13:48.400 --> 0:13:52.079 but still two billion dollars. Leone Laurent Columnists covering finance 0:13:52.120 --> 0:14:08.840 and markets for Bloomberg gad fly coming to us from London. Well, 0:14:08.840 --> 0:14:11.760 it isn't a day in up markets if there isn't 0:14:11.800 --> 0:14:14.800 a fear about a bubble in exchange traded funds. And 0:14:14.840 --> 0:14:17.320 I want to bring in Eric Beltunez, who spent his 0:14:17.440 --> 0:14:20.480 life basically at least for the past few years, defending 0:14:20.520 --> 0:14:23.520 e t f s against the bubble fears. Eric Valtunez 0:14:23.760 --> 0:14:26.640 is a senior e t F analyst for Bloomberg Intelligence 0:14:26.640 --> 0:14:30.560 and he joins us. Now, Eric, yet again we get 0:14:30.600 --> 0:14:35.400 another story about record e t F inflows fueling price 0:14:35.600 --> 0:14:39.080 bubble fears. That headline was published in the Financial Times 0:14:39.400 --> 0:14:42.160 and it stemmed from a statistic that investors have already 0:14:42.200 --> 0:14:45.600 funneled three hundred and nine billion dollars into e t 0:14:45.760 --> 0:14:49.600 f s in the first seven ones of already eclipsing 0:14:49.760 --> 0:14:53.600 the full year record that was set last year. So, Eric, 0:14:54.080 --> 0:14:58.240 does this acceleration of inflows suggest to you that perhaps 0:14:58.320 --> 0:15:00.920 people are getting over their skis and putting too much 0:15:00.960 --> 0:15:06.080 faith in these vehicles? Uh? Well, no, I mean, and 0:15:06.200 --> 0:15:09.360 when you say definite ets, I don't necessarily like to 0:15:09.360 --> 0:15:13.720 be the apologist, but there's definitely more people taking shots 0:15:13.760 --> 0:15:16.680 and just throwing out these things without using much context. 0:15:17.120 --> 0:15:20.080 I thought two better headlines for that FT article would 0:15:20.080 --> 0:15:25.840 have been investors demanding stocks fuels fears of a of 0:15:25.840 --> 0:15:29.960 a stock market bubble, or e t F record inflows 0:15:30.040 --> 0:15:34.160 fuels fears of asset managers lost revenues. I think those 0:15:34.200 --> 0:15:36.920 are two better headlines than what they did. They kind 0:15:36.920 --> 0:15:39.520 of take, Okay, all this money is going into e 0:15:39.600 --> 0:15:42.200 t s, But all this money is going into the 0:15:42.240 --> 0:15:45.520 market anyway, like if ets didn't exist, it would buy 0:15:46.120 --> 0:15:49.160 index funds, or it would buy active mutual funds, and 0:15:49.240 --> 0:15:52.000 ultimately you would own the same stocks. So I think 0:15:52.080 --> 0:15:54.960 that's what I get getting gets annoying with me is 0:15:55.000 --> 0:16:00.160 that sometimes there's some laziness and some conflating of just 0:16:00.240 --> 0:16:02.560 because money is going into e t s means that, oh, 0:16:02.640 --> 0:16:05.040 there's a bubble. I think all you're seeing is that 0:16:05.160 --> 0:16:09.720 money is basically transferring from closet indexing to actual indexing. 0:16:09.800 --> 0:16:12.800 So but it's ultimately owning the same stocks. But the 0:16:12.840 --> 0:16:16.520 investors deciding to buy equities and faith in Trump and 0:16:16.560 --> 0:16:19.520 all in the FED in the past, that's ultimately what 0:16:19.680 --> 0:16:22.720 is driving out valuations. Well, I guess that one fear 0:16:23.000 --> 0:16:26.240 is that right now and you have so much money 0:16:26.360 --> 0:16:29.440 going into the stock market through index funds, and you 0:16:29.480 --> 0:16:33.040 talked about closet indexing, in other words, active managers who 0:16:33.240 --> 0:16:37.119 essentially just followed the indexes, so are essentially we're indexers 0:16:37.120 --> 0:16:40.880 but charging larger fees. And that's been a fear and 0:16:40.920 --> 0:16:44.080 an accusation for a long time. But there's a concern 0:16:44.160 --> 0:16:47.000 that with so much money going into funds that all 0:16:47.080 --> 0:16:51.320 track the same indexes, that companies that are unworthy of 0:16:51.360 --> 0:16:55.960 their money will get them regardless of what their financial 0:16:56.000 --> 0:16:59.040 health is, but just by virtue of their being big 0:16:59.080 --> 0:17:02.120 and in the index right now. And then we've got 0:17:02.120 --> 0:17:04.119 to use context on the fact that if you go 0:17:04.200 --> 0:17:07.560 back and you look at, uh, the amount of money 0:17:08.320 --> 0:17:11.160 or the amount of ownership of the stock market made 0:17:11.200 --> 0:17:13.480 up by mutual funds, it's about half a little less 0:17:13.480 --> 0:17:16.679 than half. So there's still again plenty of people picking 0:17:16.680 --> 0:17:20.320 stocks based on valuations. UM. I also think that, look, 0:17:20.720 --> 0:17:23.159 active managers are now out saying that like e t 0:17:23.440 --> 0:17:26.439 s and index funds are bad for capitalism. UM. And 0:17:26.560 --> 0:17:28.880 you know, look, I mean there's some case who made 0:17:28.880 --> 0:17:31.800 that an active manager can evaluate a stock better. UM. 0:17:31.840 --> 0:17:34.199 And if that's the case, an investor should pick an 0:17:34.200 --> 0:17:37.080 active manager. I think part of the problem with this 0:17:37.119 --> 0:17:40.359 whole thing is that investors are just voting with their feet. 0:17:40.400 --> 0:17:42.440 I mean, I think what really has caused a lot 0:17:42.480 --> 0:17:46.680 of the movement is low cost one but to disappointment 0:17:46.680 --> 0:17:48.679 in two thousand and eight. I think a lot of 0:17:48.720 --> 0:17:51.200 people thought that their active fund would have saved them 0:17:51.280 --> 0:17:55.320 some of that uh thirty five percent loss, but it didn't. 0:17:55.320 --> 0:17:58.080 In fact, two thirds of active managers underperformed in two 0:17:58.119 --> 0:18:01.720 thousand and eight, and I think that's partially the investor's fault. 0:18:02.080 --> 0:18:05.000 Active managers know that investors can't tolerate a lot of 0:18:05.040 --> 0:18:07.720 tracking error and they have to buy these stocks, so 0:18:07.840 --> 0:18:10.960 ultimately their hands are tied. In the end, investors really 0:18:11.000 --> 0:18:14.200 want the index anyway, um, and so they're driving all 0:18:14.200 --> 0:18:19.040 of this. So you put out research recently looking at 0:18:19.160 --> 0:18:21.399 where these flows have been going, and you showed how 0:18:21.440 --> 0:18:24.920 they're going to Van Garden black Rock overwhelmingly. And does 0:18:24.960 --> 0:18:27.080 this mean that you expect to see some of the 0:18:27.119 --> 0:18:30.359 smaller et F providers close up shop or get absorbed 0:18:30.400 --> 0:18:33.639 by the bigger by the bigger players, Yeah, you know, 0:18:33.720 --> 0:18:36.280 I have this thing I use where, like you know, 0:18:36.440 --> 0:18:40.040 the old news is active passes the new news is 0:18:40.760 --> 0:18:44.119 um high cost to low cost. The future news is 0:18:44.680 --> 0:18:48.840 three companies manage the assets UM. So yes, you're going 0:18:48.840 --> 0:18:52.359 to see a massive consolidation. We just saw power Shares 0:18:52.440 --> 0:18:55.480 is on the verge of buying Guggenheim, which took a good, 0:18:55.600 --> 0:18:58.560 juicy smart data issue off the table for active shops 0:18:58.560 --> 0:19:00.960 who need a passive game. By the way, but ultimately, yes, 0:19:00.960 --> 0:19:03.320 you're gonna see a ton of consolidation. I think what's 0:19:03.320 --> 0:19:06.000 going to happen is the next sell off. There's gonna 0:19:06.040 --> 0:19:08.040 be a whole Uh. This is where a lot of 0:19:08.040 --> 0:19:09.600 this is going to come to light and a lot 0:19:09.600 --> 0:19:11.840 of managers are can be forced to team up in 0:19:11.920 --> 0:19:14.720 order to compete with the vanguarden black rocks of the world. 0:19:14.760 --> 0:19:18.560 And with those low fees you need scale. Eric BLUs, 0:19:18.600 --> 0:19:20.960 thank you so much. And you know, honestly, when I 0:19:21.000 --> 0:19:23.240 say an E T F defender, I find that a 0:19:23.280 --> 0:19:26.399 lot of our conversations end up being Eric, you calling 0:19:26.440 --> 0:19:29.000 me and saying, you know, actually, let's reframe this. Let's 0:19:29.000 --> 0:19:30.880 look at what the where the money is actually going. 0:19:30.920 --> 0:19:33.560 This is just a vehicle, uh, that people can sort 0:19:33.560 --> 0:19:36.560 of invest in the underlying assets. So it's always enlightening 0:19:37.080 --> 0:19:39.960 to speak with you and you're looking at the technical 0:19:40.080 --> 0:19:43.840 is not just blindly defending Eric beltunas, senior et F 0:19:43.840 --> 0:19:47.920 analyst for Bloomberg Intelligence. Uh. And again, those bubble fears 0:19:47.920 --> 0:19:50.919 will be ongoing, I'm sure, especially if we do not 0:19:50.960 --> 0:19:54.359 get another major downturn, you'll have people saying, well, they're untested. 0:20:06.840 --> 0:20:08.800 With all of the news that's coming out of North 0:20:08.880 --> 0:20:12.640 Korea and Virginia, there has been less talked about one 0:20:12.640 --> 0:20:16.000 of the most important things that will happen probably this month, 0:20:16.000 --> 0:20:18.880 which is the beginning of the renegotiation of the North 0:20:18.920 --> 0:20:22.399 American Free Trade Agreement known as NAFTA. And here to 0:20:22.520 --> 0:20:25.280 give us a sense of exactly what's at stake, and 0:20:25.280 --> 0:20:27.879 it potentially is quite a bit, is Mike McDonough. He 0:20:28.000 --> 0:20:31.000 is a global director of Economic Research and chief economist 0:20:31.160 --> 0:20:33.480 for Bloomberg Intelligence, and he joins us in our eleven 0:20:33.520 --> 0:20:37.200 three oh studios. Mike, just can you lay out what 0:20:37.600 --> 0:20:39.399 the main issues will be because we've heard a lot 0:20:39.400 --> 0:20:43.400 about agriculture, We've heard a lot about dairy. Yeah, you know, well, 0:20:43.440 --> 0:20:45.480 it depends on who you ask. I think a little 0:20:45.480 --> 0:20:48.280 bit right if you if you look at the trade representative, 0:20:48.640 --> 0:20:51.679 they actually put out a kind of preliminary report a 0:20:51.720 --> 0:20:54.720 month or two ago on what their expectations were, and 0:20:54.760 --> 0:20:58.000 the key things were that they expected to maintain the 0:20:58.119 --> 0:21:01.760 trade free terrorists for agricultural and industrial goods. Uh and 0:21:01.800 --> 0:21:07.040 instead focusing on things like I T financial sector integration, 0:21:07.720 --> 0:21:09.680 things like this, which which all makes sense, it would 0:21:09.720 --> 0:21:11.359 be a good thing to add to the deal. But 0:21:11.440 --> 0:21:14.200 when you listen to the Trump administration's rhetoric, it has 0:21:14.240 --> 0:21:17.600 mostly been trade deficit, trade deficit, trade deficit, be it 0:21:17.680 --> 0:21:20.879 with China, be it with Mexico, Germany, whoever. Uh. And 0:21:20.920 --> 0:21:25.000 what's interesting when you actually look at Mexico and you say, well, where, 0:21:25.040 --> 0:21:27.440 how why are we running this trade deficit with Mexico. 0:21:27.880 --> 0:21:30.399 If you actually break it down by product and you 0:21:30.440 --> 0:21:34.920 look at transportation equipment, the deficit in transportation equipment between 0:21:34.920 --> 0:21:37.800 the US and Mexico is actually larger than the entire 0:21:37.960 --> 0:21:41.160 US trade deficit, So meaning if you strip that component 0:21:41.200 --> 0:21:43.840 out there, we would actually be running a trade surplus 0:21:43.840 --> 0:21:47.320 of Mexican. So is this basically the flip side of 0:21:47.680 --> 0:21:52.399 Ford and GM manufacturing their cars in Mexico or car parts? 0:21:52.520 --> 0:21:55.720 It's two things. It's uh, exactly what you just said. 0:21:56.000 --> 0:21:58.720 Car companies building their cars in Mexico and bringing them back. 0:21:58.800 --> 0:22:01.520 And it's also all the parts being produced in Mexico 0:22:01.640 --> 0:22:04.159 that are being used in cars that are assembled in 0:22:04.240 --> 0:22:06.800 the US. When you when you break it out by state, 0:22:06.880 --> 0:22:09.200 the two largest states with the deficits that are Michigan 0:22:09.240 --> 0:22:12.480 and obviously cars in California, which is cars is number one, 0:22:12.760 --> 0:22:15.680 but then computer parts is number two. But why why 0:22:15.800 --> 0:22:18.080 I went into all this is if your President Trump 0:22:18.119 --> 0:22:20.680 and your biggest concern is the trade deficit, and you're 0:22:20.680 --> 0:22:24.159 renegotiating renegotiating NAFTA with that in mind, it's hard to 0:22:24.200 --> 0:22:26.760 see how you're going to ignore this sector. But that's 0:22:26.800 --> 0:22:29.439 kind of what was indicated by the to me at 0:22:29.480 --> 0:22:32.720