Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.
Speaker 1: Daily we bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. This
Speaker 1: is our interview of the day. It usually would always
Speaker 1: be that case, but really none more than this day.
Speaker 1: After what we saw in Brussels at NATO. It checkers
Speaker 1: with Prime Minister May and in Helsinki as well. We
Speaker 1: do this with a gentleman who did a tour of
Speaker 1: duty on one platform in Haiti, Bosnia and a Persian
Speaker 1: golf out in the real trenches of a projection of
Speaker 1: her U S Navy and Admiral Strevidis at the Fletcher School,
Speaker 1: Toughs University. Admiral your Twitter feed I featured this morning.
Speaker 1: It is the most scathing feed I have ever ever
Speaker 1: seen in the history of what Twitter wrought. I like
Speaker 1: in respect Ambassador Dan Coates. I am not sure how
Speaker 1: he goes to work tomorrow. President Trump has lost his
Speaker 1: grip on reality and by the way, Mr Putin offering
Speaker 1: to help find the culprits in our election is like
Speaker 1: Edward Snowden, et cetera. And then you finish up on
Speaker 1: a classy Strevida's note by saying that the president's decision
Speaker 1: not to throw out the first pitch at tonight's Baseball
Speaker 1: All Star Game in d C now seems brilliant. Admiral,
Speaker 1: this is the number one question I've gotten on this trip.
Speaker 1: When do people start resigning and why don't they resign?
Speaker 1: Discuss I'll start with Dan Coates, as I said in
Speaker 1: my tweet. I like Dan Coates. I respect him for
Speaker 1: were ambassador to Germany, former senator, just a terrific person
Speaker 1: by every regard um. He ought to resign and he
Speaker 1: ought to kind of lead the charge on resignations. I
Speaker 1: just think that to watch your boss, your immediate boss,
Speaker 1: and he goes into the White House almost every day
Speaker 1: to brief the president on intelligence. To watch your boss
Speaker 1: stand next to the president of Russian avowed bitter hater
Speaker 1: of the United States of America, and UH through the
Speaker 1: entire intelligence community under the bus, UH screams for a resignation.
Speaker 1: So I think I think it's kind of got to
Speaker 1: start there, because I don't think the Congress can really
Speaker 1: do much. Tom, you are very close, particularly with General Madison,
Speaker 1: your wonderful book on leadership, which was the year a
Speaker 1: few years ago, Admiral stevinus our General Madison. General Kelly
Speaker 1: held to a different standard of resignation. Can they not
Speaker 1: resign because they serve the nation in the military. I
Speaker 1: think two different cases, tom Um. First of all, they
Speaker 1: can resign, but I think both of them have a
Speaker 1: lifetime of standing up in the fire and continuing on,
Speaker 1: and I think both of them, probably part of them
Speaker 1: wants to do that. I think for General Kelly in
Speaker 1: the White House, it's probably about time for my good
Speaker 1: friend John Kelly to wrap it up. Uh. In terms
Speaker 1: of General Maddis, I hope he stays, and I think
Speaker 1: he should stay. He's in a different category. He's not
Speaker 1: part of the intelligence community per se. Uh in his
Speaker 1: role is just so vital that I hope he stays,
Speaker 1: and I think General Kelly has got to be pondering
Speaker 1: his options today. Admiral Stavrida's I'm wondering if you could
Speaker 1: comment on the notion that perhaps Donald Trump sees something
Speaker 1: that other people don't see, and that his negotiating style
Speaker 1: will yield results that we have yet to expect. I
Speaker 1: think we have to examine that possibility. But here's how
Speaker 1: I would approach Russia. We should confront them where we must,
Speaker 1: and that is on things like intrusions in our elections,
Speaker 1: support for war criminal like Assad invading Ukraine and annex
Speaker 1: and crimea. We have to confront Russia on that. But
Speaker 1: we should cooperate where we can. Can we work together
Speaker 1: on counter narcotics, on counter piracy, on counter cyber on
Speaker 1: cooperation in the Arctic, on arms control. I think there
Speaker 1: are zones of cooperation. But to approach Vladimir Putin as
Speaker 1: the President did yesterday essentially as a supplicant um undoes
Speaker 1: any ability to confront him on the vital issues. So
Speaker 1: I think we need both. And I don't think that
Speaker 1: the negotiating style being displayed with Vladimir Putin gets us anywhere,
Speaker 1: because Putin will take everything you put on the table,
Speaker 1: put it in his pocket, and then ask for more.
Speaker 1: But at the same time, the United States is outspending
Speaker 1: every country in the world on its defense budget, and
Speaker 1: President Trump has been vociferous in his support of the
Speaker 1: defense established, pushing for more spending. I think that he
Speaker 1: is in the right place, President Trump, uh in looking
Speaker 1: for modest increases in the defense budget. We don't need
Speaker 1: to uh double our defense budget or increased by even
Speaker 1: ten percent. But he's looked for modest increases in single digits,
Speaker 1: low single digits that I think are appropriate to address readiness.
Speaker 1: The United States has an enormous global uh sense of
Speaker 1: what it needs to do in the world, and that
Speaker 1: requires a pretty big defense budget. But this gets us
Speaker 1: to another fallacy and the Trump approach, which is throwing
Speaker 1: the Europeans under the bus right before he throws the
Speaker 1: intelligence community under the bus. Europeans have the second largest
Speaker 1: defense budget in the world. If we want relief on
Speaker 1: our defense budget, we're to be encouraging them, not rejecting them,
Speaker 1: as I see the President doing. Let's continue with that mostravitas,
Speaker 1: of course, with tough university in the Fletcher school. I
Speaker 1: can't say enough, folks about the briefings that you can
Speaker 1: get from the work of j. Stravitz. His book See Power,
Speaker 1: The History and geopolitics of the world's Oceans, will make
Speaker 1: you far smarter about the seas. Things we take for
Speaker 1: granted that he has lived as well. In my Book
Speaker 1: of the Year a few years ago, the Leader's bookshelf
Speaker 1: is a set of writings by military officers, for the
Speaker 1: most part, uh their favorite books. And these are people reading,
Speaker 1: including General Maddis I believe in the book, and General
Speaker 1: Kelly as well. I can't say enough about the Leader's bookshelf.
Speaker 1: You go in, you pick out one to three or
Speaker 1: four books. Mark Twain is in there, among others, but
Speaker 1: just a very valuable book to give you perspective in
Speaker 1: this time of economics, finance, politics, and of course our
Speaker 1: most interesting international relations. Right now, Ian Whittaker joins us
Speaker 1: some libering in London as we look at the end
Speaker 1: of Netflix. As we know and Ian, I just did
Speaker 1: a two standard deviation chart. Netflix is such a juggernaut.
Speaker 1: It's not even down to resistance. It's amazing. It's pulled
Speaker 1: back this morning and it's still within trend. Has the
Speaker 1: back been broken of Netflix? Is unreal ball market? Is
Speaker 1: it just a quick blip along the road or is
Speaker 1: there something different this time? I think what we'll have
Speaker 1: to see is what are the results that come out
Speaker 1: from the following quarters. I mean, it's always dangerous taking
Speaker 1: warm quarters results and then extract lating across. Having said that,
Speaker 1: I think there will be some particular points of concern
Speaker 1: for people in terms of longer term story. Very mind,
Speaker 1: giving the market camp this stock, which is still after
Speaker 1: they for over a hundred and fifty billion dollars, you
Speaker 1: really need some funchy assumptions both in terms subscribe to
Speaker 1: growth and also as well are pro growth moving forwards
Speaker 1: to justify that valuation. Now, what I think people will
Speaker 1: be particularly concerned about there's the court to subscribeer missed,
Speaker 1: which is not great. Then the Q three subscriber prediction
Speaker 1: doesn't look particularly fantastic either. But going back to this
Speaker 1: point before, it's that the the argument that Netflix has
Speaker 1: been impacted by the fact of a lack of news shows.
Speaker 1: What's particularly worrying about that is it suggests that they
Speaker 1: have to continually invest in very expensive, very glassy drama,
Speaker 1: which quite frankly, nobody knows whether it will be a
Speaker 1: success until it's shown in order to keep that subscriber
Speaker 1: momentum growing. The rest of the package just doesn't seem
Speaker 1: good enough to actually get to subscribe momentum that the
Speaker 1: analysts are expecting out there on the street. So, as
Speaker 1: I said, I think one quarters numbers, let's not put
Speaker 1: it into a trend. If this was a critique for
Speaker 1: next sort of two quarters or so, I think people
Speaker 1: would be very worried. So let's talk about a couple
Speaker 1: of things. And the first point you've made is the
Speaker 1: is the quarterly miss, and I want to talk about
Speaker 1: the communication there ian. We didn't just miss, we missed
Speaker 1: by a million subscribers. When you missed that big, typically
Speaker 1: something's gone wrong with communication, both from the company towards
Speaker 1: the street and just the general visibility internally. How have
Speaker 1: they got it this wrong? Gain well, I think they
Speaker 1: they probably if you're a company doing your forecast, what
Speaker 1: you'll obviously look you look at the trends that have
Speaker 1: been going on, both in terms of Q on q
Speaker 1: and then year on year, and you'll take a view
Speaker 1: on that. You'll say you've advanced into more markets than
Speaker 1: you were in previously. That essentially you've become a lot
Speaker 1: more they've got a lot more more products than therefore
Speaker 1: that should drive growth as well. I think therefore, of
Speaker 1: a couple of things that would extrapolate from that one.
Speaker 1: Either the growth from their new markets hasn't been as
Speaker 1: good as they expected, or they've seen more of rappid
Speaker 1: the slowdown coming through in the way existing markets both
Speaker 1: of which is obviously sort of a Boying trend. They
Speaker 1: might argue that the World Cover has had an effect
Speaker 1: in the sense that the World Cup probably was a
Speaker 1: much better receive competition than many would have expected at
Speaker 1: the start of the tournament. And I think that will
Speaker 1: probably be their main line of defense here. Having said that,
Speaker 1: so they should have actually, as he said, to get
Speaker 1: a million subscriber miss. Yeah it's okay. Let's say it
Speaker 1: was two hundred, three hundred thousand. You can probably explain
Speaker 1: it away by the effect of the World Cup missing
Speaker 1: by so much, because yeah, that's something like a sixteen
Speaker 1: seventeen miss against their estimates. I mean, that does feel
Speaker 1: as though something a bit more drastic has gone wrong.
Speaker 1: You're trying to blame the World Cup for a couple
Speaker 1: of weeks in June, for a three month quarter, for
Speaker 1: a one million submiss seems like a stretch to me.
Speaker 1: Oh no, it doesn't. And I love you and I
Speaker 1: love bringing this up because John wants to be World
Speaker 1: Cup free and I just will keep it going with
Speaker 1: This is just slowly going to drain out the program
Speaker 1: in the next couple of days. And I want to
Speaker 1: pick up on a point that the CFO David Wells
Speaker 1: made yesterday taking on Dennis most effective capital source. How
Speaker 1: much debt does this company's need to take on now
Speaker 1: to fund this growth in the future to fund that content. Well,
Speaker 1: it's very interesting if you if you look in terms
Speaker 1: of the numbers serve in terms of the cash burn
Speaker 1: on Netflix, the consensus cash burning is around three billion
Speaker 1: dollars over three billion dollars for this year, and it
Speaker 1: rapidly comes down. But you're still looking at a company
Speaker 1: where it doesn't our most analysts forecast it doesn't get
Speaker 1: cash flow positive until one. I think it all boils
Speaker 1: down to the point that maybe four. If their subscriber
Speaker 1: growth is predicated on having to get a consistent stream
Speaker 1: of high margin show of high sort of cost shows
Speaker 1: to keep those subscribers in, your cash flow is probably
Speaker 1: going to be. People expects, well, they just have the generals,
Speaker 1: the history. Well, yeah, we gotta leave it. We gotta
Speaker 1: leave it there. What I would say is it just
Speaker 1: seemed more of the Queen, I mean, clar fo, he's
Speaker 1: just got to get to work to well. Well. President
Speaker 1: Trump's proposed new tariffs on two billion dollars worth of
Speaker 1: imported goods from China. They escalate the US China trade
Speaker 1: conflict and intensify the debate about the economic and political
Speaker 1: implications of trade negotiations, but do they obscure the investment
Speaker 1: opportunities and reality. Here to tell us more is our
Speaker 1: own Matt Winkler, Bloomberg Editor in Chief emeritus. Matt, always
Speaker 1: a pleasure, Thanks for being here. I want you to
Speaker 1: just describe a little bit about what you were trying
Speaker 1: to do in your latest column, to kind of peel
Speaker 1: back the rhetoric and explore exactly what is going on
Speaker 1: in the world economy. It is in a way much
Speaker 1: more domestic, particularly when it comes to a place like China. Yes, Pim,
Speaker 1: thank you for that introduction. Always good to be with you.
Speaker 1: We're besieged. If you will buy headlines like Trump tariff
Speaker 1: barrage pushes China few to point of no return, that's
Speaker 1: a good one. China vows retaliation with you know, two
Speaker 1: hundred billion dollars of trade threat. The reality is if
Speaker 1: we do something we like to do with Bloomberg, which
Speaker 1: has followed the money is what emerging market funds are
Speaker 1: doing best, and if emerging markets are in peril, which
Speaker 1: everybody from black Rock to Carmen Reinhardt at Harvard has
Speaker 1: been saying, they are what are these emerging market funds
Speaker 1: doing it? In fact, the best of them are investing
Speaker 1: in China. They're increasing their holdings in China. And the
Speaker 1: reason for that is that the Chinese economy, which is
Speaker 1: now the second largest in the world after the US,
Speaker 1: is looking more and more like the US in the
Speaker 1: sense that it's domestic demand that's driving performance of corporate China,
Speaker 1: and corporate China that is driven by domestic demand as
Speaker 1: doing very well. And some of these funds, for example,
Speaker 1: have doubled their holdings in the past three years, going
Speaker 1: from say sixteen percent China to almost thirty percent. And
Speaker 1: on top of that, they've been reaping fiferent annual returns
Speaker 1: the best of them. So that's all pretty good in
Speaker 1: the face of all the sound bites and um the
Speaker 1: rhetoric of trade wars. Let me just push you a
Speaker 1: little bit because one of the funds that you talk
Speaker 1: about in the piece is the American Century Emerging Markets Fund.
Speaker 1: It is down about seven and a quarter percent so
Speaker 1: far this year. Does that underscore that this is a
Speaker 1: long term view or is there something else at work?
Speaker 1: It absolutely does underscore that's a long term view. And
Speaker 1: if you were to speak with as we did to
Speaker 1: Patricia Riberio, who is the UH woman who manages the
Speaker 1: American Century Emerging Markets Fund, she will tell you that, um,
Speaker 1: you know, she does not really pay much attention or
Speaker 1: make decisions based on day to day UM events. What
Speaker 1: she does is follow the performance of the companies there,
Speaker 1: and it's increasingly difficult because finding the signal and all
Speaker 1: this noise is probably more rigorous than than it otherwise
Speaker 1: would be because there's so much noise. But she would
Speaker 1: tell you that the worst thing to do is to
Speaker 1: pay attention to the noise. No But yeah, I look
Speaker 1: at this, and what's the advantage your folks, is that
Speaker 1: mett wor cler works shouldn't pay and they really go
Speaker 1: through the data on this. Are these Is this em
Speaker 1: fund out performance because they make more money when things
Speaker 1: are good? Or is that they lose less money when
Speaker 1: things are bad. So I'm not sure it's it's I'm
Speaker 1: not sure it's either of those things. Tom. It's more
Speaker 1: about UH companies that are poised for growth in China
Speaker 1: because the economy is so income, so dynamic, and because
Speaker 1: domestic consumption is such a bigger driver than it was
Speaker 1: ten years ago. We you know, we live at a
Speaker 1: time where a lot of politicians, one in particular, who
Speaker 1: thinks that the equation is all about manufacturing and exports
Speaker 1: from low cost labor, when in fact, if you look
Speaker 1: at China, the biggest UH and longest term UH and
Speaker 1: most dynamic development is that companies there are catering increasingly
Speaker 1: to domestic demand, which has nothing to do with you know,
Speaker 1: who can make the most goods at the lowest cost
Speaker 1: with within emerging markets. As you say, it's highly ideostocratic.
Speaker 1: And back to stock selection. What did you learn about
Speaker 1: active funds versus passive funds, Well, here is an example
Speaker 1: where UH, the active actually is um perhaps much more
Speaker 1: thoughtful than the most advanced algorithm UH in the case
Speaker 1: of a passive fund, because the active manager is specifically
Speaker 1: looking at how the economy is changing in China and
Speaker 1: how China is becoming much more like the US, at
Speaker 1: least in this context of the stock market, and so
Speaker 1: that thinking is probably ahead of where the passive investor is. Well, Matt,
Speaker 1: if you just look at the actions that the Chinese
Speaker 1: government has taken, they're trying to boost consumer confidence right, absolutely,
Speaker 1: And you know that's a very important point. And uh,
Speaker 1: she would uh in American century be the first to say, look, um,
Speaker 1: you have to pay attention to what the Chinese government does,
Speaker 1: and it's focused on because if you do, you are
Speaker 1: going to benefit because they are, without a doubt, the
Speaker 1: invisible hand. Uh. You know, this is a different kind
Speaker 1: of economy. It's not capitalism as we know it in
Speaker 1: the US of A. There there is clearly a force,
Speaker 1: and that is the government. And so these managers are
Speaker 1: paying very much attention to uh, the government as it
Speaker 1: attempts to pick winners along the way. Is it possible
Speaker 1: that all of this confrontation is verbal confrontation and rhetoric
Speaker 1: overtrade actually will embolden the Chinese government to keep things
Speaker 1: like the domestic interest rates low, uh, keep money and
Speaker 1: credit flowing, also a spur that domestic demand, which they
Speaker 1: were already looking to do in the first place. So,
Speaker 1: first of all, I'm totally unqualified to answer that question,
Speaker 1: so I'm not going to UM. I can say that, UM,
Speaker 1: you know where things have benefited the economy, which is
Speaker 1: consumer discretionary. There's no question that the government will do
Speaker 1: everything it can to increase it up to the point
Speaker 1: where it is um treacherous for economic policy obviously. Uh,
Speaker 1: it doesn't want to see lending gets so out of
Speaker 1: control that bubbles are created and it leads to other
Speaker 1: worst things. So um yeah, I mean I think that
Speaker 1: with trade wars are bad. And there's no question that
Speaker 1: the Chinese government and and uh just about every other
Speaker 1: government right now except maybe the US thinks this is
Speaker 1: not a good thing for the world and the global economy.
Speaker 1: That much we do know. Thank you very much, Matt Winkler.
Speaker 1: He is Bloomberg Editor in Chief emeritus. Uh. The column
Speaker 1: on Bloomberg Opinion definitely worth checking out. The entitled these
Speaker 1: investors aren't spooked by trade wars. Emerging markets funds keep
Speaker 1: increasing their exposure to China and they're doing just fine.
Speaker 1: Paul Man of Forts in Jail. Stephanie Baker is not.
Speaker 1: She's with us right now on our set in London.
Speaker 1: Let's go to which is one of the forty seven
Speaker 1: fallouts that we've seen here in the last twenty four hours.
Speaker 1: Off as I watched Air Force one takeoff last night
Speaker 1: from Helsinki tarmac, it's amazing. I mean, what Donald Trump
Speaker 1: was going back to let's look at the heat this
Speaker 1: obtain the Millbay Fair and Balance in the Washington Post.
Speaker 1: Mr Milbank really goes after the president as you would
Speaker 1: expect as well. President Trump has repeatedly informed us that
Speaker 1: we are quote a stupid country. He is a quote
Speaker 1: very stable genius. Among the many stupid things, Trump is
Speaker 1: identified to White House staffers, the f e I National
Speaker 1: Football League, democrats of Filipbuster and journalistic step Stephenie Baker stupid, stupid,
Speaker 1: stupid as a wise man. One said, stupid is as
Speaker 1: stupid as meal Bank, among others fired up as well.
Speaker 1: What will be the ramifications? Is it even feasible we
Speaker 1: could get Senate centure? You know? Uh? I was a
Speaker 1: somewhat heartened to see some Republicans come out and criticize him,
Speaker 1: but by and large the criticism was quite measured. I
Speaker 1: thought the most notable critique came from new gain Rich
Speaker 1: who said, you know, Trump trump defender, former Geoky Leader
Speaker 1: of the House said it's the most mysterious, most serious
Speaker 1: mistake of his presidency and he must immediately correct it.
Speaker 1: Two hours later, he tweets out, but Trump has been
Speaker 1: cutting regulations to help US business, so that kind of
Speaker 1: capsulates the dilemma and the attitude of Republicans in Congress.
Speaker 1: Is this going to be more of a Charlotte's Film
Speaker 1: moment where people are outraged and that outrage pass is
Speaker 1: quickly and we get back to status quo? Or do
Speaker 1: they actually take action. I'm not seeing any indication that
Speaker 1: any real action will be taking. What is fascinating about this?
Speaker 1: And I've seen this every moment on my trip. People
Speaker 1: come up to me and they say what other Republicans doing,
Speaker 1: And yet I remember wanting Gate, they really didn't do
Speaker 1: much right up until the end of the moment. Is
Speaker 1: that what you expect is this will just dragon and dragon?
Speaker 1: I mean, if this can do it, what what can
Speaker 1: change this dialogue for Trump and non Trump supporters? Yeah,
Speaker 1: I mean I think that you've seen calls for members
Speaker 1: of his administration to step down and protest um, you know,
Speaker 1: but it remains to be saying what do you do
Speaker 1: in this situation? I think many people have felt reassured
Speaker 1: by the presence of people like gematics perhaps being a
Speaker 1: moderating force, but those those people aren't actually pulling him
Speaker 1: back and restraining him. And you do have to ask
Speaker 1: the question, why didn't they make sure that there was
Speaker 1: someone else in the room during that two hour meeting
Speaker 1: with Trump and Putin. We will never know what really
Speaker 1: happened during those two hours. Yeah, And I mean the
Speaker 1: question is would it have even made any difference? But
Speaker 1: what could actually happen to the president himself beyond how
Speaker 1: he's impacted in the mid terms from this, if at all. Well,
Speaker 1: I think his attempts to change the conversation with the
Speaker 1: Russia investigation, this has dealt a serious setback to that effort.
Speaker 1: And um, I think his resistance to sitting down for
Speaker 1: an interview with Robert Mueller, I think that has been
Speaker 1: undermined by this. And I think any attempts by Trump
Speaker 1: to shut down the Muller investigation I think will be
Speaker 1: challenged by COT to ask you with your expertise. So,
Speaker 1: Mr Manaford, he's in jail, which is a shocking thing
Speaker 1: in itself. Does that change him that he's sitting in jail. Well,
Speaker 1: we had reports overnight that his trial in Virginia had
Speaker 1: been delayed for a week, which is unusual. Um, and
Speaker 1: there has been some speculation that he may be negotiating
Speaker 1: a plea deal. We don't know if that's the case,
Speaker 1: but that might be that might be one of the
Speaker 1: reasons for it. We don't know. Okay, Stephanie, Thank you
Speaker 1: so much, Stephanie Baker. Where this, of course Bloomberg senior
Speaker 1: writer with really expertise on Cyprus and banking here in
Speaker 1: your where of the money flows. Thanks for listening to
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on
Speaker 1: Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm
Speaker 1: on Twitter at Tom Keane before the podcast. You can
Speaker 1: always catch us worldwide. I'm Bloomberg Radio.