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,
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Speaker 1: months ago, there was a modest press release out of
Speaker 1: Think Tank America's would with the Peterson Institute brand. It
Speaker 1: was a wonderful press release. Douglas Irwin and Mary Lovely
Speaker 1: joined Peterson Institute for International Economics. Many of you will
Speaker 1: know Professor Irwin of Dartmouth, perhaps fewer very Lovely of
Speaker 1: Syracuse University, who is absolutely definitive on intellectual transfer across nations,
Speaker 1: and she joins us this morning with the Peterson Institute
Speaker 1: on tariffs and such. Mary, what's the number one thing
Speaker 1: we get wrong in our tariff analysis or discussion two
Speaker 1: thousand eighteen vintage. I think the biggest misconception is the
Speaker 1: extent to which the trade between the United States and
Speaker 1: China happens via multinationals by a foreign firms operating in China.
Speaker 1: To a large extent, it is uh supply chain trade.
Speaker 1: What does that mean? Is that just more amorphous or
Speaker 1: harder to get our hands on that it's within the
Speaker 1: menu facture of products. Well, it has a lot of
Speaker 1: implications for how the us UH is either helped or
Speaker 1: hurt by these tariffs. First of all, when we when
Speaker 1: we place tariffs on these types of goods, we're not
Speaker 1: we're almost indirectly trying to get at the Chinese were
Speaker 1: first off, hitting mainly our allies operations in China. Secondly,
Speaker 1: we're hurting our own corporations, the companies that employ people
Speaker 1: in the United States by raising their costs. Because the
Speaker 1: overwhelming majority of the goods that were hit with tariffs
Speaker 1: are inputs to our production processes. I mean, Katherine Rampole
Speaker 1: in the Washington Post has made this huge distinction, folks,
Speaker 1: between finished goods and inputs. Give us an example of
Speaker 1: what an input would be is that like a distributor
Speaker 1: in a car. Absolutely, it could be a distributor to car.
Speaker 1: It could be semiconductors that we originally exported to China
Speaker 1: coming back to us after they've been tested and packaged.
Speaker 1: It can be auto parts, although primarily it's not. Primarily
Speaker 1: it's electronics. Let's go right there. We make a semiconductor
Speaker 1: in California, it gets shipped to China. Or what do
Speaker 1: they do? They bless it and pour holy water on it?
Speaker 1: What do they I doubt if it's holy Water town.
Speaker 1: What do they do? They test it, they package it,
Speaker 1: they send it back in a suran rap thing. It
Speaker 1: comes off a thing in Long Beach. And that's the
Speaker 1: input that's taking jobs away from America right Well, in
Speaker 1: the rhetoric it is. In reality, it's not firms that
Speaker 1: that have off short have added jobs in the US.
Speaker 1: The problem is that there are different jobs than the
Speaker 1: jobs that are that are destroyed by changes in the
Speaker 1: global economy. So the jobs are moving towards the more
Speaker 1: highly skilled folks. They're moving away from sort of the
Speaker 1: use of physical labor. But at the same time, we're
Speaker 1: seeing exactly the same changes happening with changes in technology
Speaker 1: and firms and and we've all heard a great deal
Speaker 1: about coming robotization of the factory floor. So technology shocks
Speaker 1: are hitting us at the same time that China has
Speaker 1: opened up and also made it easier to offshore to them.
Speaker 1: So Mary, you say China's opened up to what extent
Speaker 1: has the Chinese economy opened up over the last decade?
Speaker 1: The Chinese economy has opened up quite dramatically. They lowered
Speaker 1: their tariffs quite a bit uh to well below ten
Speaker 1: percent with the agreement that was made between the US
Speaker 1: and China for them to join the w t O.
Speaker 1: They've opened up in terms of decreasing the number of
Speaker 1: sectors in which you have to participate in a joint
Speaker 1: venture to invest in China. We hear a lot about
Speaker 1: joint ventures and how they're the conduit forward technological theft
Speaker 1: from the United States, but in fact they've decreased dramatically
Speaker 1: the number of sectors in which you need to have
Speaker 1: a joint venture. And recently uh Sheet and Ping mentioned
Speaker 1: or offered to open up the automobile sector to wholly
Speaker 1: owned subsidiary Mary. Would it be fair to say that
Speaker 1: they've opened up things they've started to dominate. For instance,
Speaker 1: the auto sector is a great example. For many manufacturers.
Speaker 1: They've had to take the manufacturing position to China to
Speaker 1: avoid the import tariffs, and now the Chinese are looking
Speaker 1: at removing import tariffs or at least luring imports tariffs
Speaker 1: on imports. It's not as if those manufacturers that have
Speaker 1: already moved to China and now going to move back
Speaker 1: to Europe or move to the Nazis States as it
Speaker 1: that's stuck that. Uh, well, I think they want to
Speaker 1: be there. I think they want to serve the market.
Speaker 1: As far as are they dominating the auto industry? The
Speaker 1: US imports only about a billion dollars worth of of
Speaker 1: of vehicles from China, and yet we export more than
Speaker 1: ten billion. So are they dominating autos? No? I certainly
Speaker 1: don't want to trade in my car for a car
Speaker 1: that's made holy in China. So I think this idea
Speaker 1: that they're dominating already is getting way ahead of ourselves
Speaker 1: by several decades. Your core research is on intellectual transfer
Speaker 1: between China and US. Give us that dynamic. Right now,
Speaker 1: They in droves are sending their kids over here at
Speaker 1: different levels of brightness to study. Do they all go home? No,
Speaker 1: they don't, although you know more will go home with
Speaker 1: the changes in uh US policies. But there's lots of
Speaker 1: avenues by which technology transfer is happening, including what we
Speaker 1: call intellectual attorneys. Not only the return of of students
Speaker 1: who have received you know, a Bachelor of Science or
Speaker 1: a Bachelor of Arts, but of course PhDs and highly
Speaker 1: skilled professionals. So This is happening at all levels, in
Speaker 1: all sectors. It's happening in my own field, which is
Speaker 1: higher education, where the Chinese are wooing back very skilled people. Um.
Speaker 1: There's no international laws against this. You're able to, uh,
Speaker 1: you know, offer higher salaries or better housing subsidies to
Speaker 1: people if you want. So that's one way. Other ways,
Speaker 1: or of course they're enticing corporations to bring technology to China.
Speaker 1: This is something we don't really want to talk about.
Speaker 1: We want to talk about theft and other things. But
Speaker 1: many corporations do transfer technology voluntarily. The Chinese offer you know,
Speaker 1: ready fields for factories or for you know, high tech businesses. UM.
Speaker 1: And the the opening up, the growth of the market
Speaker 1: there is very attractive. Let's say it there you so
Speaker 1: much great, appreciate it, very lovely with the Peterson Institute.
Speaker 1: From our studios in Washington to this morning, Douglas Peebles
Speaker 1: is with us with a B alliance Bernstein in fix
Speaker 1: ting What do you actually do? Do you? Are you
Speaker 1: running money? Are you are you in the mail room
Speaker 1: clipping coupons? What do you do for a B? Well
Speaker 1: those two things are sort of one and the same
Speaker 1: these days. Um, but yeah, I'm the chief investment officer
Speaker 1: for the fixed income group. I've been at a b
Speaker 1: UH and its affiliates forty one years. I know that's
Speaker 1: where I wanted, exactly where I wanted to go. You
Speaker 1: and I remember when fixed income at trouble competing with
Speaker 1: CDs and other manipulated coupon products, and then there was
Speaker 1: a point where everybody was a genius and total return
Speaker 1: was easy. He's easy with your wonder for three decades
Speaker 1: of experience, what's the mood this year? They just clip
Speaker 1: the coupon and say thank you? Well. I think two
Speaker 1: thousand eighteen is really a transition year, UM. And we've
Speaker 1: had the main influence on all financial markets over the
Speaker 1: last ten years has been monetary policy. And and the
Speaker 1: reason I call it a transition year is we have
Speaker 1: a transition of monetary policy. And the Fed has two
Speaker 1: levers now in which they tighten policy, and they're using
Speaker 1: both of them. They're they're now shrinking their balance sheet
Speaker 1: and they're obviously raising interest rates, which we saw last week. UM.
Speaker 1: I think what happened globally last week of importance is
Speaker 1: that Drag and team decided that they were going to
Speaker 1: be more dubbish for longer, and and I think that
Speaker 1: that kept the fixed income markets under wrap, and that
Speaker 1: will probably continue to do so for the for at
Speaker 1: least for the summer um. But this transition is in place,
Speaker 1: and you know, we we tom we we look back
Speaker 1: and say, okay, I and when the ten year note
Speaker 1: was was ten eleven, but the five year note today
Speaker 1: is just under three percent, and I think that that's
Speaker 1: what the new normal is in terms of what is
Speaker 1: a respectable return and can two or three percent compete
Speaker 1: for capital? Are there any signs of credit stress right now? Well,
Speaker 1: I don't think there's any particular signs in the marketplace
Speaker 1: in terms of credit stress. But that's the worry, right,
Speaker 1: I mean, we have we have certain signals. UH we
Speaker 1: use a combination of quantitative and fundamental factors. The fundamental
Speaker 1: team has been saying rightfully so that we are late
Speaker 1: in the credit cycle for a long period of time.
Speaker 1: We have very very highly levered, particularly investment grade companies
Speaker 1: relative to history. And then a very important signal that
Speaker 1: we follow is the flattening of the yield curve. And
Speaker 1: that flattening of the yield curve historically has meant UH
Speaker 1: rain in on risk because that's not in good environment
Speaker 1: for risk taking. I've heard this a lot right in
Speaker 1: on risk. Do you actually see that in the positioning
Speaker 1: of west some of these fun zon right now? Because
Speaker 1: people will come on the program with me and they'll say,
Speaker 1: it's conte day risk. Because you've pointed out there's a
Speaker 1: competition for capital. You can just buy treasuries at the
Speaker 1: front end. You don't have to take as much duration risk,
Speaker 1: you don't have to take as much credit risk. I
Speaker 1: hate that cooler law. People actually acting on it well.
Speaker 1: I think if you look at the mutual fund flows,
Speaker 1: the fixed income flows are in outflow mode right now.
Speaker 1: I'm not sure what they're doing with their money. My
Speaker 1: my guess is they're not buying CDs. I do think
Speaker 1: that they're they're actually more often than not moving out
Speaker 1: the risk spectrum, but not in the fixed income world.
Speaker 1: The only place where they're moving out the risk spectrum
Speaker 1: in the fixed income world is in the floating rate.
Speaker 1: The bank loans the the new nirvana at the moment,
Speaker 1: if you will, And and that's because they're so afraid
Speaker 1: of interest rate risk um And I think that when
Speaker 1: people look at bond markets and their bond investments. They
Speaker 1: really have to break it down into between what is
Speaker 1: my risk reducing bond portfolio and what is my return
Speaker 1: seeking bond portfolio. And bank owns, for example, are in
Speaker 1: our opinion and should be in the return seeking don't
Speaker 1: worry about duration if you're a high yield investor, right,
Speaker 1: what you should worry about duration, which is the interest
Speaker 1: rate risk if you're a risk mitigating investor. Now, one
Speaker 1: thing that hasn't changed in this environment is the negative
Speaker 1: correlation between treasuries and risk markets. And and are recommendation
Speaker 1: to people is with this transition in place from the
Speaker 1: central bank, particularly the FED move back into more balance.
Speaker 1: So don't be so afraid of duration. I don't think.
Speaker 1: I don't think that that's the fear that most people
Speaker 1: should have, even though they do one thing. We john
Speaker 1: correct me if I'm wrong, but we're way too full
Speaker 1: faith and credit focused. And then we look at high yield,
Speaker 1: and then there's the in between the investment grade paper.
Speaker 1: What's the in between risk look like? Well? I think
Speaker 1: the in between risk looks fine as long as the
Speaker 1: economy is strong. So, for example, if you look at
Speaker 1: the investor grade market, the investment grade average credit quality
Speaker 1: has never been as low as it is right now.
Speaker 1: So why is that. It's not because the economy has
Speaker 1: been doing, you know, so awful. It's because the average
Speaker 1: CFO in the marketplace has now decided instead of running
Speaker 1: their balance sheet at a single A rating, they want
Speaker 1: to move it down to a triple B. Yeah, they're
Speaker 1: they're issuing bonds to buy backstop. Is that what Comcast
Speaker 1: is doing? But they're not going Yeah. Look, I think
Speaker 1: each and every company is different. I'm looking at it
Speaker 1: as a as a macro position, and from a macro position,
Speaker 1: the CFOs have been rewarded for doing this, right, I mean,
Speaker 1: that's that's That's just the way it's been. Will that continue?
Speaker 1: We that's why we want to reign inst case a
Speaker 1: really interesting point. You write an important concept. You've said
Speaker 1: we're nswering the latter stages of the cycle, and we
Speaker 1: can have a separate debate on where we are on
Speaker 1: the cycle. But let's assume that's true. At this point,
Speaker 1: we've got the government livering up and you've got corporate
Speaker 1: America adding leverage as well. What does it mean when
Speaker 1: the government and corporate America at leverage this light in
Speaker 1: the cycle well, I think there's two things. I think
Speaker 1: that this when we look at the cycle, we have
Speaker 1: to separate the credit cycle and the economic cycle, and
Speaker 1: we are, one could argue, fairly early in the economic cycle,
Speaker 1: but late in the credit cycle, and that is something
Speaker 1: that we haven't seen before. And the laboring up on
Speaker 1: the government side is the second half of this grand
Speaker 1: experiment we talked about. Monetary policy is the first half.
Speaker 1: The second half is we've never seen fiscal thrust to
Speaker 1: this large in an economy that's already operating at full employment.
Speaker 1: So I would imagine that we're gonna, you know, continue
Speaker 1: to do okay until the economy doesn't do so well,
Speaker 1: and we don't think that's for a while yet. Dug
Speaker 1: one final question, if we could in terms of the
Speaker 1: actual assumption of fixed income you mentioned three before. There's
Speaker 1: still a lot of people out there they just say
Speaker 1: I can't live on that. Well, again, he goes back
Speaker 1: to how much debt has been issued, and so if
Speaker 1: we have real interest rates right now that are at
Speaker 1: one percent, or nominal rates at three percent, we would
Speaker 1: think that with so much debt outstanding, the old assumptions
Speaker 1: of let's say a four percent real rate or of
Speaker 1: five or six percent nominal rate. They probably don't work anymore.
Speaker 1: People think you so much. Mr. People's with a B
Speaker 1: fixed income this morning, without question, this is my interview
Speaker 1: of the day. I might point out it maybe my
Speaker 1: interview of the week, and even Carlos gudierres I could
Speaker 1: suggest it could be my interview of the year. Four
Speaker 1: or five years ago, long ago and far away, the
Speaker 1: former Secretary of Commerce and I did an interview on
Speaker 1: short notice the day a one immigration debate in America collapse,
Speaker 1: and I clearly remember Mr Secretary speaking to you at
Speaker 1: that time, and we do it again today. Is one
Speaker 1: first lady Mrs Bush, and another first lady Mrs Trump,
Speaker 1: say stop. Have you ever seen anything like what we're
Speaker 1: doing at our border? Carlos Gutiers, I've never seen it.
Speaker 1: I've read that if we go back far enough in
Speaker 1: our history, we've had moments where families have been divided.
Speaker 1: We know that happened during slavery, it happened somewhat during
Speaker 1: some of the Chinese immigration, but it never, ever, ever
Speaker 1: is something that we can get used to. The images
Speaker 1: are heartbreaking, and it's just hard to imagine that this
Speaker 1: is the US. Your father was an enemy of the
Speaker 1: state of Cuba. How did you come into this country
Speaker 1: and were you separated at the border? We flew in,
Speaker 1: We who in as a family on a Pan American
Speaker 1: airlines into Miami, and I'll tell you we felt so welcome.
Speaker 1: I felt like people wanted me to be here, and
Speaker 1: people wanted me to succeed. Conservatives in those worried about
Speaker 1: the future of America. In one way, I would say
Speaker 1: that's fine because the Good Years were educated, etcetera, etcetera.
Speaker 1: But so many of these people that are at the
Speaker 1: border and the language that used as appalling, they're not
Speaker 1: Carlos Goodyears. Can we make a distinction at the Texas
Speaker 1: border between that the smart, the haves, and the less
Speaker 1: fortunate and make a separation of parents and children. You know,
Speaker 1: I don't think history makes that distinction. Uh. So many
Speaker 1: immigrants came over uh from all over the world, starting
Speaker 1: in Europe. Many were he literate, many had very low schooling.
Speaker 1: But you know what, their kids went to school, became lawyers,
Speaker 1: and became tweachers and became business people. I believe that
Speaker 1: happens to every generation of immigrants. Full disclosure, Folks, my
Speaker 1: middle name. They came over in handcuffs. It was a
Speaker 1: few years ago, John Farrell, there was a small civil
Speaker 1: war in England. I believe it was at the time.
Speaker 1: It was back. Thank goodness you came, Tom. I know,
Speaker 1: I look at look at that call us. What would
Speaker 1: we have done every morning with that Tom, that's a
Speaker 1: great example of the power of immigration. Or a few
Speaker 1: years and as some listeners thinking, that's a great example
Speaker 1: as to why we shouldn't let people in not be
Speaker 1: a good argument. So tell tell us, uh, Mr Secretary,
Speaker 1: what your Republican party needs to do. There's two pieces
Speaker 1: of legislation in But what leadership do you need from
Speaker 1: President Trump? How do the Republicans make this their constructive issue? Well, yeah,
Speaker 1: the Republican Party is almost indistinguishable. We look more like
Speaker 1: a right wing European party. Populus, not to concerned about business,
Speaker 1: anti immigrant, you know, every everything that the US has
Speaker 1: not been. UM, and I do think we need to
Speaker 1: get back to where we have always been. The American dream.
Speaker 1: Immigration is the American dream, free enterprise. Business, businesses can't
Speaker 1: find enough workers. That's just that's the first reason why
Speaker 1: we need immigration. But um, it is indistinguishable, and we
Speaker 1: have to get back, and I think this is all
Speaker 1: about leadership. Tom Uh. You know, the Democrats had President Obama,
Speaker 1: he changed the party, that looked like he had changed
Speaker 1: the trend of history. Well, now we have President Trump. Uh,
Speaker 1: it's all about leadership, and it's not going to happen
Speaker 1: inside the party. It's going to happen through the leadership
Speaker 1: of one person in the coming days. Do you think
Speaker 1: that this could rupture his relationship with his attorney general,
Speaker 1: who has led the charge on this. Uh, it could,
Speaker 1: it could. It could happen, because you know, it's interesting
Speaker 1: that everyone but the president is taking responsibility for this.
Speaker 1: So if he is looking for a scapegoat, there's no
Speaker 1: one better than Jeff Sessions, given that they already have
Speaker 1: a a very strained relationship. But I just don't see
Speaker 1: how this can continue. And the photographs will continue. We've
Speaker 1: all seen some of the photographs that will come out
Speaker 1: today and that's you know, it's going to be the
Speaker 1: cover of magazines all over the world, the cover of newspapers.
Speaker 1: This isn't good for us. Give us an update. One
Speaker 1: final question, if you wouldn't, we're saying with the politics
Speaker 1: with Carlos goodyears on Cuba, and the transfer from a
Speaker 1: generational castro regime. Are you optimistic the Cuba can find
Speaker 1: a place beyond the two Castros? Yes, I believe that
Speaker 1: Cuba is going through gradual change, but it is change,
Speaker 1: and they will continue to go down that direction. They
Speaker 1: will continue to have to allow private businesses. I think
Speaker 1: that's pretty much irreversible. The irony is that, you know,
Speaker 1: we're trying to make friends with North Korea, but here's
Speaker 1: Cuba going U in the in the right direction. Economically,
Speaker 1: They're ninety miles away, and we've got crippling sanctions on Cuba.
Speaker 1: So uh, it's very contradicting. Greatly honor to have you
Speaker 1: with us today, Secretary Goodiers, thank you always use the commerce.
Speaker 1: Just a timely and important discussion on these issues. John.
Speaker 1: I can certainly say the combination of the morning note
Speaker 1: from Mr Velier in the morning note from Mr Allen
Speaker 1: was stunning. The two together, it was absolutely stunning, and
Speaker 1: I think it was domestically speaking, this is something that's
Speaker 1: sort of I've had taken everything else I would take
Speaker 1: tried for sure, very quickly on Friday and through the
Speaker 1: weekend till that was a wonderful conversation. You can hear
Speaker 1: Carlos Goodiers. We'll do that on our podcast out in
Speaker 1: a bit. You can talk to Paul Sweeney for somewhere
Speaker 1: between two three and even four hours today on any
Speaker 1: number of topics. I want to touch on a couple
Speaker 1: of topics here and then get over, of course, to
Speaker 1: the business of Fox, Disney and comcause, Paul, the soccer
Speaker 1: on TV is incredibly controlled by FIFA, the video and
Speaker 1: they pay huge fees Fox and Telemundo and all that.
Speaker 1: Is that going to change by the time the next
Speaker 1: World Cup comes around? No? I think the you know,
Speaker 1: World Cup rights, sports rights globally, but certainly the NFL
Speaker 1: and the US and Premier League in the UK and
Speaker 1: then World Cup rights across the globe continue to go
Speaker 1: up in value. You know, I think the rate of
Speaker 1: increase might be slowing. And the reason I say that
Speaker 1: is because the pay TV business and much of the
Speaker 1: Western world is slowing, and so the feet you know,
Speaker 1: the fees that these networks can charge consumers are passed
Speaker 1: along to consumers I think are peaking, if not completely
Speaker 1: peaked as in the U S. So how much more
Speaker 1: can ESPN or Fox for to pay for US rights?
Speaker 1: I think remains to be seen. But you know, we've
Speaker 1: certainly been in an environment with tremendous rights inflation, and uh,
Speaker 1: you know, we just don't really see any end in
Speaker 1: sight at the moment. But you know, you could certainly
Speaker 1: look out over the next four to five years and
Speaker 1: and expect to see it at least the rate of
Speaker 1: growth slow. I mean, I saw Germany Mexico, the Germany
Speaker 1: in Germany rather they had share, which is a number
Speaker 1: I can't even fathom that that that's so it's so high.
Speaker 1: Is this where the stupid money comes in? The Amazons
Speaker 1: and the rest of them with jillions of inflated dollars,
Speaker 1: do they come in? And I think, did these typical carriers, Yeah,
Speaker 1: I think you will. I think you know, Amazon dipped
Speaker 1: their toe into the English Premier League. They've dipped their
Speaker 1: toe into NFL, and as Facebook and some others, and
Speaker 1: you know, I think the belief is from a certainly
Speaker 1: from the leagues around the world, is to extend the
Speaker 1: espns and the Foxes. The world stepped back a little
Speaker 1: bit because their businesses are challenge income will be that
Speaker 1: the technology companies with bottomless pockets, and I think that's
Speaker 1: the hope for the leagues and the players and the
Speaker 1: teams and all that. Okay, next team before Disney, Fox Comcast,
Speaker 1: The Incredible is brought in a hundred eight zillion dollars.
Speaker 1: You know they're gonna bring in double triple that over time.
Speaker 1: I don't know if it's going to be the biggest
Speaker 1: movie ever. I'll let you decide. Well, who gets that money?
Speaker 1: When they say The Incredibles two brings in a hundred
Speaker 1: and eighty million, how is that divided up? Yeah, well,
Speaker 1: roughly half goes to the theater distributors in the US.
Speaker 1: Outside the US, uh, probably more than half goes, probably
Speaker 1: goes the theater distributors. The remainder goes to the studio,
Speaker 1: and then the studio takes the money and then the
Speaker 1: creative Hollywood accounting comes in. And it's always a question
Speaker 1: if you're a star and you have back end of
Speaker 1: the movie, how much do I get if for a
Speaker 1: movie that made a billion dollars? And um, But that's
Speaker 1: where it kind of gets split up between the theater
Speaker 1: operators and the studio operators. So you know, you know
Speaker 1: it's been a This Incredible too was just you know,
Speaker 1: it was a good at first movie, A long time
Speaker 1: between the first and second movie, and they were really
Speaker 1: surprised about how strong the second installment was. And so
Speaker 1: the ninety million that you're presuming in the US went
Speaker 1: to quote unquote the studio. I believe Disney Pixar. You
Speaker 1: as a pro really don't know how that's divvied up,
Speaker 1: do you. It's it's it's it's tough. But the the
Speaker 1: studio at the Walt Disney Studios has some of the
Speaker 1: highest margins in the industry, so they're able to you know, uh,
Speaker 1: they financed most of their deals themselves because they're very,
Speaker 1: very sure in the long term profitability of those things,
Speaker 1: and that allows them to take higher cuts of the movie.
Speaker 1: And so what we've seen over time is that Disney
Speaker 1: the studio is one of the more profitable studios in Hollywood. Conversely,
Speaker 1: Paramounts one of the least profitable. A good colleague of
Speaker 1: ours and giving us wisdom is Brian Weezer over Pivotal.
Speaker 1: He goes to a cell today and Disney Paul Sweeney,
Speaker 1: I don't want you to do buy hold Cell. But
Speaker 1: the idea of Fox moon Shot, they're the one in
Speaker 1: play Disney moon Shot. Relative to come cast let's go
Speaker 1: to the other side of the equation, is Comcast dirt cheap?
Speaker 1: Uh Comcast is pretty cheap. But one of the reasons,
Speaker 1: particularly a free cash flow basis, but one of the
Speaker 1: reasons it is cheap is because investors are concerned that
Speaker 1: they are going to overpay for content, most notably twenty
Speaker 1: century Fox and maybe Sky. They're using all cash um
Speaker 1: and I think the concern is that's going to lever
Speaker 1: up their balance sheet, really retard their ability to invest
Speaker 1: in their core business going forward, and certainly reduce the
Speaker 1: amount of money they have for buying back stock, which
Speaker 1: is what Comcast shareholders have really become accustomed to. How
Speaker 1: do you and Bloomberg Intelligence respond to hear from the
Speaker 1: Cell side in this case Moffatt and Nathanson that you know,
Speaker 1: that's great if you're gonna lever up, lever up and
Speaker 1: just either go private or you know, buy back a
Speaker 1: ton of stock. How do you respond to that? Yeah,
Speaker 1: it would certainly be more creative. One one could argue
Speaker 1: buying Comcast down here than than buying uh Century Fox.
Speaker 1: But of course, if you're Brian Roberts, you're thinking very
Speaker 1: long term, You're thinking that you're companies can be one
Speaker 1: of the two or three companies out of the media
Speaker 1: world to really compete against the the Netflix is and
Speaker 1: the Googles and the facebooks, and it's it's it's really
Speaker 1: between him and Bob Iger and uh, you know, we'll
Speaker 1: see who went at the end of the day. So
Speaker 1: there there in an auction room like a soth of
Speaker 1: Bee's or Crispi's Fine and Christie's and and there auction
Speaker 1: in Comcast has clearly made the decision, as you say
Speaker 1: to lever Up, is that Disney's wild card. They go
Speaker 1: the Comcast way, and we have a balance sheet free
Speaker 1: for all. Yeah, we've actually modeled out the current Disney deal,
Speaker 1: the all stock deal for Fox, and we actually have
Speaker 1: it a little bit dilutive to Disney's earnings. And it's
Speaker 1: kind of the weird math here is that the more
Speaker 1: cash that they put into the extent they want to
Speaker 1: put in cash, it actually becomes less dilutive and actually
Speaker 1: becomes a little bit of creative. The more debt they
Speaker 1: put on UM. So I think Disney has a lot
Speaker 1: more flexibility three point for Century Fox from a balance
Speaker 1: sheet perspective. So and and and again, I also make
Speaker 1: the point that even though Brian Roberts is a obviously
Speaker 1: a very credible buyer and really wants the assets, I
Speaker 1: think Disney and Bob Bigger want them just a little
Speaker 1: bit more. I mean, this is fascinating, folks, and want
Speaker 1: Mr Sweeney goes to there was, you know, not my
Speaker 1: informed back of the envelope, but my hunch. And at
Speaker 1: the real surprise here is they can be the same
Speaker 1: and just lever up. And I mean to be clear here,
Speaker 1: Disney's got tons of room to lever up, don't they. Yeah,
Speaker 1: they really do. So Comcast is a little bit more levered.
Speaker 1: But and if they were to do an all cash
Speaker 1: deal as currently structured, to take them north of four
Speaker 1: times at the cash flow, which is higher than where
Speaker 1: they like to be, higher than where the market likes
Speaker 1: them to be. They like to be down around two times.
Speaker 1: Even if if Disney were to put half this deal
Speaker 1: in cash, it's still be just about a little bit
Speaker 1: less than three times at the cash flow. So they
Speaker 1: have much more fanatical muxibility that I think they have
Speaker 1: strategic comparative a little bit more. But you know, you
Speaker 1: can't discount Comcast at all. Brian Roberts is in a
Speaker 1: very aggressive strategic thinker, and I don't think he'll walk away.
Speaker 1: I think there will be several rounds of bidding here.
Speaker 1: But at the end of the day, I think Disney
Speaker 1: walks away with it. Why why are there several rounds?
Speaker 1: I mean if you extrapolate out, I mean, is this
Speaker 1: just you know, linear algebra, folks on a log of
Speaker 1: rhythmic y axis. You extrapolated out, Paul, and you come
Speaker 1: to a terminal value point and you just say, look,
Speaker 1: here's our stupid bid. I mean, why goes through multiple
Speaker 1: tranches of bidding. Yeah, that that might happen. They might
Speaker 1: put their you know best and final offers on the table.
Speaker 1: I think there might be some discussions behind the scenes
Speaker 1: about maybe carving up some of the assets of one
Speaker 1: Century and Sky that might, you know, allow them to
Speaker 1: walk away each with a little bit of victory. But
Speaker 1: I don't think that's going to be the case. I
Speaker 1: think both of these bidders here want the whole Enchilada,
Speaker 1: including sky Um and so I think there's going to
Speaker 1: be lots of mechanicians back and forth. So so are
Speaker 1: you leaving today, Paul at one to watch Tunisia England?
Speaker 1: Like everyone else I'm actually in London as we speak,
Speaker 1: so you're going to be in an evenings. I didn't
Speaker 1: know you were in Pharaoh. Pharaoh has a doctor's appointment
Speaker 1: and he does. Paul Sweenie, thank you so much. Evening
Speaker 1: viewing of Tunisia England, and probably over at the net
Speaker 1: which is like right next to our gorgeous offices and
Speaker 1: I'm sure that's where Mr Sweeney is. Wisconstin as well.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
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