WEBVTT - Risk Is Localized To Turkey, Jalinoos Says 0:00:00.080 --> 0:00:12.960 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jay Leye. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:33.560 Bloomberg dot Com, and of course on the Bloomberg. If 0:00:33.600 --> 0:00:35.960 you want some price sanction, maybe you need to go 0:00:36.120 --> 0:00:39.520 to Emerging markets and effects this morning a want to punch, 0:00:39.600 --> 0:00:43.080 and both of those lead to the same source. US sanctions, 0:00:43.159 --> 0:00:45.920 Russia threatening to retaliate for a new round of sanctions 0:00:45.960 --> 0:00:48.960 announced by the United States, and Urdawan's delegation to the 0:00:49.000 --> 0:00:52.760 United States failing to secure any concessions from the administration 0:00:52.800 --> 0:00:55.440 in Washington. Join me to discuss this. Shahab John news 0:00:55.480 --> 0:00:58.720 Credit Sweete, Global head of FEC Strategy, Good morning to 0:00:58.720 --> 0:01:01.920 your Shahab wanning E m f X. Walk me through 0:01:01.960 --> 0:01:05.319 whether this is idiosyncratic or whether there's a much bigger 0:01:05.360 --> 0:01:09.640 story taking place here. I think the underlying story is 0:01:09.720 --> 0:01:14.119 and has been, the rising global yields, which obviously puts 0:01:14.120 --> 0:01:16.880 pressure on all emerging markets. But on top of that 0:01:16.920 --> 0:01:20.479 you have clearly the trade story, the tariff's story as well, 0:01:21.440 --> 0:01:25.240 which is as a severe risk to export oriented economies 0:01:25.440 --> 0:01:27.720 and what that what happens then is if you don't 0:01:27.760 --> 0:01:31.399 throw in specific themes like sanctions as well, um, you've 0:01:31.440 --> 0:01:35.280 really got a very weak patience that's not necessarily ready, 0:01:35.440 --> 0:01:38.320 you know, for yet another sickness. And I think that's 0:01:38.440 --> 0:01:41.640 for countries like Turkey. That's definitely what the problem we 0:01:41.680 --> 0:01:44.279 have is right now dot A Turkey moving by another 0:01:44.319 --> 0:01:47.440 two percentage points again today. I mean, we're seeing big 0:01:47.480 --> 0:01:49.440 moves in Turkish markets. And I think what a lot 0:01:49.440 --> 0:01:51.400 of people perhaps listening to this program are trying to 0:01:51.440 --> 0:01:54.560 figure out is how this bleeds, the contagion, the ripple effect, 0:01:54.560 --> 0:01:57.120 the channels for that. How do you see this playing 0:01:57.120 --> 0:01:58.720 out at the moment, At the moment it might be 0:01:58.720 --> 0:02:00.840 contained to Turkish assets, do you see it bleeding into 0:02:00.920 --> 0:02:04.640 financial system and potentially beyond shaub So, I think the 0:02:05.080 --> 0:02:08.480 sanctions story, the way that bleeds is that the market 0:02:08.520 --> 0:02:10.760 looks at any other country that could have a sanctions 0:02:10.880 --> 0:02:14.280 risk as well, um, And of course Russia is right 0:02:14.280 --> 0:02:17.600 now clearly in that zone UM, and worries about those 0:02:17.639 --> 0:02:19.800 and you need a bigger risk premium. And of course 0:02:20.160 --> 0:02:22.880 right now the U S seems to have a number 0:02:22.880 --> 0:02:25.600 of different spats with a number of different countries, so 0:02:25.639 --> 0:02:30.359 that's one factor in terms of more direct financial contagion. 0:02:31.000 --> 0:02:34.720 The easiest way that could happen would be for severe 0:02:34.800 --> 0:02:38.640 losses on Turkish assets UM due to for example, default 0:02:38.760 --> 0:02:42.800 risk or something of that nature, leading markets to have 0:02:42.960 --> 0:02:45.840 to sell out of other places with risk UM Now 0:02:45.840 --> 0:02:47.480 at the moment, I think that the risk of that 0:02:47.560 --> 0:02:50.240 is relatively low, just because so many investors have already 0:02:50.280 --> 0:02:52.600 sold the Turkish assets. Maybe that the risk is more 0:02:52.639 --> 0:02:55.520 localized right now to Turkey from that perspective, but it's 0:02:55.560 --> 0:02:57.959 something that you shouldn't rule out and definitely keep an eye. 0:02:58.040 --> 0:03:00.240 Something that we've explored on this program is how a 0:03:00.320 --> 0:03:02.800 technical issue can quickly become a fundamental one when you 0:03:02.800 --> 0:03:05.160 have to address what's happening in Turkey's markets, when you 0:03:05.160 --> 0:03:07.560 have to address what happens in Russia, Argentina and elsewhere. 0:03:07.800 --> 0:03:10.799 All of a sudden, short term rates in these countries 0:03:10.840 --> 0:03:13.440 are just aggressively higher, and then you have to think 0:03:13.440 --> 0:03:15.920 about whether that chokes offt growth and chokes off earnings 0:03:15.919 --> 0:03:18.919 of local companies as well. Are we at that point 0:03:18.919 --> 0:03:21.480 now already? Sharp? I think for sure. In the case 0:03:21.520 --> 0:03:25.760 of Argentina, we've we've passed that point. In Turkey's case, 0:03:25.840 --> 0:03:28.200 we are definitely at that point that the reality is 0:03:28.240 --> 0:03:31.480 that the reason why earlier going and others in Turkey 0:03:31.800 --> 0:03:35.160 don't want much higher rates is their knowledge that that 0:03:35.200 --> 0:03:37.360 will probably go hand in hand with the recession, and 0:03:37.360 --> 0:03:40.760 that's obviously something that's politically unpalatable. So that point has 0:03:40.800 --> 0:03:43.120 already been reached. The only question now is the path 0:03:43.200 --> 0:03:46.000 we take from here in terms of whether they go 0:03:46.080 --> 0:03:48.840 for an early stabilization of the currency or not. Can 0:03:48.880 --> 0:03:52.680 I switch gears? You can? Can I do that? Permission? 0:03:52.720 --> 0:03:55.880 You have permission very quietly. You know, we're talking about 0:03:55.880 --> 0:03:58.040 Sterling blah blah blah and e M and all that. 0:03:58.200 --> 0:04:03.000 I get it. Euros is on the move. We haven't 0:04:03.000 --> 0:04:07.040 talked about Switzerland and this huge signal, if you will, 0:04:07.120 --> 0:04:10.480 this traffic signal for all of foreign exchange. Why is 0:04:10.560 --> 0:04:14.720 Swiss stronger versus the Euro? The Swiss franc continues to 0:04:14.800 --> 0:04:19.000 play a role as the ultimate barometer, explain it to 0:04:19.040 --> 0:04:22.400 our audience well of local European problems. So we do 0:04:22.520 --> 0:04:25.400 have a situation still where the market knows that they 0:04:25.440 --> 0:04:29.680 have to be potentially contentious budget negotiations in Italy, UH 0:04:29.839 --> 0:04:32.119 and there is a risk premium, so it's a flight 0:04:32.200 --> 0:04:35.799 to quality. It's still in FX space. The Euro against 0:04:35.839 --> 0:04:39.120 the Swiss Franc remains the ultimate barometer of how intra 0:04:39.240 --> 0:04:42.640 European tensions are. So if A. C. Malona is going 0:04:42.640 --> 0:04:47.040 down the tubes and what's it called Juventus juveniles, they're 0:04:47.080 --> 0:04:50.080 going up with with the Renault and all that. The 0:04:50.120 --> 0:04:57.240 answer Swiss Frank you just to Renaldo was renaled Renaldo? Anyways? 0:04:57.279 --> 0:05:00.240 I mean Swiss Frank's moving off of Italy, right it is. 0:05:00.279 --> 0:05:02.320 And look, at the end of the day, market also 0:05:02.480 --> 0:05:05.680 knows that the capacity of the Swiss National Bank to 0:05:05.800 --> 0:05:08.920 continue to intervene and Prince Swiss Frank's to expand this 0:05:09.000 --> 0:05:11.440 balance sheet is lower than in the past because the 0:05:11.520 --> 0:05:14.080 currency is much weaker than it was let's say a 0:05:14.120 --> 0:05:16.720 year ago. And you know this, Switzerland want to be 0:05:17.040 --> 0:05:19.880 the only buyer, for example, of Italian debt at the 0:05:19.960 --> 0:05:23.919 time of budget crisis in Italy. Probably not. So the 0:05:23.920 --> 0:05:26.280 market knows this, and that's one of the reasons why 0:05:26.320 --> 0:05:28.920 the Swiss franc is going out. How does it effects 0:05:28.920 --> 0:05:32.720 guy like you react to central banks that own equity 0:05:32.800 --> 0:05:36.720 positions and I understand the Swiss ownership. I assume is 0:05:36.760 --> 0:05:40.800 way different than the Japanese ownership. But I mean, I 0:05:40.839 --> 0:05:42.919 don't know, maybe the Fed ons, you know, ten million 0:05:42.960 --> 0:05:45.279 shares of Tesla for all I know. But how do 0:05:45.320 --> 0:05:47.920 you respond to the idea that a central bank is 0:05:48.000 --> 0:05:51.479 running a stack portfolio. Well, in the Switzerland's case, you 0:05:51.560 --> 0:05:56.040 have the central banks balance sheet being over in equities 0:05:56.080 --> 0:05:59.080 and I don't know, and it's as overseas equities as well, 0:05:59.360 --> 0:06:02.359 apple and different to Japan's. So that makes it a 0:06:02.440 --> 0:06:06.920 very leveraged and very uh I guess aggressive balance sheets. 0:06:07.160 --> 0:06:10.480 That The problem, of course is that until such points 0:06:10.480 --> 0:06:13.839 as equities come off significantly, no one's going to talk 0:06:13.880 --> 0:06:16.359 too much about this issue as a potential problem for 0:06:16.400 --> 0:06:19.520 the Swiss if anything. Right now, what it does is 0:06:19.560 --> 0:06:24.160 a very positive carry balance sheet. Because John there was 0:06:24.200 --> 0:06:28.159 a massive jargon alert's two minutes in the penalty box. Well, 0:06:28.279 --> 0:06:30.719 what it means is that the Swiss of paying zero 0:06:30.760 --> 0:06:34.840 and negative or receiving you know, from negative rates on 0:06:34.880 --> 0:06:37.800 the Swiss francs they've printed in order to buy these 0:06:37.839 --> 0:06:42.159 assets overseas which provide very positive dividend flows. So every 0:06:42.240 --> 0:06:44.799 year the Swiss National Bank has a very positive cash 0:06:44.800 --> 0:06:48.280 flow negative rates. Well, that's the that's the fact. So 0:06:48.320 --> 0:06:51.120 the reality is it's it's a very sustainable position because 0:06:51.160 --> 0:06:54.919 you print Swiss francs and you buy these obviously assets 0:06:55.080 --> 0:06:57.840 until such point as stakes for in a dramatic word, 0:06:57.880 --> 0:06:59.239 Jo and I didn't have a time to talk about 0:06:59.240 --> 0:07:02.040 this on television this morning, but it's real simple. Nobody's 0:07:02.080 --> 0:07:05.760 talking about the chronic effect of these negative interest rates 0:07:06.160 --> 0:07:09.800 and be in place in a place like Switzerland. If 0:07:09.840 --> 0:07:12.560 I told you where monetary policy was in Switzerland, could 0:07:12.560 --> 0:07:14.360 you tell me that GDP would have a two handle 0:07:14.800 --> 0:07:17.400 year on year. I mean, growth is okay, the country 0:07:17.480 --> 0:07:20.000 is rich, it's a wealthy nation. What are they doing. 0:07:20.640 --> 0:07:24.360 I think what they're trying to do is effectively keep 0:07:24.400 --> 0:07:28.040 everybody employed in a country where there's enough overseas wealth 0:07:28.080 --> 0:07:31.680 and enough returns from that overseas wealth to effectively mean 0:07:31.720 --> 0:07:34.520 that you don't absolutely need to do that. UM. In 0:07:34.520 --> 0:07:37.240 a sense, you have a very wealthy individual if you 0:07:37.240 --> 0:07:39.400 want to look at it as a person that still 0:07:39.440 --> 0:07:41.600 wants to work. UM. And so you're trying to find 0:07:41.600 --> 0:07:45.480 the exchange rate that allows both you know, the wealth 0:07:45.520 --> 0:07:48.720 stocks that Switzerland have has to come into the country 0:07:48.760 --> 0:07:51.600 while allowing employment to remain high. It's not an easy 0:07:51.640 --> 0:07:54.600 thing to achieve, and that's why you have this awkward 0:07:54.640 --> 0:07:57.240 situation that you have in Switzerland right now. Of course, 0:07:57.280 --> 0:07:59.960 inflation is always ready to be low in Switzerland too, Yeah, 0:08:00.160 --> 0:08:04.360 and so trying to at least maintain the illusion that 0:08:04.400 --> 0:08:08.120 you can reach two percent infigation requires these kinds of Honestly, 0:08:08.160 --> 0:08:10.680 I used to scratch my head every time I went 0:08:10.720 --> 0:08:14.120 over to Zurich um and I'd interviewed the Swiss National 0:08:14.120 --> 0:08:16.120 Bank governor and I'd sit down in front of him, 0:08:16.120 --> 0:08:17.720 and I scratched my head all the time because I 0:08:17.800 --> 0:08:19.960 was looking around and seeing all of these people driven 0:08:20.000 --> 0:08:23.800 around and blanked out mercedes, incredibly wealthy individuals. And then 0:08:23.840 --> 0:08:27.360 we had this country there was exploring deeply negative interest 0:08:27.440 --> 0:08:31.040 rates and building up a balance sheet through buying equities, Tom, 0:08:31.200 --> 0:08:33.080 and it can't make sense of this. And Japan, by 0:08:33.120 --> 0:08:34.600 the way, it is doing the same things, an incredibly 0:08:34.640 --> 0:08:39.120 wealthy country per capita is totally fine. Yet they are 0:08:39.240 --> 0:08:45.040 exploring what is completely unprecedented in central bank history. Yeah, 0:08:45.200 --> 0:08:48.839 I agree. I mean, it's it's odd and the last really, 0:08:49.200 --> 0:08:52.360 John lest bizarre. Yeah, there's just no other way to 0:08:52.400 --> 0:08:55.640 put it. Thank you. So much great, thank you, thank 0:08:55.679 --> 0:08:58.640 you very much with us today and SIS. But you know, 0:08:58.679 --> 0:09:01.400 a lot of these currencies really moving. I walked in John, 0:09:01.440 --> 0:09:19.120 I saw Turkish Lear and said, wow, we're looking at 0:09:19.120 --> 0:09:22.600 the media wars now and it's worse plural. There's so 0:09:22.679 --> 0:09:26.240 much going on, just extraordinary what we're seeing. To this 0:09:26.320 --> 0:09:29.480 morning Tribune, Sinclair Tribune says no, oh yeah. And by 0:09:29.480 --> 0:09:31.800 the way, Sinclair, we're gonna sue you because it has 0:09:31.840 --> 0:09:35.200 to do with Sinclair wanted to hold on to their stations, etcetera, etcetera. 0:09:35.240 --> 0:09:39.480 And there's six other diversions as well. Exhausted In early August, 0:09:39.480 --> 0:09:43.559 Tuna Amobi joins us with see up our research about Tuna. 0:09:43.600 --> 0:09:47.360 When I say the media wars, how do you translate that? 0:09:48.679 --> 0:09:52.160 You know, I think that's exactly the right terminology, Tom, 0:09:52.200 --> 0:09:55.240 And I think what we're seeing, you know, the events 0:09:55.240 --> 0:09:58.120 that are unfolding in the media landscape, what I see 0:09:58.280 --> 0:10:01.920 on the regulatory and legal UH side, or even the 0:10:02.040 --> 0:10:04.280 M and A and the implications, I think, you know, 0:10:04.880 --> 0:10:08.840 it's it's unprecedented, right you talk about the Sinclair Tresune, 0:10:09.000 --> 0:10:12.360 I mean this deal was you know, kind of uh 0:10:12.920 --> 0:10:15.120 had a lot of tip on its shoulder from the beginning, 0:10:15.200 --> 0:10:18.920 I think, um, the FCC when they voted to send 0:10:18.920 --> 0:10:21.560 a deal for a judicial review, we were of the 0:10:21.559 --> 0:10:25.079 opinion that it was effectively a death sentence, and that's 0:10:25.080 --> 0:10:29.000 why we downgraded or shares on SYNC on Sinclair to hold. 0:10:29.040 --> 0:10:31.920 So at this point, I think a lot of parties 0:10:31.920 --> 0:10:33.920 in the media landscape are going to be trying to 0:10:34.000 --> 0:10:37.000 read the tales and trying to figure out what this means, 0:10:37.080 --> 0:10:40.560 especially with the Justice Department pushing ahead with the appeal 0:10:40.600 --> 0:10:42.199 of the A T and P time warners. There's a 0:10:42.280 --> 0:10:45.160 lot of a lot of things too, um, you know, 0:10:45.200 --> 0:10:49.000 to to read into what's going on. Is our earnings, 0:10:49.440 --> 0:10:54.880 are cash flows our margins persistent into the future or 0:10:54.960 --> 0:11:01.840 are they threatened because of the competitive and technological lens gape. Well, 0:11:01.880 --> 0:11:07.320 I think there's no question that technology and advancements have been, uh, 0:11:07.360 --> 0:11:09.679 you know, one of the catalysts to some of the 0:11:09.880 --> 0:11:14.400 M and A announcements that we have witnessed, especially now 0:11:14.440 --> 0:11:17.040 that a lot of companies are looking to a direct 0:11:17.160 --> 0:11:20.880 consumer and the technology that supports that scale is also 0:11:20.960 --> 0:11:24.600 another factor that comes into play here. So you've seen 0:11:24.640 --> 0:11:27.240 a lot of justly in among these companies just trying 0:11:27.240 --> 0:11:31.520 to you know, get exposures across areas, whether it's horizontal 0:11:31.679 --> 0:11:35.320 or vertical. Um. You know, my sense is that there 0:11:35.400 --> 0:11:38.120 is a little bit of hesitation right now because of 0:11:38.160 --> 0:11:42.600 all of these regulatory uncertainties. UM, but there's still some 0:11:42.679 --> 0:11:45.559 appetite out there. I think overall, we think the prevailing 0:11:45.679 --> 0:11:49.559 sentiment in the landscape is still cautiously positive. But you know, 0:11:49.600 --> 0:11:52.040 I thought we had a little bit more regulatory certainty, 0:11:52.440 --> 0:11:56.800 not uncertainty, No, I think best. I think the signals 0:11:56.840 --> 0:12:00.720 have been mixed under the Trump administration, which they moved 0:12:00.800 --> 0:12:04.920 quickly to read stated the you Achev discount, which was 0:12:04.960 --> 0:12:08.200 the catalyst for this um you know sincular Tribune deal 0:12:08.280 --> 0:12:11.440 in the first place, right, and then fast forward latter 0:12:11.520 --> 0:12:14.880 they go ahead and challenge vehemently the A T and 0:12:14.920 --> 0:12:18.280 T time one to merger. There's still appealing that transaction. 0:12:18.320 --> 0:12:21.800 So there's conflicting signals out there. Uh. And broadcasters are 0:12:21.840 --> 0:12:24.480 just kind of sitting trying to figure out what's going 0:12:24.480 --> 0:12:27.640 on in media companies in general. We saw the um, 0:12:27.679 --> 0:12:32.040 you know, the the Discovery um script deal was was 0:12:32.080 --> 0:12:34.959 supposed to be another supposed to be you know, well 0:12:35.000 --> 0:12:38.080 that's right, right, but not to interrupt you. But what's 0:12:38.120 --> 0:12:40.439 critical here is there's a lot of supposed to be 0:12:40.520 --> 0:12:43.520 going on. I mean, I mean I just find deal 0:12:43.559 --> 0:12:47.280 to deal to deal. What's the what's supposed to be story? 0:12:47.880 --> 0:12:52.240 That's an opportunity right now for you. Well, we know 0:12:52.400 --> 0:12:55.040 there's a lot of dry powder out there sitting u 0:12:55.520 --> 0:12:58.000 looking to get to work media companies. I think the 0:12:58.120 --> 0:13:01.559 balance is a largely in good shape. Um you know. 0:13:01.640 --> 0:13:04.520 I think that what the Disney Fox deal um on 0:13:04.640 --> 0:13:07.200 the scores is that companies are willing to leverage up 0:13:07.200 --> 0:13:12.640 their balance sheets, uh significantly if they can proved investors 0:13:12.679 --> 0:13:16.040 and make a case that there's potential synergies. And that's 0:13:16.040 --> 0:13:18.280 why investgent. Oh come on, you sound like a CEO. 0:13:18.559 --> 0:13:21.679 Come on, tuning, you sound like a CEO. Potential synergies. 0:13:22.200 --> 0:13:24.559 Did they do that deal and the other deals to 0:13:24.679 --> 0:13:29.559 coming in this supposedly environment? Did they do Disney Fox 0:13:30.160 --> 0:13:32.840 to do the deal or to be sure somebody else 0:13:32.880 --> 0:13:36.600 didn't get it? I would argue that it's a little 0:13:36.600 --> 0:13:38.880 bit of both, right. I think Bob Bagger has made 0:13:38.920 --> 0:13:42.800 a pretty compelling case that, um, you know, those synergies 0:13:42.920 --> 0:13:47.040 can be achievable if not conservative. Right. Um, So I 0:13:47.080 --> 0:13:51.120 think you know, Comcast obviously wanted to just that as bad, 0:13:51.400 --> 0:13:54.200 and for Disney to get those that's just as strategic 0:13:54.320 --> 0:13:58.679 as not letting Comcast get them. And all played into this, 0:13:59.000 --> 0:14:03.280 Uh you know, playd to this rot race among these 0:14:03.400 --> 0:14:06.320 companies to get much bigger and more content in the 0:14:06.360 --> 0:14:09.920 pipeline to push out to consumers very quickly. Or give 0:14:09.960 --> 0:14:12.440 me a Brian Roberts update. How bad is this August? 0:14:14.280 --> 0:14:16.600 That's a very interesting question. Uh, you know, I think 0:14:16.640 --> 0:14:21.360 the only good one he'll do just fine. Yeah, I mean, 0:14:21.480 --> 0:14:24.600 I mean the persistent of cash flow um speaks for itself. 0:14:24.600 --> 0:14:40.120 Tuna Mobi, thank you so much, CFI A research. I'm 0:14:40.120 --> 0:14:42.280 gonna bring in our next guest because John Ferrell made 0:14:42.280 --> 0:14:46.520 me smarter and George Freeman can add to it. George Friedman, 0:14:46.560 --> 0:14:49.240 one of our most popular guests working out of a 0:14:49.280 --> 0:14:56.040 bunker in Austin, is in cyclopedic on our political economics 0:14:56.520 --> 0:15:01.520 and how it folds into our defense in our offense. 0:15:01.680 --> 0:15:05.400 And George John Farrell just made me smarter by mentioning 0:15:05.440 --> 0:15:11.280 the tensions within China. Your lead is circled wagons in China. 0:15:11.600 --> 0:15:14.640 What do you mean by that? Oh, China is in 0:15:14.720 --> 0:15:18.520 deep trouble aside from the Western you know, all of China. 0:15:19.440 --> 0:15:23.040 Uh China has reached a point where it cannot export 0:15:23.240 --> 0:15:26.840 competitively with other countries. The U S sanctions make that 0:15:26.920 --> 0:15:30.800 even more difficult. That means there's tremendous pressure in China. 0:15:30.920 --> 0:15:34.120 China is a poor country, about a billion people live 0:15:35.040 --> 0:15:39.120 in pretty much third world of property and uh G 0:15:39.560 --> 0:15:42.600 is desperately trying to hold all these fashions together as 0:15:42.640 --> 0:15:46.760 he applies very painful solutions, and there is tension within 0:15:46.880 --> 0:15:49.320 China and whether or not it can possibly hold together 0:15:50.120 --> 0:15:53.800 uh For a hundred years before maut Sung, China was 0:15:53.840 --> 0:15:57.240 a highly fragmented country. So the Chinese are playing with 0:15:57.360 --> 0:16:00.960 existential problems. But we still think of China's it was 0:16:01.040 --> 0:16:04.440 five or ten years ago. So what's changed, George, and 0:16:04.640 --> 0:16:08.000 how is this going to materialize in the coming months. Well, 0:16:08.040 --> 0:16:11.640 what change basically was that China built an industrial plan 0:16:12.280 --> 0:16:17.120 far too large for domestic consumption, and foreign consumption declined 0:16:17.200 --> 0:16:21.840 after two eight and competing countries like Vietnam and others 0:16:22.640 --> 0:16:26.560 were taken away the Chinese market. How this plays out 0:16:26.640 --> 0:16:30.160 basically has little to do with economics. At this point, 0:16:30.320 --> 0:16:33.600 the economic reality is set, it's now a social and 0:16:33.600 --> 0:16:37.080 political problem, which is how does the Chinese regime and 0:16:37.200 --> 0:16:40.120 the Chinese public in various interests react to the fact 0:16:40.200 --> 0:16:44.400 that China's move is not only over, uh, it is 0:16:44.440 --> 0:16:47.840 now in a period of extreme stringency. So, George, this 0:16:47.840 --> 0:16:50.040 is an important question, and I imagine how that anybody 0:16:50.080 --> 0:16:53.120 would speak to would say yes to this. But do 0:16:53.200 --> 0:16:57.000 you actually see existential risk to the Communist Party at 0:16:57.080 --> 0:16:59.400 this point, or at least you see an existential risk 0:16:59.800 --> 0:17:05.720 of evolving. Well, the Communist Party is monolithic, it has 0:17:05.760 --> 0:17:08.639 it's a compendium of interests. They are the interests of 0:17:08.680 --> 0:17:12.719 the coastal cities and party committees there, and their interest 0:17:12.800 --> 0:17:17.640 is basically to maintain good relations with the West. There 0:17:17.680 --> 0:17:22.600 is the interior interior parties. Uh. They haven't benefited much 0:17:22.640 --> 0:17:26.280 from the major boom, and they want to see resources 0:17:26.280 --> 0:17:30.960 diverted from the coastal areas to their interests. This is 0:17:30.960 --> 0:17:33.480 a huge country. It's very diverse, it has a very 0:17:33.480 --> 0:17:37.640 diverse interest Obviously, when it was growing fantastically, you could 0:17:37.680 --> 0:17:40.439 cover up these things. But now when the question how 0:17:40.520 --> 0:17:43.679 to be distribute the pain is different. George. One of 0:17:43.680 --> 0:17:46.840 the great realities of our ute is how wrong we 0:17:47.000 --> 0:17:53.280 got Russian and Soviet Union intelligence before their collapse. Do 0:17:53.400 --> 0:17:58.399 we have a knowledge of Chinese intelligence, Chinese society, the 0:17:58.520 --> 0:18:01.840 dynamic of their politics, or as we are we flying 0:18:01.880 --> 0:18:08.280 as blind as we were in six Americans have the 0:18:08.400 --> 0:18:13.720 strange tendency to overestimate and some enemies and underestimate others. 0:18:14.440 --> 0:18:19.800 We underestimated at Vietnamese, we underestimated Taliban. We vastly overestimated 0:18:19.840 --> 0:18:23.359 the Russian capability, and we're doing the same thing with 0:18:23.440 --> 0:18:25.920 China now. We don't look at their weaknesses, and we 0:18:25.960 --> 0:18:29.000 don't look at the problems that they have, and above all, 0:18:29.000 --> 0:18:30.880 we don't look at the fact that what they were 0:18:31.359 --> 0:18:34.840 a decade ago is not what they are now. We 0:18:35.000 --> 0:18:38.760 tend to see them as a kind of static, monolithic 0:18:38.880 --> 0:18:41.879 entity that can understand anything. So George on the on 0:18:41.920 --> 0:18:46.080 the issue of overestimating also an issue of overestimating political rivalries. 0:18:46.119 --> 0:18:48.000 We saw this with Japan in the nineteen eighties, and 0:18:48.080 --> 0:18:50.800 we saw how that turned out. If we think about 0:18:50.840 --> 0:18:53.520 why the sanctions push is coming through this arrist push 0:18:53.560 --> 0:18:55.920 to be more precise, from the U. S administration on China, 0:18:56.320 --> 0:18:59.400 do you think it's borne out of overestimating the economic 0:18:59.480 --> 0:19:01.919 rivalry that shine of poses. Are you saying they are 0:19:01.960 --> 0:19:04.200 weak than some people think they are going to be 0:19:04.359 --> 0:19:07.240 in the next ten years. It has much more to 0:19:07.280 --> 0:19:09.480 do with the fact that the United States has a 0:19:09.560 --> 0:19:12.680 reality didn't have ten years ago, which is his a 0:19:12.760 --> 0:19:16.560 clienting industrial class. And that may not be a macro 0:19:16.680 --> 0:19:20.879 economic problem, but it's a massive political problem. And the 0:19:21.000 --> 0:19:23.080 question that we're doing and how do we take care 0:19:23.119 --> 0:19:26.359 of him? George, this came up yesterday. I want to 0:19:26.480 --> 0:19:28.760 rip up the script here, but with your abilities, it's 0:19:28.760 --> 0:19:32.760 a timely question. We had the great uh interview of 0:19:32.880 --> 0:19:35.159 David Rubinstein and his peer to peer. We did that 0:19:35.240 --> 0:19:38.280 last night folks on Bloomberg Radio with a gentleman as 0:19:38.280 --> 0:19:42.280 the chief executive officer Boeing, and a gentleman emailed in 0:19:42.680 --> 0:19:46.920 and said, would somebody ask how we do defense contracts? 0:19:46.920 --> 0:19:49.679 And this came back to something called the case for 0:19:50.800 --> 0:19:54.679 was his genormous billion dollar airplane deal and there's cost 0:19:54.800 --> 0:19:57.920 overruns and Boeing, I guess, has to pay the US 0:19:58.000 --> 0:20:02.200 government a ga jillion million dollars. Do you, George Freeman, 0:20:02.280 --> 0:20:08.240 have any clue how we spend money at the Pentagon? Well, 0:20:08.280 --> 0:20:11.159 the first thing is what is our strategy and how 0:20:11.160 --> 0:20:14.280 do we set it. And it's a very conventional understanding. 0:20:14.359 --> 0:20:18.000 I mean, look, the U. S. Navy wants there are 0:20:18.040 --> 0:20:20.760 two entities. They want to make China look super powerful. 0:20:20.840 --> 0:20:23.520 What is China? The other is the U. S. Navy. 0:20:23.720 --> 0:20:26.159 Because the U. S. Navy is able to say that 0:20:26.240 --> 0:20:28.880 the Chinese or a major threat, they're going to get 0:20:28.880 --> 0:20:32.960 funded heavily. So the vision of the world of what 0:20:33.080 --> 0:20:36.200 the threats are, what the dangers are, these are essential. 0:20:36.359 --> 0:20:38.840 They drive the American economy. I mean one of the 0:20:39.200 --> 0:20:42.800 we talked about this Soviet Union and overestimating them. There 0:20:42.840 --> 0:20:47.080 was a major overestimation by the Pentagon. Other intelligence sources 0:20:47.119 --> 0:20:50.400 had different views, but the Pentagon view, and that's how 0:20:50.440 --> 0:20:55.399 we fund them. We identify threats. It takes it. It 0:20:55.480 --> 0:20:59.399 takes ten fifty years to build a weapon system and 0:20:59.440 --> 0:21:02.800 at that time and we hold after its steady. I 0:21:03.080 --> 0:21:05.760 shall end up reading more about the case for which 0:21:05.800 --> 0:21:08.240 I don't know what that is. Do we know China's 0:21:08.280 --> 0:21:11.400 technology and military? I mean, all the interviews we do, 0:21:11.480 --> 0:21:14.600 and they've got a submarine base hanging off Vietnam there 0:21:14.600 --> 0:21:19.280 on that island, etcetera. Do we actually know their technology? 0:21:20.960 --> 0:21:25.199 I'm pretty sure that the military and intelligence people know 0:21:25.840 --> 0:21:29.320 what they're capable of. But again the question is not 0:21:29.400 --> 0:21:33.320 what they're capable of, but how it's projected. So, yes, 0:21:33.520 --> 0:21:37.200 they've got an island they built, So what that island 0:21:37.200 --> 0:21:41.080 will disappear about fifteen minutes into a war. That's not 0:21:41.160 --> 0:21:45.480 a strategic capability. The Chinese are blocked by a string 0:21:45.520 --> 0:21:48.239 of islands. They can't get out of it because they 0:21:48.280 --> 0:21:52.000 have right, haven't have a military strength. Okay, one final question, 0:21:52.200 --> 0:21:55.800 Georgia will let you go. I was in Helsinki a 0:21:55.840 --> 0:21:58.480 few weeks back. John wasn't and I was having a 0:21:58.480 --> 0:22:00.480 beverage of my choice down by the harbor, and I 0:22:00.520 --> 0:22:02.600 thought I saw a periscope stick up in the water. 0:22:02.960 --> 0:22:08.760 Are there really submarines floating around the Baltic He was 0:22:08.960 --> 0:22:14.360 like ten drinks, Dave. At that point brin with Mr Freedman, 0:22:14.440 --> 0:22:18.080 keep this serious, George's Baltic Sea are They're like submarines 0:22:18.160 --> 0:22:21.080 bouncing into each other in the Baltic Sea. We not 0:22:21.240 --> 0:22:23.359 bossing at each other. There's a lot of maneuvering, the 0:22:23.400 --> 0:22:27.760 Russians of maneuver there. We cannot to go too deep 0:22:27.800 --> 0:22:32.160 into it. But yeah, there are submarines everywhere, and uh, 0:22:32.280 --> 0:22:34.560 if there were, a lot of them would be destroyed. 0:22:34.680 --> 0:22:37.560 Very how do they get through the Danish Straits? I 0:22:37.560 --> 0:22:40.640 mean out there, you know, way west of Helsinki, there's 0:22:40.760 --> 0:22:45.320 like island. The months gives them a little bit of 0:22:45.320 --> 0:22:47.840 a tuck tomb. Okay, we're gonna George, you're gonna have 0:22:47.880 --> 0:22:49.720 to answer that question. We'll do that the next time. 0:22:49.920 --> 0:23:07.600 George Freedman with us on the Danish Straits. Francis Donald 0:23:07.640 --> 0:23:12.119 with us with Manual Life doing macro strategy there and 0:23:12.200 --> 0:23:15.160 right now we want a macro strategy through the core 0:23:16.240 --> 0:23:20.639 economic function. Let's start with g d P, which is 0:23:20.680 --> 0:23:24.000 the consumer. Francis, what's the dynamic of the consumer right now? 0:23:24.720 --> 0:23:27.480 It's just fine. We could go through all the numbers, 0:23:27.520 --> 0:23:29.679 but the story is the same as been which is 0:23:29.760 --> 0:23:34.200 employment is strong, wages are steadily rising, the labor forces increasing, 0:23:34.400 --> 0:23:37.119 and there are wealth effects that occurring way not just 0:23:37.160 --> 0:23:40.600 through wages, but home prices at six and through the 0:23:40.600 --> 0:23:44.080 equity market. Consumer. That's the steady state that we don't 0:23:44.119 --> 0:23:45.760 need to worry about right now. Where we need to 0:23:45.800 --> 0:23:47.919 shift our focus is to the eye and to the 0:23:47.960 --> 0:23:50.800 g Well, the eye always is variable, folks, I is 0:23:50.840 --> 0:23:54.560 what's what what Francis sev the economy, am I right 0:23:54.600 --> 0:23:58.679 on that it's up there, and it's incrementally important. It's volatile, 0:23:59.240 --> 0:24:03.080