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Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene

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Speaker 1: Jay Leye. We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. It's

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Speaker 1: not just the equity market then that's facing a rough

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Speaker 1: for the first time since the global financial crisis. High

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Speaker 1: yield an investment grade in both dollars and euros heading

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Speaker 1: for an annual loss. So what is going on in

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Speaker 1: credit and how it's concerned? Should you be George Bori

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Speaker 1: joining us and now whilst Fargo Securities head of Credit Strategy.

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Speaker 1: Good morning to you, George. Some of our listeners might

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Speaker 1: not have the same visibility they have on s S

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Speaker 1: and P five hundred and the Dow than they do

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Speaker 1: in credit. Just walk me through what has been goinging

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Speaker 1: gone and talk to me about the price of the story. Now, sure,

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Speaker 1: I think there are two really big issues and two

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Speaker 1: big factors that are happening in credit. First and foremost,

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Speaker 1: it all starts with the Fed. The Fed obviously has

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Speaker 1: been raising rates over the course of this year. Over

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Speaker 1: the last two plus years, and it's the the march

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Speaker 1: back towards cash. It's well underway, and you know, you

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Speaker 1: can look at it from a return perspective, you can

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Speaker 1: look at it as a fund flow perspective. You know,

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Speaker 1: investors are moving towards the front end of the curve.

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Speaker 1: They've been doing that all year. But the total returns,

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Speaker 1: the capital protected money is doing just fine. If you

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Speaker 1: have a maturity profile of three years or less, doesn't matter,

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Speaker 1: if you held treasuries, if you held corporates, if you

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Speaker 1: held high yield, you are generating positive total returns. That's

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Speaker 1: a good thing. The other issue is simply who's buying debt.

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Speaker 1: Who's investing in debt today? And this is the difference

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Speaker 1: between a price investor and a yield investor. The price

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Speaker 1: investor the folk, the folks who kind of worry when

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Speaker 1: prices go down. They're moving out of the market. And

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Speaker 1: those folks have been buying a lot of debt over

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Speaker 1: the last decade. Those investors are finally seeing yields rise,

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Speaker 1: prices drop, and they're moving away. But the institutional investor,

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Speaker 1: these pension funds, insurance companies, endowments, these are the folks

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Speaker 1: that really care about yields and yields actually look very

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Speaker 1: compelling right now, So, George, let's talk about that. For

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Speaker 1: an institutional investor, what's important right now? So look at

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Speaker 1: things in terms of relative value or absolute value. I

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Speaker 1: think you can look at absolute value to really I mean,

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Speaker 1: if you look at say high yield as an asset

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Speaker 1: class has an all in yield of about seven point

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Speaker 1: to five percent inflations at two percent, a four point

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Speaker 1: to five percent really yield is very compelling to a

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Speaker 1: long term institutional investor. You don't have to worry about

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Speaker 1: relative value. In the world of investment grade, it's less

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Speaker 1: less compelling. But even there you're talking about roughly four

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Speaker 1: point three or four point four percent yields. Those yields

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Speaker 1: are are are compelling. They're not wildly cheap, but they

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Speaker 1: do look pretty good, you know, over a medium term perspective, George,

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Speaker 1: A lot of people looking at what is happening an

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Speaker 1: investment grade and spotting some very specific ugly stories. General

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Speaker 1: electric one. A lot of people are talking about, and

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Speaker 1: I hear that word that I heard surrounding the emerging

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Speaker 1: market asset class over this year, idiosyncratic, idiosyncratic. Then all

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Speaker 1: of a sudden it's not it's systemic. You ask the

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Speaker 1: question your recent research, and it's a great now and

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Speaker 1: I want to ask it to you now, When does

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Speaker 1: an upsurge of idiosynchronic risk become systemic? Yeah? No, I

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Speaker 1: think that's absolutely the right question in my in our opinion,

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Speaker 1: and idiosyncratic problems. This is when individual a list of

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Speaker 1: individual companies are having challenges. When that becomes systemic is

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Speaker 1: when otherwise healthy companies cannot access the capital they need.

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Speaker 1: It doesn't mean that a healthy company needs to pay

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Speaker 1: a little bit more, which is what we're seeing right now.

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Speaker 1: It's when they can't borrow at all. And I, in

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Speaker 1: our opinion, we're still a far cry from from that

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Speaker 1: that sort of scenario. Good morning, John, What are you

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Speaker 1: doing real yield? It's what time is it, John Tucker?

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Speaker 1: Where's the surveillance clock? It's seven o four in the morning,

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Speaker 1: and you're doing convexity too. It's too early to jez George.

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Speaker 1: Are we in a bear market? Let me define this.

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Speaker 1: Here's the way retail works. They have an envelope, they

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Speaker 1: open it maybe now it's by you know, email or whatever.

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Speaker 1: They look at the bond portfolio. It's down one month,

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Speaker 1: it's down, two months, it's down three months. Are we

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Speaker 1: there yet? We are there? Okay, we are, John, there's

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Speaker 1: a really good question you can use. You know, I

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Speaker 1: was doing it for wolf Street. You want to do

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Speaker 1: for re out helping my guest? Carry on, please, Jo.

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Speaker 1: It's a bear market, right, thank you? You know with

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Speaker 1: you know what the way we're categorizing this year. And

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Speaker 1: if you look at historical total returns for fixed income,

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Speaker 1: you know, every seven to eight years you get a

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Speaker 1: real bad down market. That could because defaults are going up,

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Speaker 1: or because yields are rising. This year, it's all about yields.

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Speaker 1: Yields are up, spreads are wider. Total returns for the

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Speaker 1: asset class they look pretty bad. You know, investment grade

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Speaker 1: down three point eight percent. That's not typical. Retail investors

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Speaker 1: not in it for a minus four percent return. However,

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Speaker 1: yields are materially higher. The prospect for a positive return

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Speaker 1: next year are much higher today than they were at

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Speaker 1: the end of last year. And I think that's the

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Speaker 1: that's the silver lining. Let's talk about leverage loans. Tom's

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Speaker 1: gonna love this. It's seen actually it's a part of

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Speaker 1: fixed income, but held up really really well, there's two

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Speaker 1: big reasons for that, two big reasons many institutional investors

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Speaker 1: would be driven towards leverage loans appetite for credit risk,

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Speaker 1: appetite for floating rate. What's been interesting in the last

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Speaker 1: couple of months is light boards remained elevates it, so

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Speaker 1: you should still have the appetite for floating rate. Yet

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Speaker 1: leverage loans has started to crack just a little a bit.

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Speaker 1: And I'm wondering what you think about what is happening

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Speaker 1: in George because most people would ask if there's been

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Speaker 1: a flood of money anywhen fixed income. This year it

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Speaker 1: has been to that spice. Yeah, the growth in leverage

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Speaker 1: loans has been truly impressive over the last several years.

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Speaker 1: I think it's a combination of sort of pretty healthy

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Speaker 1: companies putting up good numbers and wanting to borrow with

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Speaker 1: a floating rate structure. As you point out, investors being

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Speaker 1: drawn to that floating rate structure at a senior point

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Speaker 1: in the capital structure. All of that is all well

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Speaker 1: and good. The underwriting standards have clearly eroded over the

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Speaker 1: last couple of years. All types of companies can get money,

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Speaker 1: they can get it pretty easily, you know, our our

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Speaker 1: recommendation is to go from floating maybe back into fix,

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Speaker 1: to go from say your leverage loan into the world

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Speaker 1: of high yield, because there are some cracks that are

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Speaker 1: starting to emerge. It doesn't look as if we're at

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Speaker 1: the sort of imminent end of the credit cycle, but

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Speaker 1: when you've had very very loose lending standards for a

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Speaker 1: long period of time, you know, that's basically where the

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Speaker 1: problems start to emerge. What did your worlds about tech

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Speaker 1: bonds usually signal equity trauma? Did Is there so little

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Speaker 1: tech debt that you really can't use bonds as a

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Speaker 1: vehicle for tech like you could with generous electric Well,

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Speaker 1: I think that, you know, the bond world is divided.

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Speaker 1: You know, the bond world. I think, whether it's investment grade,

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Speaker 1: high yield, or even in leverage loans, it tends to

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Speaker 1: be kind of the cash cow of the corporate world.

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Speaker 1: Once you're sort of in the world of bonds, you

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Speaker 1: know you're a very cash generative company that tends to

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Speaker 1: be leaning on the fixed income side. Tech specifically is

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Speaker 1: so cash generative it tends to divide into old world tech,

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Speaker 1: say an IBM, New world tech, say like Microsoft, the

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Speaker 1: new world tech is just doing just fine. Old world

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Speaker 1: tech is still in a transformational stage. I don't think

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Speaker 1: that's the leading edge in our world. One quick question.

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Speaker 1: Are Michael mcgloan publishes a brilliant note how to Bloomberg

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Speaker 1: Intelligence this morning on potential? Right? General Electric is a spinoff?

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Speaker 1: Baker hughes in a more fast manner. You don't talk

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Speaker 1: about individual debt, but as General Electric is a junk opportunity?

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Speaker 1: Or is it something to avoid? Really not? I really

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Speaker 1: can't go. You don't want to do too much detail. Um,

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Speaker 1: you know that it's it's it's outside of my remit.

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Speaker 1: I'm glad you're here in the studio is full now

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Speaker 1: our our wonderful studio with limited seating here. Let me

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Speaker 1: cancel over this with Pimco and you know the market kin,

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Speaker 1: let me from where you set. I mean, I know

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Speaker 1: the president. If we go to a correction status negative

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Speaker 1: ten percent on SMB and we're nowhere near bear market,

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Speaker 1: but with a tech implosion, does a president come out

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Speaker 1: and say a weak stock market is un American and

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Speaker 1: it's you know, whoever's fault he'll pick that day? Um? Well, look,

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Speaker 1: I mean has he maybe does he regret now sort

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Speaker 1: of hitching his own kind of card to to the

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Speaker 1: stock market. You know. Maybe, However, I mean, I think

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Speaker 1: what he has shown that he's very good at is

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Speaker 1: pivoting um to other issues. And I think how simply

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Speaker 1: at least you know, right now, I mean, the fundamentals

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Speaker 1: of the U. S economy are still relatively strong. Maybe

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Speaker 1: weak name, but but still so I think he'll to

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Speaker 1: to to that versus uh, you know, plan at the

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Speaker 1: stock plan canny he pivot to anything on policy that

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Speaker 1: in a lame duct term anybody can get done. I

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Speaker 1: just don't see it. But what's your optimism of something

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Speaker 1: getting done? Yeah, so I think you know, from a

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Speaker 1: from a market's perspective, you know, the big unknown variable

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Speaker 1: is whether we can see a big infrastructure package. Now,

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Speaker 1: of course that could have implications from a longer term

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Speaker 1: deficit and debt dynamics. But um, we know that the

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Speaker 1: Democrats in the House, who are going to have a

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Speaker 1: pretty healthy majority, want to show that they can covern.

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Speaker 1: We know that infrastructure is a priority for Democrats, and

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Speaker 1: we also know the infrastructure in the priority for the President.

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Speaker 1: So I think the big question here is can you

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Speaker 1: see the Democrats pass a bill that actually has a

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Speaker 1: chance of passing a Republican controlled Senate, and does the

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Speaker 1: President support it. Because if the President gets behind a

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Speaker 1: democratic infrastructure bill, it's going to be very hard for

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Speaker 1: Republicans in the Senate who are facing you bad difficult

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Speaker 1: map in to go against the president. So I actually

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Speaker 1: think that you know, our base cases you don't see

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Speaker 1: a big infrastructure package, but I think the chances are

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Speaker 1: actually higher than the markets seem to think, which I

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Speaker 1: think I've just written off this split Congress as a

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Speaker 1: completely lamed ut Congress and UM and you know, kind

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Speaker 1: of paralysis and gridlock. So Libby, over the last couple

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Speaker 1: of years, we've actually had a real pro growth impetus

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Speaker 1: come from Washington, d C. When you sit around with

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Speaker 1: the Big Committee over a Pimco and Caulifornia and talk

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Speaker 1: about the good stuff that could come from Washington, d C.

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Speaker 1: What do you talk about, Well, yeah, I mean it's

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Speaker 1: it's a it's a great point, John, I mean we

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Speaker 1: you know, of course, we have seen a really significant

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Speaker 1: fiscal tail wind, which is unusual, as you know, in

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Speaker 1: the sort of the tenth year of an economic expansion

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Speaker 1: to see the fiscal accelerator. So to speak, really being

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Speaker 1: kind of pushed. UM, so six tenths of a percent.

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Speaker 1: We're expecting in terms of real GDP growth contribution about

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Speaker 1: four tenths percent, and so significant numbers when you're talking

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Speaker 1: about kind of two and a half three percent real

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Speaker 1: growth worlds. However, we are expecting to see that physical

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Speaker 1: stimulus that has been has contributed from the tax cut

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Speaker 1: in the sending bill fade in late to your question,

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Speaker 1: infrastructure really is the question mark there, because if we

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Speaker 1: see an infrastructure spitch, and then we could actually see

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Speaker 1: that that you know, UM, in terms of the reduction

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Speaker 1: of fiscal stimulus, UM sort of mitigate that. I want

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Speaker 1: you to clarify the fiscal stimulus fades versus the actual

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Speaker 1: deficit to GDP level. The deficit to GDP doesn't fade,

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Speaker 1: does it? No? No? And in fact, m so you know,

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Speaker 1: as of as of UM, it looks like the spending

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Speaker 1: spend government spending is actually supposed to revert to levels.

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Speaker 1: Wait wait, wait, who says, well, the law says, is

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Speaker 1: this pimpcoe accounting No to the law as of now,

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Speaker 1: if Congress doesn't do anything, and we'll see a big

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Speaker 1: draw down in government spending and that's because they Congress

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Speaker 1: passed the government spending bill earlier this year that increases.

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Speaker 1: But that's like that wait wait, wait, wait, that's like

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Speaker 1: the Broncos winning the Super Bowl, right, Ye, so exactly,

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Speaker 1: so let me just let me send So, so if

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Speaker 1: Congress doesn't do anything, then spending will revert to a

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Speaker 1: much lower level. As of now, assuming that spending decreases,

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Speaker 1: the CBO still has an estimated trillion dollar deficit. Now

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Speaker 1: to your point, and I am equally skeptical that Congress

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Speaker 1: would let that happen, especially in election year. We don't

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Speaker 1: I don't think we'll see that draw down and spending.

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Speaker 1: Meaning and the point here is that the deficit is

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Speaker 1: likely much higher, or at least, you know, relatively significantly

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Speaker 1: higher versus what the CBOs than right now. The CBOs

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Speaker 1: is meaning has at a trillion dollar deficits, So you

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Speaker 1: know that the point here is that we're seeing very

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Speaker 1: large deficits this latent economic expansion, and the you know,

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Speaker 1: at the end of the day, it means that the

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Speaker 1: fiscal space for the government to respond to a recession

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Speaker 1: is much more limited. Libby cars just drove off the

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Speaker 1: road between Boulder and Denver and the I mean the

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Speaker 1: issue Libby. The issue here is people trot out and

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Speaker 1: say the fiscal stimulus will end, and John Ferrell were

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Speaker 1: left with is Libby really laid out? Is one point

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Speaker 1: ex trillion of debt? When you finally let Libby finish

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Speaker 1: your thought well said, I think a lot of people

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Speaker 1: get upset by this. I agree it was nice of

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Speaker 1: you to let us meek. Why did you jump in

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Speaker 1: after you're writing the script? We've only got two minutes left.

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Speaker 1: Thanks Tom, your base case on the debt of fiscal deficit,

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Speaker 1: we've done that. Liver your base case for infrastructure? Can

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Speaker 1: I get your base case for the G twenty? What

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Speaker 1: does the conversation look like a Pimco at the moment?

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Speaker 1: Are you hopeful? Optimistic? You know? Um, you know, my

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Speaker 1: personal view is that we're we don't see a big

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Speaker 1: grand bargain coming out of um of the G twenty,

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Speaker 1: and I think that's you know, most folks here share

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Speaker 1: that view. And now I think that the big wild card,

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Speaker 1: of course, is that President g and President Trump are

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Speaker 1: going to be meeting bilaterally. We know that, according to

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Speaker 1: President Trump, they have a great chemistry, and so you know,

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Speaker 1: who knows what actually happens in that room. However, you know,

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Speaker 1: I would just point to the fact that what we're

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Speaker 1: asking from China, the bar is quite high. So this

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Speaker 1: is not just a question about China buying more soybeans

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Speaker 1: and airplanes from US. It's about them making structural reforms

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Speaker 1: to their economy that you know, honestly looking back to

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Speaker 1: their kind, they don't, they don't have any self interest

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Speaker 1: in doing so. So I think that you know, we

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Speaker 1: might maybe we see, you know, some sort of happy

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Speaker 1: rhetoric coming out of the out of the G twenty,

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Speaker 1: but I think that would just be it. I think

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Speaker 1: we would just be rhetoric. I don't think we see

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Speaker 1: a meaningful deal, and we continue to think that trade

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Speaker 1: risk will will be a policy risk coming out of

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Speaker 1: Washington for most of twenty nineteen, if not for all

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Speaker 1: of it. Lebby, thank you so much. Let me capture

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Speaker 1: with HIMCO this morning, our Mark Gilbert, writing for Bloomberg Opinion.

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Speaker 1: He's taken a voluminous Mackenzie report and distilled it down

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Speaker 1: to the future of global Wall Street with hinges always

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Speaker 1: on asset management, James Gorman and come station whether Eric Shatzker.

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Speaker 1: Later today, a Morgan Stanley is believed in wealth management

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Speaker 1: and asset management. If it remains standing, Mark, congratulations on

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Speaker 1: a terrific summary of the mckensey report. What I love

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Speaker 1: about this is it tells us what's happening beneath the headlines.

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Speaker 1: What's your key takeaway? Well, it's not good, Tom. The

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Speaker 1: profitability last year was astonishing for global asset management in

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Speaker 1: the US. For example, the global profit pool was about

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Speaker 1: forty four and a half billion dollars. That was up

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Speaker 1: more than more from But under the surface, most of

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Speaker 1: our profit growth came from rising stock markets. You know,

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Speaker 1: the goes up and so they bring in more money.

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Speaker 1: So they've got more money, so they charge more. They've

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Speaker 1: got extra fee income. So twelve billion dollars of that

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Speaker 1: extra profit came came just from rising stock markets. But

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Speaker 1: you know what costs a rising fees are being reduced

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Speaker 1: for investors. People are shifting to cheaper products. So six

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Speaker 1: point seven billion dollars went away from the profit pool.

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Speaker 1: So if you look at this year, if you look

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Speaker 1: at where stocks are this year, you know, the benchmark

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Speaker 1: US indexes are just about eken out of game. The

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Speaker 1: MSCI World is down four to five percent this year.

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Speaker 1: That extributes from rising stock markets. That not going to

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Speaker 1: be there for the asset management industry this year. What

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Speaker 1: does the studies say and what do you say with

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Speaker 1: your industry reach about the divide of active and passive.

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Speaker 1: We've heard for years active will be there. Is it

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Speaker 1: just simply active needs a mother of all bear markets

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Speaker 1: to stabilize. Well, that's the claim. The claim is that

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Speaker 1: active is better when when the bear market comes. But

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Speaker 1: so far this year that's not being that's not really

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Speaker 1: being a bear market. Well we're getting very closely. You've

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Speaker 1: got Apple in a bear market. Come on, Mark, there's spive.

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Speaker 1: I did the chart today on TV. We're barely to

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Speaker 1: a correction again out of February. I get that. But

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Speaker 1: not everybody owns just tech stocks, right, that's true, But

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Speaker 1: if you look at European markets, they're in a much

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Speaker 1: worse position. Fair the red the red is has been

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Speaker 1: pretty consistent here on. This is even before we get

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Speaker 1: to Brexit. I'm with growth slowing in Italy still a problem.

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Speaker 1: So the market, the market out looks not great and

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Speaker 1: for the phone management the industry, that's going to be

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Speaker 1: a problem. As you know, Mark Gilbert, I'm fond of

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Speaker 1: walking down the promenade and Davos wandering towards UH the

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Speaker 1: piano lesson I take at the piano bar and on

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Speaker 1: the way, or all the shops taken over by global

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Speaker 1: asset managers, and thinking about two Davos, is there will

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Speaker 1: only be one store open because they're all going to

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Speaker 1: merge together. I mean, Anne Richards was an Energy she

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Speaker 1: goes over to UH Fidelity International. And there's the Aberdeen

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Speaker 1: story in your London or over here in the United States,

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Speaker 1: Investco merging with this that Oppenheimer Funds and and and

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Speaker 1: all that discuss what Mackenzie saw in scale. It's the

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Speaker 1: squeeze middle. So the top ten that the trillion dollar

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Speaker 1: club is doing fine, the bottom club that's also doing well,

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Speaker 1: the specialist boutiques who offer something extra, something with a

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Speaker 1: bit of spin on it's something that they can charge

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Speaker 1: a bit more fee. It's the middle market that's really

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Speaker 1: suffering and the flows into passive hurting them. The consolidation

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Speaker 1: is going to come in that squeeze middle. And as

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Speaker 1: you said, we've seen deals so far, what we've seen

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Speaker 1: is very few big deals. You know, Standard Life and

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Speaker 1: Aberdeen was one. Janis and Henderson was another. We haven't

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Speaker 1: really seen those good blusters the deals yet. Next year

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Speaker 1: people are going to be looking to those those firms

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Speaker 1: for for more consolidation, for more margers. So what's interesting

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Speaker 1: about this is the backdrop is a backdrop of I'm

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Speaker 1: gonna call managed desperation, like Abbie Johnson and Fidelity saying

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Speaker 1: X number of kinds of pairs of funds will be free, free,

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Speaker 1: and just in the last twenty four hours that will

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Speaker 1: leave Vanguard, you know, lowerst the minimum amount or whatever

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Speaker 1: to get into their funds. I mean, is there a

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Speaker 1: desperation out there even among the successful giants. Well, there's

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Speaker 1: a race to zero on the fee basis because once

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Speaker 1: one person offers free, what are you gonna do? You're

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Speaker 1: not going to get away with charging, And it's a

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Speaker 1: way of selling extra product to an investor. It comes

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Speaker 1: in for that zero fee. You're going to broaden your

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Speaker 1: product range. You're gonna move horizontal rather than just vertically

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Speaker 1: in terms of in terms of your offering. I don't

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Speaker 1: know about desperation, but there's definitely Darwinistic pressure going on

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Speaker 1: the industry. Here's an email tailor from San Francisco emails

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Speaker 1: in and says does this mean see your face make

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Speaker 1: loss money? What do you mean? Undoubtedly you mean somebody

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Speaker 1: that was making one seventy five with a bonus out

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Speaker 1: four hundred, five hundred thousand whatever us. They're gonna take

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Speaker 1: loss money or they gonna leave. Investors are taking charge

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Speaker 1: of their own money. The technology platforms are there so

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Speaker 1: that you can cut out those middle agents. You can

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Speaker 1: go directly to the funds that you want to choose.

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Speaker 1: I think the CFAs are going to see their their

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Speaker 1: incomes reduced them and probably rightly so. They've been living

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Speaker 1: high on the hug for far too long and basically

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Speaker 1: creaming money out of people's pension pots. To line, are

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Speaker 1: you talking about me, Tom as If as If Mark

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Speaker 1: Gilbert with us? As we look at the mckins report,

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Speaker 1: what else was it in this tune? I mean everybody

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Speaker 1: knows I adore these mackensey reports because they've got charts,

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Speaker 1: they've got you know, X, y Z feel of like

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Speaker 1: the dynamics of a given industry. But there was another

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Speaker 1: insight there. You talk about the split between passive and active. Interestingly,

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Speaker 1: money still moving out of active equity funds. Six D

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Speaker 1: fifty three billion dollars out of active five hundred five

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Speaker 1: billion into into passive equity funds, but in fixed income

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Speaker 1: it's pretty much it's pretty much a split picture. Inflows

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Speaker 1: in more than five and a billion dollars were split

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Speaker 1: evenly between passive and active strategy. So active fixed income

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Speaker 1: still has a big role to play in the markets.

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Speaker 1: Passive is coming more and more eat F products a

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Speaker 1: link to fixed income, but active fixed income is really

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Speaker 1: still a high margin business for most asset managers. What

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Speaker 1: do you see in the city, mean, Mark, you totally

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Speaker 1: wired into the city, and what do you see in

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Speaker 1: terms of having the brain power moved to other European cities.

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Speaker 1: I don't see evidence of it yet? Is it there?

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Speaker 1: They continue plans aren't being triggered. We had Mark Arni

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Speaker 1: oppenion before the treasure and holding exactly that. And basically

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Speaker 1: you know a lot of businesses they're still waiting and seeing.

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Speaker 1: They still hope that Brexit won't happen, and there's a

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Speaker 1: chance that Brexit won't happen, and Marc Arni himself said

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Speaker 1: that there's a there's an there's a not negligible chance

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Speaker 1: that that that that we won't get Brexit um but

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Speaker 1: we could also get a fall out without a deal.

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Speaker 1: If you're in Global Wall Street asset managers are drowning

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Speaker 1: Comma not waving Mark Gilbert. It is the must read

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Speaker 1: of the day, working off of terrific work by Mackenzie.

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Speaker 1: We thank Mark Gilbert out of our Queen Victoria Street

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Speaker 1: studios this morning. One child joins us. Now, thanks very

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Speaker 1: much for being with us. I know you're coming to

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Speaker 1: us from Oxford in the United Kingdom. In Britain, what

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Speaker 1: is the mood right now about the process by which

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Speaker 1: Britain is selecting to leave is the European Union. That's

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Speaker 1: a good question. The mood is very confused. People have

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Speaker 1: everybody still is in a in a phase where they

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Speaker 1: think they have their own, their own their own, their

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Speaker 1: own separate plans. Theresa May has now negotiated the plan

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Speaker 1: to leave with the EU, but there are still still

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Speaker 1: a certain degree of confusion about whether that plan can

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Speaker 1: go can go through. She at the moment doesn't have

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Speaker 1: a majority for it, and she is battling hard to

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Speaker 1: get that majority. And my hunch is that we that

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Speaker 1: her chances are not that bad, contrary to what people

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Speaker 1: are expecting now, because you know, when it comes to

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Speaker 1: the vote, which could be in mid December UM or

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Speaker 1: a little earlier than that. When it comes to the vote,

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Speaker 1: people will then realize that this is really a take

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Speaker 1: it or leave it proposition. It has taken almost two

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Speaker 1: years to negotiate the whole, the whole, the whole agreement,

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Speaker 1: and neither the EU nor the British government are in

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Speaker 1: the mood to unravel these negotiations. So we are basicly

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Speaker 1: you know, it's in or out basically based on what

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Speaker 1: you know about the agreement and the reaction to the

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Speaker 1: agreement that there's very little positive that anyone has said

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Speaker 1: about it, and it seems as though every side has

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Speaker 1: decided that it is a terrible agreement. Does that in

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Speaker 1: itself tell you that it's not a bad agreement, because

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Speaker 1: if everybody disagrees with it, then that means there must

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Speaker 1: have been some compromise indeed, and so so it was

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00:24:28,520 --> 00:24:32,840
Speaker 1: was very much a a an exercise of compromise. She

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00:24:33,040 --> 00:24:35,960
Speaker 1: really cut through the middle the to the Brexit tears.

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00:24:36,000 --> 00:24:40,280
Speaker 1: Those in favor of a heart Brexit hated. Those who

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Speaker 1: want to remain in the U hated. I mean they

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Speaker 1: would have hated any agreement. And what they all have

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Speaker 1: in common, they didn't read the agreement. The agreement runs

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Speaker 1: to five from eighty five pages, and I know of

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Speaker 1: only a very few people who manage not only to

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00:24:53,000 --> 00:24:55,400
Speaker 1: read it, but to digest it fully. It's a very

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00:24:55,440 --> 00:24:58,240
Speaker 1: complex agreement with a lot of cross references, like all

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00:24:58,320 --> 00:25:02,240
Speaker 1: EU treaties are, and so this this, this is you know,

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00:25:02,680 --> 00:25:06,160
Speaker 1: they are basically, you know, reflecting their prejudices rather than

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00:25:06,240 --> 00:25:09,320
Speaker 1: than making an informed judgment on what they're actually you know,

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00:25:09,800 --> 00:25:13,920
Speaker 1: confronted with does she need a majority to affect brexit?

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Speaker 1: I mean one of the things is there's a set

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Speaker 1: of minorities. I get that, but does she need to

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Speaker 1: find a majority to get this done? She needs a

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00:25:23,040 --> 00:25:26,240
Speaker 1: majority for this deal to be ratified. This is a

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Speaker 1: deal that requires ratification. That means approval by both the

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00:25:29,400 --> 00:25:33,360
Speaker 1: UK Parliament and the European Parliament. And if that's ratified,

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Speaker 1: then this deal, this Brexit in a way it's negotiated,

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Speaker 1: comes into effect now under the rules of the EU

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Speaker 1: and of the treaty that you know that is this

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Speaker 1: subject under If there is no ratification, the UK would

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Speaker 1: still leave, uh Ed would still leave without the deal,

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Speaker 1: and that means a very abrupt deal, a sudden, sudden

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Speaker 1: stop to trading possible. Possible because the trading relationship that

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Speaker 1: that existed will cease to exist. They both sides would

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00:26:01,280 --> 00:26:03,840
Speaker 1: have to switch to w t O rules, but they

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00:26:03,840 --> 00:26:07,800
Speaker 1: don't have customs to facilities to handle this. The ports

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00:26:07,800 --> 00:26:11,840
Speaker 1: of Dover and Calais cannot handle customs, so much of

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00:26:11,880 --> 00:26:14,280
Speaker 1: the UK trade might be affected. So there would be

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00:26:14,400 --> 00:26:18,919
Speaker 1: significant short term, short term disruption. It will be funded

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00:26:18,920 --> 00:26:20,959
Speaker 1: out in the long run, but in the short run

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Speaker 1: it will be very messy with US as we transition

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Speaker 1: to Germany. Here we can also transition into a data

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Speaker 1: CHECKPIM negative five hundred and two five one seven SMB

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00:26:32,200 --> 00:26:38,680
Speaker 1: down negative, the VIX twenty three point zero three up

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Speaker 1: two point nine three points of both going un Does

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Speaker 1: the future of Italy and Italy's government run through Berlin?

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Speaker 1: I don't think it will. I think people have made um.

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Speaker 1: You know, people are overestimating the power of Germany, both

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00:26:56,600 --> 00:26:59,879
Speaker 1: to influence the future of the EU and to influence

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Speaker 1: of the politics of other member states. What The simple

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Speaker 1: truth is that the Eurozone hasn't worked out for Italy.

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Speaker 1: It has been in the Eurozone for almost twenty years.

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00:27:09,040 --> 00:27:12,080
Speaker 1: There has been virtually no growth. Um It's not that

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00:27:12,160 --> 00:27:14,280
Speaker 1: you can blame the euro for this. You can also

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00:27:14,320 --> 00:27:17,639
Speaker 1: blame success of Italian governments for this, But for to

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Speaker 1: make Italy basically you know, happy and you know successful

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00:27:21,520 --> 00:27:26,120
Speaker 1: in the Eurozone would require policies that that no Italian

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Speaker 1: governments have implemented over the last twenty years. So people

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Speaker 1: are asking, and I'm asking myself is this a sustainable proposition?

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Speaker 1: And I don't think it is. And the question is

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Speaker 1: how does this lack of sustainability the rise in you know,

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Speaker 1: the new we expect the dead level to rise again.

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Speaker 1: How does this lack of sustainability play out? Will it

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Speaker 1: be made sustainable? I will Italy change his policies or

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Speaker 1: will it eventually leave the euro or will it do

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Speaker 1: something in between in like introducing a parallel county and

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Speaker 1: live with dual counties for so a certain well as

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Speaker 1: a sort of a step towards euro exit. These are

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00:27:58,440 --> 00:28:01,480
Speaker 1: all possibilities, Wolf game, We've got to leave it there

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Speaker 1: due to the markets. Wolf came Moncha with this founder

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Speaker 1: of FT Deutsche Land and their editor for years of

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Speaker 1: course writing in the ft from euro Intelligence. Thanks for

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00:28:11,359 --> 00:28:15,760
Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe and listen to

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00:28:15,920 --> 00:28:21,639
Speaker 1: interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.

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Speaker 1: I'm on Twitter at Tom Keane before the podcast. You

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00:28:25,560 --> 00:28:28,960
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio