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Speaker 1: Yea. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane

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Speaker 1: jay Ley. 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 US

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Speaker 1: economic growth is set to slow to two and a

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Speaker 1: half percent, down from two point nine percent as according

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Speaker 1: to Goldman Sachs. They cite fading fiscal stimulus as well

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Speaker 1: as multiple rate hikes. Let's find out more from Brett Ryan.

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Speaker 1: He is Deutsche Banks senior economist and he joins me

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Speaker 1: in studio. Brett, thanks very much for being here. Happy

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Speaker 1: New Year to you. Maybe just explain from your perspective

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Speaker 1: why it is that so many analysts economists are actually

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Speaker 1: pulling down their estimates for economic growth. No wars, thank

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Speaker 1: you for having mere of the program. Um. Basically, uh,

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Speaker 1: you know, I think everybody expects the the economy is

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Speaker 1: slow next year as as the fiscal stimulus starts to

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Speaker 1: come off. Would agree, I would agree with that. Uh,

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Speaker 1: But the main thing is that consumer spending is still

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Speaker 1: the engine of the economy. It's still se of GDP. Uh.

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Speaker 1: Everybody expects housing to remain weak because mortgage rates are high,

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Speaker 1: the Fed's hiking rates UM. But the housing is only

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Speaker 1: three point one percent of the economy compared to six

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Speaker 1: percent where it was in the last cycle, and we

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Speaker 1: don't we certainly don't have the leverage on it um.

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Speaker 1: Non residential investment, which is CAPEX business spending that's been

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Speaker 1: that was on a tear in the first half of

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Speaker 1: this year of CAPEX is software and technology, so that

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Speaker 1: should continue at a healthy pace, but not as strong

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Speaker 1: as it was last year. Because why us that? Why

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Speaker 1: do you feel that there's going to be less spending?

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Speaker 1: And you know you mentioned housing. Okay, that's interest rates,

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Speaker 1: We'll get to that in a second. But why less

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Speaker 1: Why less spending on on investment and software? And right, well,

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Speaker 1: I think there was there was an initial rush in

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Speaker 1: the wake of the tax bill. UM. Certainly it seems

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Speaker 1: that we're in these little mini cycles with CAPEX that

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Speaker 1: are like accelerated depreciation. Yeah, it's exactly bonus appreciation UM.

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Speaker 1: And it seems like we're in like two to three

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Speaker 1: year cycles now for CAPEX. So I wouldn't our forecast

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Speaker 1: is fairly conservative. I think we're we have capex growing

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Speaker 1: it around three percent next year. But really it's it's

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Speaker 1: it's the question is, you know, do we slow from

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Speaker 1: three point one percent growth in eighteen to two percent

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Speaker 1: next year or is it more of a gradual three

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Speaker 1: percent to two and a half, you know, two point four,

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Speaker 1: which is what what our number is. And that's kind

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Speaker 1: of going to determine where the where the FED is

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Speaker 1: going to shake out this year, next next year. Okay,

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Speaker 1: So with a two point four percent estimate for economic

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Speaker 1: growth in how many rate hikes and what are the

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Speaker 1: path to those rate hikes? Well, I mean, in our

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Speaker 1: view it should be it should be three rate hikes, um,

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Speaker 1: if we're gonna be growing at two point four percent

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Speaker 1: next year. Uh and core inflation um being above the

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Speaker 1: Fed's target. That's the other key there. Um. It's it's

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Speaker 1: pretty easy to get to two point one percent on

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Speaker 1: core core PC inflation. I think in you know, it

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Speaker 1: becomes obviously it's a little bit more in doubt now

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Speaker 1: the markets not pricing any FED hikes for next year,

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Speaker 1: and some parts of the curve or inverted um telling

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Speaker 1: you that the market is now expecting rate cuts two

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Speaker 1: point five for the two year and point five for

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Speaker 1: the three year al right, so they're saying I'm not

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Speaker 1: gonna be hiking much at all, um, But you know,

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Speaker 1: these things can change quickly. Uh. And I think the

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Speaker 1: risk markets and yields may have gotten head of where

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Speaker 1: the economic data have been. Um. Case in point, the

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Speaker 1: Chicago p m I last week was at sixty five.

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Speaker 1: That's still a very healthy leve manufacturer. But I can

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Speaker 1: I can you know, I can see your Chicago fed

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Speaker 1: with the Kansas City FED report and raise you of

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Speaker 1: Philadelphia or an Empire manufacturing report. Right, so I'll give you,

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Speaker 1: I'll give you a filliant Philly and phillion. New York

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Speaker 1: have slow, but there's still firm firmly in growth territory.

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Speaker 1: The Richmond was the one that really kind of surprised

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Speaker 1: people last week. But I would say that Richmond was

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Speaker 1: more locally driven. Um. But yeah, it's to the extent

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Speaker 1: that do finite the tightening that does the fight tightening

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Speaker 1: of financial conditions. Right now, how much does that lead

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Speaker 1: bleed over into the real economy. And that's that's really

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Speaker 1: what people are doing right now in terms of the

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Speaker 1: growth forecast. Now, even the thing that I find it's

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Speaker 1: not an intercessily stock market, it's investment grade credit spreads,

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Speaker 1: and that's what really the Fed's gonna be watching. That's

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Speaker 1: what we're watching, um. And right now, Yeah, if if

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Speaker 1: the credit spreads say wide where they are, let's call it,

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Speaker 1: you know, a hundred and fifth two d and sixty

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Speaker 1: basis points over treasuries, Yeah, you could seek growth slowing

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Speaker 1: to a low two percent as opposed to a mid

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Speaker 1: two percent range. Are lenders being compensated for this spread? Um?

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Speaker 1: You know? At this point, I think when you look

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Speaker 1: at imbalances out there the economy, it's not like the

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Speaker 1: household last time. It's corporate debt and so at a

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Speaker 1: level right at record levels. But from the FED Senior

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Speaker 1: Loan Officer to survey, they're still easing lending standards two corporates.

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Speaker 1: So I don't know if lenders are being compensated just yet.

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Speaker 1: Does that concern you? Um? Actually, is the fact that

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Speaker 1: that there's still there's still be easing credit standards to

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Speaker 1: corporates is a positive for cap bacs. And you know

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Speaker 1: it's not like there you know, there's been a ton

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Speaker 1: of demand out there. UM. So earlier on in for

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Speaker 1: exactly earlier on in the cycle. So UM, you know,

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Speaker 1: there's still profits are still at least in the deeper

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Speaker 1: profits are up ten percent year over a year. Companies

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Speaker 1: are doing fairly well, and you know, risk markets seem

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Speaker 1: to have have sort of priced in now zero to

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Speaker 1: negative profit growth next year. I think it's just gotten

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Speaker 1: a little ahead of itself. The reality is probably somewhere

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Speaker 1: in between. It's not going to be great, but it's

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Speaker 1: not going to be off a cliff either. Speak a

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Speaker 1: little bit about job growth and wage I guess you

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Speaker 1: could call it inflation, but not really. What do you see?

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Speaker 1: I mean, does that make it more difficult to do

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Speaker 1: your job when you see almost full employment in the

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Speaker 1: economy and yet you don't see a surge in acceleration

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Speaker 1: and inflation? Yeah, I mean this has been you know,

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Speaker 1: this has been the case throughout this cycle, and it's

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Speaker 1: been sort of you know, confounded economists. Why is the

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Speaker 1: Phillips curve so flat in this cycle versus other cycles?

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Speaker 1: And you know, there are many arguments for that. I

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Speaker 1: think the main thing to keep it not key in

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Speaker 1: perspective here is that you know, at three point seven

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Speaker 1: percent unemployment rate, we're generating non farm payroll growth in

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Speaker 1: the private sectors one point nine percent year every year.

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Speaker 1: With three percent wage inflation and thirty four and a

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Speaker 1: half hours worked on average, that's generating four point nine

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Speaker 1: percent year over year nominal income growth. So you know,

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Speaker 1: not only nominal income growth is what what you make

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Speaker 1: is then what you spend, right, and the combination of

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Speaker 1: hours and wages and job growth, what you're gonna see

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Speaker 1: is job growth slow because we're getting near the kind

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Speaker 1: of the limits in terms of labor supply and wage growth.

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Speaker 1: You're starting to see now take up and grind higher.

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Speaker 1: UM three percent is generally what FED officials would consider

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Speaker 1: um consistent with two percent core pc inflation targets. So

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Speaker 1: it's taken a while, and it's but finally, yes, yes,

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Speaker 1: but we're finally getting to a point where you're seeing

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Speaker 1: their response in wages to a tight labor market. It's

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Speaker 1: not roaring, but you know you're seeing the response. Do

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Speaker 1: you think you could characterize it as a lost decade,

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Speaker 1: just as there was a lost decade in Japan? Um? No,

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Speaker 1: certainly not. Japan has had seven recessions over the last

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Speaker 1: thirty years. Um. You know, the US has managed to

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Speaker 1: avoid that. Uh, And all the while the US has

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Speaker 1: been able to raise interest rates, so Japan has been

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Speaker 1: stuck at zero. So I would I would certainly wouldn't

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Speaker 1: say it's a bit of lost decade. And you know,

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Speaker 1: it's quite impressive that we've come from a ten percent

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Speaker 1: unemployment rate down to three point seven percent now, even

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Speaker 1: though it took you know, initially a long while to

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Speaker 1: get started. What do you think is the biggest challenge

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Speaker 1: for the US economy in t I think it's it's

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Speaker 1: it's really it's on the policy front. UM. I think

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Speaker 1: we have you know, the things that are weighing on

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Speaker 1: the market right now are one trade China US trade

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Speaker 1: issue is UH, if you do if talks do not,

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Speaker 1: you know, produce something on March one, and those tariffs

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Speaker 1: go to two fifty billion goods, that's a seventy billion

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Speaker 1: dollar tax on on US and that's gonna get passed

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Speaker 1: onto businesses and consumers. UM. So that certainly hurts with

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Speaker 1: in terms of investment or the uncertainty causes UM causes

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Speaker 1: you to pause on capex plans, UH, that sort of thing. UM.

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Speaker 1: Second I would say would be you know, obviously international Italy, Brexit, UM.

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Speaker 1: Those issues that are kind of been been a constant

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Speaker 1: you know in the background destabilizing issues. Um, and then

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Speaker 1: you know, the last thing I would say is, uh,

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Speaker 1: you know, really a corporate loss of confidence would be

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Speaker 1: would be the the main thing where corporation is to say,

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Speaker 1: you know, with all the policy and certainty, that's it.

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Speaker 1: I'm I'm you know, hunkering down and not investing in

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Speaker 1: my busines this or of being a layoff workers. But

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Speaker 1: it doesn't seem we're far from that point. I mean

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Speaker 1: the labor market there is nothing. There is very little

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Speaker 1: signs that's slowly all right, thanks very much, really well done.

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Speaker 1: I appreciate it. All three of those things going to

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Speaker 1: be front and center. Appreciated that. Brett Ryan is Deutsche

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Speaker 1: Bank's senior US economists, joining us here in the Bloomberg

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Speaker 1: Interactor Brokers Studios mergers and acquisitions. The hallmark, perhaps foreen

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Speaker 1: is going to be the mega deal. Those are the

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Speaker 1: deals that have valuations of five billion dollars or more.

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Speaker 1: Here to tell us what to expect in twenty nineteen,

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Speaker 1: having learned everything about the mergers and acquisitions industry because

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Speaker 1: he basically helped to create it, is Robert Profusak. He

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Speaker 1: is the global chair of Mergers and Acquisitions at Jones Day.

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Speaker 1: Thanks very much for being here, Rob Profusak much appreciated.

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Speaker 1: Happy New Year to you. Happy New Year too, it was.

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Speaker 1: It was a pretty happy new year for the world

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Speaker 1: emerges and acquisitions, wasn't it too? Yeah, But it was

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Speaker 1: sort of a tale of two halves. The first half

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Speaker 1: was record setting, it was fabulous, and the third quarter

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Speaker 1: started to get bumpy a little bit, I think, mostly

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Speaker 1: because of the trade issues um and uncertainty about evaluation.

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Speaker 1: And of course the last month or so has been

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Speaker 1: very bumpy with all the volatility, but it's it was

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Speaker 1: still a third third highest year ever, almost four trillion

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Speaker 1: dollars of transactions. That's a mind boggling You can't even

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Speaker 1: I don't know what I mean. Four trillion. Couldn't line

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Speaker 1: up four trillion things, And actually I have no idea

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Speaker 1: what it really means. A lot, a lot I like that.

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Speaker 1: That's the technical term. You mentioned, the word valuation, and

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Speaker 1: I want to call upon your expertise and your experience

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Speaker 1: in the world of valuation, because when we quote daily

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Speaker 1: stock prices or the price of any asset on a

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Speaker 1: daily basis, it is not for the whole entity, whereas

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Speaker 1: when a company or a buyout firm puts forth an

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Speaker 1: offer to purchase an entire company. It's like buying a

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Speaker 1: car versus buying the steering wheel. There's a whole different

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Speaker 1: valuation process that is involved, and I'm just wondering if

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Speaker 1: you could share a little detail about that. Yes, well,

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Speaker 1: the valuation the M and A setting is different. It's

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Speaker 1: very different. If you talk to your average analyst about

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Speaker 1: on Wall Street, it's a multiple of earnings. It's earnings

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Speaker 1: growth that sets them multiple. They look at that. That's

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Speaker 1: not so important in M and A is it's a

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Speaker 1: more fundamental valuation. It looks at the cash flow of

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Speaker 1: the business and if we pay this and we spend

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Speaker 1: that much capital, what return are we getting on our

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Speaker 1: capital investment. In a sense, it's it's similar, but it

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Speaker 1: really is a function of the return on the investment

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Speaker 1: you're making. M and A really is just the alternative

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Speaker 1: to building something yourself. So you could build that car

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Speaker 1: if you bought a steering wheel, and you bought the

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Speaker 1: tires and you bought all this stuff, But it would

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Speaker 1: be pretty hard to do. You know, you'd have to

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Speaker 1: spend a lot of time and you really wouldn't know

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Speaker 1: what you were doing, and you weren't sure what you'd

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Speaker 1: get when you came out with it. Out of it.

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Speaker 1: If you go to the dealership and buy that car,

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Speaker 1: you know what you're getting, so you're willing to pay

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Speaker 1: a premium for that. That's what companies do. So the

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Speaker 1: valuation in a sense is more fundamental. The markets are

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Speaker 1: more fickle. Uh, they're They're just based on I'm willing

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Speaker 1: to invest this much on the assumption somebody will buy

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Speaker 1: it for more. That's it. It isn't a question of

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Speaker 1: really and a hope that I got to return on

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Speaker 1: my capital. But as we've seen in the last quarter,

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Speaker 1: you know, it is what it is. Well, if it

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Speaker 1: is what it is in the last quarter, what do

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Speaker 1: you think the change in stock market valuations has done,

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Speaker 1: if anything, to those efforts to buy and sell companies?

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Speaker 1: Well things things look, the fundamentals of M and A

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Speaker 1: are driven by this investment decision. Am I better off

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Speaker 1: investing in a new plant or buying one? And to

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Speaker 1: make it simple, um, and usually it's better to to

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Speaker 1: buy than to build. You've got it happens quicker, you've

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Speaker 1: got more certainty, you know what you're getting, at least

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Speaker 1: you think you know what you're getting. Let me about

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Speaker 1: it that way. Um, the by versus build decisions very simple.

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Speaker 1: Um So, but when and M and A is driven

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Speaker 1: in these in this world, that's why basis becomes so

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Speaker 1: fundamental by technology and globalization. It isn't really the credit

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Speaker 1: markets does that and the other thing stuff that guys

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Speaker 1: like me talk about. Yeah, on the fringes that matters,

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Speaker 1: but it's a more fundamental process than that. Um Right now.

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Speaker 1: You know with with evaluation is being uncertain. If you're

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Speaker 1: a seller and your ten percent higher a month ago,

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Speaker 1: you're gonna say I better wait. So it will have

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Speaker 1: a short term effect, not a long term effect. Now,

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Speaker 1: some of the other things that are going on the

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Speaker 1: headline issues probably will be stimulative. If there is a

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Speaker 1: deal with China or if there's we say there's a

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Speaker 1: deal with China, and there's a difference between saying it

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Speaker 1: and having one. I think, um, you're gonna have a

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Speaker 1: real spirit of activity. China was a big player in

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Speaker 1: North American seen that door was it's safe to say,

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Speaker 1: really slam shut in. It went from three hundred billion

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Speaker 1: dollars of transactions in North America to just just a

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Speaker 1: tiny fraction of that last year. If that door is reopened,

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Speaker 1: there'll be a blizzard of activity here because Chinese companies,

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Speaker 1: despite putting all the politics aside, want the market, they

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Speaker 1: want the technology, they want to know how, they want

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Speaker 1: all those things, and right now they are foreclosed from

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Speaker 1: doing it. You know, the Broadcom situation last year was

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Speaker 1: really important symbolically. It meant we need to reset this balance.

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Speaker 1: What one thing that I find interesting is this sort

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Speaker 1: of inner dynamics of this year's morgers and acquisitions, small

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Speaker 1: deals one out Goldman Sacks one, for example, with being

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Speaker 1: the top advisor by dealing with small deals, not big deals.

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Speaker 1: Do you think that will continue next year as it

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Speaker 1: becomes more politically fraught to get some of these big

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Speaker 1: deals done. Well, it's hard to tell. This administration is

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Speaker 1: much more accommodating in terms of anti trust issues. Um,

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Speaker 1: much more accommodating. Now that isn't to say unless it's

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Speaker 1: from China, right, or anything from China, um. But in

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Speaker 1: terms of the China influence, it's the doors is shut.

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Speaker 1: And you can say that's political if you want, doesn't matter.

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Speaker 1: It's shut. So who cares? Who shut it? You know? Um?

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Speaker 1: And I think if you know you there's going to

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Speaker 1: be some sort of resolution of that. Whether that door

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Speaker 1: is wide open or just partially opened, I don't know. Um,

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Speaker 1: But there were fewer bigger deals. Um. There were a

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Speaker 1: lot of big deals in the first half of the year. UM,

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Speaker 1: and that was mostly I think because the sense of

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Speaker 1: people like me, which you can get. You can get

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Speaker 1: big deals through this administration, whereas the Obama's administration, especially

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Speaker 1: in the end of it, was very difficult. So what

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Speaker 1: we'll see, you know, I think there's there's so much capital,

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Speaker 1: and there's so there's so much to do with it.

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Speaker 1: I don't think it's it's right to look at a

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Speaker 1: particular segment of a particular period and come to some conclusion. Um,

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Speaker 1: you know, that's what we do. I know. The overall

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Speaker 1: number of deals is still down year over year this year,

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Speaker 1: which is kind of an interesting statistic, even though the

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Speaker 1: third biggest year ever in terms of dollar volume. Talk

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Speaker 1: if you can about activist investors and their role in

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Speaker 1: mergers and acquisitions, Well, it's a we're in this we're

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Speaker 1: in a quiet period of activism, so to speak. There

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Speaker 1: is a without getting real technical about it, we're just

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Speaker 1: about to enter a period that if an activist wants

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Speaker 1: to nominate somebody to a board of directors, they get

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Speaker 1: the right to do that. It's generally January and into

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Speaker 1: part of February. You're going to see a lot of that.

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Speaker 1: And you know, this story is easier with this decline

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Speaker 1: in the marketplace. You know, show me the money and

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Speaker 1: do something with it. Now. You know, the traditional refrain

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Speaker 1: of the activists has been level up your balance, she

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Speaker 1: pay out the cash. Well, companies have been doing that.

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Speaker 1: I mean, last we're gonna have a trillion dollars buybacks

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Speaker 1: this year. A trillion again once again, that number that

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Speaker 1: we can't even fathom. We don't know what it means.

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Speaker 1: So that's not so much. But there's still a lot

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Speaker 1: to do. A lot of the story about activism probably

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Speaker 1: will be sell the company, break it up, meaning more

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Speaker 1: M and A. What are the top industries that are

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Speaker 1: going to get beset by mergers and acquisitions in it's easy,

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Speaker 1: it's easier to say which businesses won't be that active.

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Speaker 1: I don't think we're gonna see we have despite the

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Speaker 1: precipitous decline in oil prices. I don't think I think

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Speaker 1: we're gonna a rush of M and a in the

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Speaker 1: oil PA in the fracking patch, because it already happened, Yeah,

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Speaker 1: it happened. It already happened to media, and they're not

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Speaker 1: as levered as they were, you know, when this happened

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Speaker 1: last time. So I don't think you're gonna have a

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Speaker 1: lot of it and people are gonna look at the

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Speaker 1: prices and say, not a good time to sell. Um.

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Speaker 1: Everybody else is in about the same boat, you know,

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Speaker 1: the oil the oil stocks are are different. I think

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Speaker 1: you're gonna see a huge amount of technology that's just

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Speaker 1: the name, that's just the name of the game and technology.

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Speaker 1: When you look at the big tech companies, they are

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Speaker 1: Bill Weathers for what goes on in the industry in general.

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Speaker 1: You've got to keep buying things. You've got to get

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Speaker 1: mark you've got to get additional name brands and all

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Speaker 1: that stuff as part of your portfolio. Industrial companies are

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Speaker 1: still are still globalizing. So you're going to see that

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Speaker 1: Europe is a little bit less certain. I and think

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Speaker 1: until we have some greater clarity on what Brexit means,

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Speaker 1: hard to tell. It really is hard to tell. Thank

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Speaker 1: you very much for being with us, Always a pleasure.

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Speaker 1: Thanks for your thoughts and your insight and happy new

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Speaker 1: year to Robert Profuseck. He is the global chair of

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Speaker 1: Mergers and Acquisitions for Jones Day, giving us not only

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Speaker 1: his outlook for but a little bit of description on

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Speaker 1: what happened in We are broadcasting from the Bloomberg Interactor

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Speaker 1: Broker's studios. And here's an acronym for you. C P

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Speaker 1: t p P the Comprehensive and Progressive Agreement for Trans

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Speaker 1: Pacific Partnership. It entered into force yesterday. Seven of the

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Speaker 1: eleven members have ratified. This practice reduces tariffs among countries

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Speaker 1: such as Mexico, Japan, New Zealand, Canada, Australia and Vietnam.

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Speaker 1: Here to help us understand the implications, Meredith Sumter, Eurasia

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Speaker 1: Group Head of Research, Strategy and Operations. Meredith, thank you

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Speaker 1: very much for being with us. Happy new year to you,

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Speaker 1: and will it be a happy new year for those

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Speaker 1: member states that have actually ratified this agreement? What will

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Speaker 1: happen as a result? Thanks for having met him. We

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Speaker 1: should expect that it will be a happy new year

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Speaker 1: and happy between nineteen four those member countries. We should

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Speaker 1: expect a massive rush of immediate liberalization among those countries.

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Speaker 1: As you said initial cuts. The majority of the initial

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Speaker 1: cuts went into effect UM yesterday, but the substantial amount

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Speaker 1: over of terrors will either be cut or eliminated by tomorrow.

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Speaker 1: We're at the start of the process by which the

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Speaker 1: remaining tariff lines for these countries will be drawn down

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Speaker 1: annually over a period of several years. And when it's

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Speaker 1: all said and done, perhaps over the next five or

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Speaker 1: six years, we could see most cpt p P member

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Speaker 1: countries will see nearly of tariffs amongst them eliminated. So

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Speaker 1: will this be enough to I guess, create a new

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Speaker 1: superpower or do kind of alliance when it comes to

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Speaker 1: trade that does not include the US. It certainly will

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Speaker 1: be an economic force. And the key question is when

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Speaker 1: a Washington wake up to realizing that it is outside

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Speaker 1: of what is likely to be the most high value, generating,

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Speaker 1: cutting edge trade pacts UH that the twenty one century

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Speaker 1: so far will see. This is it the third largest

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Speaker 1: trade pack behind NAFTA and UH the European UM Single Market.

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Speaker 1: But at the same time it comprises UH important crucial

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Speaker 1: rules that are meant to address many of the industrial

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Speaker 1: market access concerns of the compan administration. They're important chapters

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Speaker 1: on leveling that the playing field with state owned enterprises.

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Speaker 1: There are also critical new rules UH concerning trade and

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Speaker 1: investment related to the digital economy. Now this is important

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Speaker 1: because the digital economy, of course, is where economic activity

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Speaker 1: is headed. But it's also notable that these sorts of

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Speaker 1: rules don't necessarily exist elsewhere, either in international UH institutions

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Speaker 1: like the w t O or another notable trade pacts.

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Speaker 1: If the US wanted in, if they, using your words,

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Speaker 1: wake up to what they are missing out on, would

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Speaker 1: this pact have them? So there are certain several members

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Speaker 1: that really do want the US to come back, because

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Speaker 1: adding the US economy to this trade pact will significantly

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Speaker 1: expand its dynamic force. But at the same time, the

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Speaker 1: US will have to negotiate to get back into the pact.

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Speaker 1: Several of these countries have because the US decided to

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Speaker 1: leave the pack, many of these sort of stringent provisions

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Speaker 1: that Washington had advocated for have effectively been suspended. So

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Speaker 1: you see some reports that some of these member countries,

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Speaker 1: because the US has pulled out of the pact, are

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Speaker 1: not subject to as high levels of competition UH with

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Speaker 1: US companies as they would have been otherwise. So Japan

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Speaker 1: aside and some other key members aside, you may see

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Speaker 1: some of the existing cpt p P members drag their

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Speaker 1: feet a bit should Washington decide that it wants to

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Speaker 1: re enter. What role do you believe countries such as Colombia, Thailand,

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Speaker 1: South Korea, even Indonesia and maybe even the United Kingdom

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Speaker 1: will play in the future of this pact. Well, certainly,

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Speaker 1: now that we've had the cpt p P ratified member,

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Speaker 1: countries are now looking at ways to expand the pack.

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Speaker 1: So Columbia has already applied to join, Thailand is keenly interested,

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Speaker 1: South Korea's indicated interest, uh, the UK and Indonesia have

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Speaker 1: expressed interest. But watch here, because while Thailand has the

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Speaker 1: most to lose from being outside the cpt p P

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Speaker 1: given its heavy role in regional supply chains and the

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Speaker 1: increased competition that will come to its economy from other

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Speaker 1: Southeast Asia cpt P PEAK countries, except that Thailand will

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Speaker 1: move first to try to enter, the UK joining will

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Speaker 1: likely not happen for the foreseeable future, um as the

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Speaker 1: United Kingdom will not be able to join until after

429
00:25:13,240 --> 00:25:17,800
Speaker 1: the post Brexit transition phase. It's over the one country

430
00:25:17,800 --> 00:25:20,960
Speaker 1: though that that people should watch over the long term

431
00:25:21,080 --> 00:25:25,240
Speaker 1: is China. China is watching this trade pac closely, but

432
00:25:25,359 --> 00:25:28,200
Speaker 1: for for now in the short term, will remain focused

433
00:25:28,680 --> 00:25:31,879
Speaker 1: on the less ambitious trade pact it is negotiating with

434
00:25:31,920 --> 00:25:36,040
Speaker 1: Asian countries and trading partners. This is the regional comprehensive

435
00:25:36,119 --> 00:25:40,480
Speaker 1: and an economic partnership. Now that aside, Beijing's interests will

436
00:25:40,520 --> 00:25:44,880
Speaker 1: be peaked by a successful cpt p P. However, as

437
00:25:45,000 --> 00:25:48,600
Speaker 1: ultimately China's priority is to be at the center of

438
00:25:48,640 --> 00:25:51,679
Speaker 1: the Asia Pacific's economic architecture. They will not want to

439
00:25:51,720 --> 00:25:54,080
Speaker 1: be outside of this trade pact and will look for

440
00:25:54,119 --> 00:25:57,760
Speaker 1: some way to align with it, if not to join. Meredith,

441
00:25:58,000 --> 00:26:00,760
Speaker 1: I want to sort of ease the do able knowledge

442
00:26:00,800 --> 00:26:06,600
Speaker 1: that you have having been a diplomat in Beijing, fascinating role.

443
00:26:06,720 --> 00:26:09,520
Speaker 1: Especially right now, I'm trying to get a sense of

444
00:26:09,600 --> 00:26:12,600
Speaker 1: how much we should really give credence to the softening

445
00:26:12,640 --> 00:26:15,480
Speaker 1: of trade tensions between the US and China based on

446
00:26:15,560 --> 00:26:20,080
Speaker 1: a Twitter post by President Trump and some utterances from

447
00:26:20,080 --> 00:26:25,160
Speaker 1: officials in Beijing, is this real? I would say, for now,

448
00:26:25,200 --> 00:26:28,399
Speaker 1: pay less attention to the tweets and more attention to

449
00:26:29,280 --> 00:26:32,520
Speaker 1: any sort of announcements and the detail of announcements that

450
00:26:32,600 --> 00:26:35,800
Speaker 1: actually come from the negotiators themselves. So with that I

451
00:26:35,800 --> 00:26:39,640
Speaker 1: would watch closely in the US as to what U.

452
00:26:39,720 --> 00:26:43,240
Speaker 1: S TR Bob Letitheiser might put out in terms of

453
00:26:43,280 --> 00:26:47,199
Speaker 1: the progress of those negotiations coming through. Certainly, from my

454
00:26:47,359 --> 00:26:52,680
Speaker 1: perspective watching China, I have seen little into no indication

455
00:26:52,840 --> 00:26:56,840
Speaker 1: yet that President Shijun king uh is ready to make

456
00:26:57,600 --> 00:27:01,040
Speaker 1: some of these significant structural reforms to his state backed

457
00:27:01,040 --> 00:27:06,520
Speaker 1: economy that Washington is demanding. President Ji Jim Ping gave

458
00:27:06,600 --> 00:27:10,760
Speaker 1: a notable policy speech on the eighteenth of December uh

459
00:27:10,880 --> 00:27:13,600
Speaker 1: lauty in the forty Years of Reform and Opening, and

460
00:27:13,640 --> 00:27:16,600
Speaker 1: he used that speech not to signal that there would

461
00:27:16,600 --> 00:27:21,320
Speaker 1: be structural reforms to the economy, but rather to champion

462
00:27:21,480 --> 00:27:24,320
Speaker 1: the Party's role in the economy and the success of

463
00:27:24,840 --> 00:27:30,240
Speaker 1: China's economy under his watch. Murder The next year will

464
00:27:30,320 --> 00:27:35,320
Speaker 1: mark seventy years since Maltzi Tong led the Communist Party

465
00:27:35,320 --> 00:27:41,560
Speaker 1: to power. Is there any likelihood that nineteen will cause

466
00:27:42,280 --> 00:27:47,600
Speaker 1: leaders in China to reassess their economic program or will

467
00:27:47,640 --> 00:27:51,240
Speaker 1: it just bolster their efforts to push forward their China

468
00:27:51,320 --> 00:27:56,880
Speaker 1: First program. Certainly, Hi Jim Ping is perhaps the most

469
00:27:56,920 --> 00:28:01,800
Speaker 1: powerful leader that China has seen since and all indications

470
00:28:01,800 --> 00:28:06,160
Speaker 1: thus far indicate that, while they're likely, is UH some

471
00:28:06,359 --> 00:28:11,640
Speaker 1: grumbling and discontent among you know, party and policy circles

472
00:28:11,720 --> 00:28:16,200
Speaker 1: with the direction that Juan Pain is taking the economy.

473
00:28:16,280 --> 00:28:22,320
Speaker 1: So think less structural reform, certainly, more party control over

474
00:28:22,400 --> 00:28:27,720
Speaker 1: the functioning and the state economy, more control over civil society.

475
00:28:28,080 --> 00:28:33,000
Speaker 1: There are no alternatives to she UH, and it is

476
00:28:33,080 --> 00:28:35,760
Speaker 1: unlikely even if there is this discontent, we have seen

477
00:28:36,200 --> 00:28:38,640
Speaker 1: little sign that there is going to be anything but

478
00:28:38,800 --> 00:28:43,680
Speaker 1: more power consolidation UH and more political stability for China

479
00:28:43,760 --> 00:28:47,040
Speaker 1: under Juan Pain, which in a certain sense is positive

480
00:28:47,200 --> 00:28:49,200
Speaker 1: for markets, But if you think about it from an

481
00:28:49,240 --> 00:28:53,840
Speaker 1: economic reform perspective and with China's continued slowing and growth

482
00:28:54,360 --> 00:28:57,280
Speaker 1: over the long term, that doesn't look so good. Thank

483
00:28:57,320 --> 00:28:59,720
Speaker 1: you so much for being with us, Meredith start Uh,

484
00:28:59,800 --> 00:29:03,080
Speaker 1: your head of research, strategy and operations for your Asia group.

485
00:29:04,120 --> 00:29:06,080
Speaker 1: I want to bring in an expert when it comes

486
00:29:06,120 --> 00:29:10,440
Speaker 1: to looking at investments. Jack Ablin is the chief investment

487
00:29:10,520 --> 00:29:15,320
Speaker 1: officer and founding partner of Crescent Wealth Advisors. Jack Ablin,

488
00:29:15,400 --> 00:29:17,520
Speaker 1: Happy New Year to you and thank you for being

489
00:29:17,560 --> 00:29:21,680
Speaker 1: with us. Let's begin with your thoughts on US equities

490
00:29:21,760 --> 00:29:27,400
Speaker 1: are they expensive? US equities, unfortunately, pim are still a

491
00:29:27,440 --> 00:29:29,840
Speaker 1: little bit expensive when you look at them through the

492
00:29:29,920 --> 00:29:35,920
Speaker 1: lens of history. Um, the the one thing that perhaps

493
00:29:35,960 --> 00:29:41,560
Speaker 1: some bulls are latching onto is forward pees. That forward

494
00:29:41,600 --> 00:29:47,840
Speaker 1: pees look reasonable based on the next twelve months earnings projections.

495
00:29:48,600 --> 00:29:51,960
Speaker 1: But I would argue that only six months of those

496
00:29:51,960 --> 00:29:56,160
Speaker 1: projections are real. Uh, the Q three and Q four

497
00:29:56,280 --> 00:30:00,000
Speaker 1: probably haven't been revised downward to a point where they

498
00:30:00,120 --> 00:30:02,360
Speaker 1: a lot of sense. All right, So if you believe

499
00:30:02,400 --> 00:30:05,880
Speaker 1: that stocks in the United States are still perhaps expensive,

500
00:30:06,760 --> 00:30:11,240
Speaker 1: when will they cease being expensive? How much further do

501
00:30:11,320 --> 00:30:15,000
Speaker 1: they need to decline in value? It's you know, it's

502
00:30:15,040 --> 00:30:23,080
Speaker 1: hard to tell, just because markets oftentimes overshoot. Also, um,

503
00:30:23,120 --> 00:30:28,280
Speaker 1: you know, it's it's a timing thing. It's possible, for example, that, um,

504
00:30:28,320 --> 00:30:32,440
Speaker 1: you know, if the forward earnings are in fact true

505
00:30:32,760 --> 00:30:37,920
Speaker 1: and earnings could you know, miraculously be revised upward, which

506
00:30:38,000 --> 00:30:41,840
Speaker 1: of course they've been being revised downward. Um we could

507
00:30:41,920 --> 00:30:45,360
Speaker 1: we could also, um you know, get a cheap market

508
00:30:45,400 --> 00:30:49,880
Speaker 1: without too much pain. But my sense is, um, you know,

509
00:30:50,680 --> 00:30:53,880
Speaker 1: the foreign markets are actually fairly priced, and in fact,

510
00:30:53,960 --> 00:30:55,960
Speaker 1: I would in fact go so far as to say

511
00:30:56,040 --> 00:31:00,000
Speaker 1: emerging markets are down right cheap, down right cheap emerging

512
00:31:00,400 --> 00:31:04,560
Speaker 1: markets when it comes to their export quality, or are

513
00:31:04,600 --> 00:31:08,280
Speaker 1: you talking about companies that are focused on domestic consumption

514
00:31:08,640 --> 00:31:12,000
Speaker 1: in emerging market Yeah, it's um, well, I'm looking at

515
00:31:12,000 --> 00:31:15,920
Speaker 1: the index in general, but I would say, um, domestic

516
00:31:16,120 --> 00:31:19,680
Speaker 1: consumption is certainly a part of it, a big in fact,

517
00:31:19,760 --> 00:31:23,960
Speaker 1: an increasing part of it, which is encouraging news. But

518
00:31:24,080 --> 00:31:27,920
Speaker 1: you're right, Um, a lot of emerging market companies do

519
00:31:28,080 --> 00:31:31,720
Speaker 1: rely on global growth and global demand, and of course

520
00:31:32,360 --> 00:31:34,560
Speaker 1: that's something that's been called in a question over the

521
00:31:35,120 --> 00:31:38,400
Speaker 1: most recent couple of quarters. So now that leads you,

522
00:31:38,480 --> 00:31:41,520
Speaker 1: I would imagine to thoughts about the value of the

523
00:31:41,640 --> 00:31:47,640
Speaker 1: US dollar. It does, and I think here the US dollar,

524
00:31:48,040 --> 00:31:51,240
Speaker 1: which have certainly been driving the the S and P

525
00:31:51,720 --> 00:31:55,520
Speaker 1: versus emerging market trade over the last few years, UM

526
00:31:55,800 --> 00:31:59,800
Speaker 1: has probably gone as high as it's gonna go, largely

527
00:31:59,840 --> 00:32:05,840
Speaker 1: be because um, the central banks are now particularly broader,

528
00:32:05,920 --> 00:32:09,960
Speaker 1: now starting to close down a lot of their aggressive

529
00:32:10,000 --> 00:32:13,640
Speaker 1: policies and you know, who knows, maybe even start to tighten,

530
00:32:14,080 --> 00:32:18,840
Speaker 1: which could help boost the value of foreign currencies relative

531
00:32:18,920 --> 00:32:22,960
Speaker 1: to the US dollar over the coming twelve eighteen months.

532
00:32:23,000 --> 00:32:26,280
Speaker 1: So would that suggest that if you are an investor

533
00:32:26,360 --> 00:32:29,800
Speaker 1: that has dollars to spend, now is the time to

534
00:32:30,080 --> 00:32:37,680
Speaker 1: do so when it comes to purchasing assets outside the US, well,

535
00:32:37,720 --> 00:32:40,680
Speaker 1: you know that's uh. I think it's a tricky question

536
00:32:40,760 --> 00:32:44,920
Speaker 1: because we look at a multiple of factors and valuations.

537
00:32:44,960 --> 00:32:49,160
Speaker 1: Certainly one of them, I certainly wouldn't jump headlong into

538
00:32:49,160 --> 00:32:51,760
Speaker 1: a market that I didn't think, which you know, was cheap.

539
00:32:52,560 --> 00:32:55,240
Speaker 1: But in the other hand, there are fundamental factors like

540
00:32:55,560 --> 00:32:59,600
Speaker 1: you know, the economic backdrop, liquidity uh, and of course

541
00:32:59,680 --> 00:33:03,520
Speaker 1: moll entum um, none of which has really been too cooperative.

542
00:33:03,560 --> 00:33:06,880
Speaker 1: I will say on a momentum front, we do look

543
00:33:06,920 --> 00:33:11,720
Speaker 1: at the relative return of let's say international or emerging

544
00:33:12,400 --> 00:33:15,880
Speaker 1: versus the US, and you know, probably not a surprise

545
00:33:16,040 --> 00:33:20,200
Speaker 1: because the foreign markets did get hurt earlier in the year,

546
00:33:20,680 --> 00:33:23,760
Speaker 1: that they've actually been out performing on a relative basis

547
00:33:24,800 --> 00:33:28,280
Speaker 1: UH to the US. So I would say from that perspective,

548
00:33:28,440 --> 00:33:30,600
Speaker 1: if you've got money already in the market and it's

549
00:33:30,640 --> 00:33:35,000
Speaker 1: in US, yes, shifted it, keep your keep your position

550
00:33:35,040 --> 00:33:38,240
Speaker 1: in place, and shifted to the international markets. If you've

551
00:33:38,240 --> 00:33:41,479
Speaker 1: got dry powder and you're waiting to add risk, I

552
00:33:41,520 --> 00:33:44,320
Speaker 1: think there's probably still a little more time left on this.

553
00:33:44,680 --> 00:33:49,040
Speaker 1: On this move, you mentioned liquidity. What is your impression

554
00:33:49,080 --> 00:33:54,240
Speaker 1: of liquidity conditions? Liquidity unfortunately appears to be tightening. I

555
00:33:54,240 --> 00:33:57,560
Speaker 1: mean not just because of the FED, but also lenders

556
00:33:57,640 --> 00:34:03,040
Speaker 1: willingness to extend hash to borrow spends and invest um. Here,

557
00:34:03,080 --> 00:34:06,720
Speaker 1: we've seen credit conditions tighten if you look, for example,

558
00:34:06,760 --> 00:34:10,040
Speaker 1: at credit spreads, which is one of the main metrics

559
00:34:10,080 --> 00:34:13,640
Speaker 1: that I like to track, uh, and that really broke

560
00:34:13,719 --> 00:34:18,160
Speaker 1: down from our perspective in the first or second week

561
00:34:18,200 --> 00:34:22,840
Speaker 1: of October, uh, suggesting that uh, you know, it is

562
00:34:22,880 --> 00:34:27,480
Speaker 1: getting a little bit more difficult to uh borrow money

563
00:34:27,719 --> 00:34:30,719
Speaker 1: uh in these markets, not just on a you know,

564
00:34:30,840 --> 00:34:35,440
Speaker 1: nominal basis, obviously with interest rates potentially moving higher, but

565
00:34:35,600 --> 00:34:39,600
Speaker 1: also on a spread basis, as lenders require higher premium

566
00:34:39,840 --> 00:34:43,800
Speaker 1: to extend credit to lower quality borrowers. Jack Avelin is

567
00:34:43,840 --> 00:34:48,520
Speaker 1: the chief investment officer and founding partner of Crescent Wealth Advisors.

568
00:34:48,640 --> 00:34:52,839
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and

569
00:34:52,880 --> 00:34:58,239
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast

570
00:34:58,280 --> 00:35:02,520
Speaker 1: platform you prefer. I'm on Twitter at Tom Keene. Before

571
00:35:02,520 --> 00:35:06,360
Speaker 1: the podcast, you can always catch us worldwide. I'm Bloomberg

572
00:35:06,480 --> 00:35:06,760
Speaker 1: Radio