Speaker 1: Yea. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane
Speaker 1: jay Ley. We bring you insight from the best in economics, finance, investment,
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Speaker 1: economic growth is set to slow to two and a
Speaker 1: half percent, down from two point nine percent as according
Speaker 1: to Goldman Sachs. They cite fading fiscal stimulus as well
Speaker 1: as multiple rate hikes. Let's find out more from Brett Ryan.
Speaker 1: He is Deutsche Banks senior economist and he joins me
Speaker 1: in studio. Brett, thanks very much for being here. Happy
Speaker 1: New Year to you. Maybe just explain from your perspective
Speaker 1: why it is that so many analysts economists are actually
Speaker 1: pulling down their estimates for economic growth. No wars, thank
Speaker 1: you for having mere of the program. Um. Basically, uh,
Speaker 1: you know, I think everybody expects the the economy is
Speaker 1: slow next year as as the fiscal stimulus starts to
Speaker 1: come off. Would agree, I would agree with that. Uh,
Speaker 1: But the main thing is that consumer spending is still
Speaker 1: the engine of the economy. It's still se of GDP. Uh.
Speaker 1: Everybody expects housing to remain weak because mortgage rates are high,
Speaker 1: the Fed's hiking rates UM. But the housing is only
Speaker 1: three point one percent of the economy compared to six
Speaker 1: percent where it was in the last cycle, and we
Speaker 1: don't we certainly don't have the leverage on it um.
Speaker 1: Non residential investment, which is CAPEX business spending that's been
Speaker 1: that was on a tear in the first half of
Speaker 1: this year of CAPEX is software and technology, so that
Speaker 1: should continue at a healthy pace, but not as strong
Speaker 1: as it was last year. Because why us that? Why
Speaker 1: do you feel that there's going to be less spending?
Speaker 1: And you know you mentioned housing. Okay, that's interest rates,
Speaker 1: We'll get to that in a second. But why less
Speaker 1: Why less spending on on investment and software? And right, well,
Speaker 1: I think there was there was an initial rush in
Speaker 1: the wake of the tax bill. UM. Certainly it seems
Speaker 1: that we're in these little mini cycles with CAPEX that
Speaker 1: are like accelerated depreciation. Yeah, it's exactly bonus appreciation UM.
Speaker 1: And it seems like we're in like two to three
Speaker 1: year cycles now for CAPEX. So I wouldn't our forecast
Speaker 1: is fairly conservative. I think we're we have capex growing
Speaker 1: it around three percent next year. But really it's it's
Speaker 1: it's the question is, you know, do we slow from
Speaker 1: three point one percent growth in eighteen to two percent
Speaker 1: next year or is it more of a gradual three
Speaker 1: percent to two and a half, you know, two point four,
Speaker 1: which is what what our number is. And that's kind
Speaker 1: of going to determine where the where the FED is
Speaker 1: going to shake out this year, next next year. Okay,
Speaker 1: So with a two point four percent estimate for economic
Speaker 1: growth in how many rate hikes and what are the
Speaker 1: path to those rate hikes? Well, I mean, in our
Speaker 1: view it should be it should be three rate hikes, um,
Speaker 1: if we're gonna be growing at two point four percent
Speaker 1: next year. Uh and core inflation um being above the
Speaker 1: Fed's target. That's the other key there. Um. It's it's
Speaker 1: pretty easy to get to two point one percent on
Speaker 1: core core PC inflation. I think in you know, it
Speaker 1: becomes obviously it's a little bit more in doubt now
Speaker 1: the markets not pricing any FED hikes for next year,
Speaker 1: and some parts of the curve or inverted um telling
Speaker 1: you that the market is now expecting rate cuts two
Speaker 1: point five for the two year and point five for
Speaker 1: the three year al right, so they're saying I'm not
Speaker 1: gonna be hiking much at all, um, But you know,
Speaker 1: these things can change quickly. Uh. And I think the
Speaker 1: risk markets and yields may have gotten head of where
Speaker 1: the economic data have been. Um. Case in point, the
Speaker 1: Chicago p m I last week was at sixty five.
Speaker 1: That's still a very healthy leve manufacturer. But I can
Speaker 1: I can you know, I can see your Chicago fed
Speaker 1: with the Kansas City FED report and raise you of
Speaker 1: Philadelphia or an Empire manufacturing report. Right, so I'll give you,
Speaker 1: I'll give you a filliant Philly and phillion. New York
Speaker 1: have slow, but there's still firm firmly in growth territory.
Speaker 1: The Richmond was the one that really kind of surprised
Speaker 1: people last week. But I would say that Richmond was
Speaker 1: more locally driven. Um. But yeah, it's to the extent
Speaker 1: that do finite the tightening that does the fight tightening
Speaker 1: of financial conditions. Right now, how much does that lead
Speaker 1: bleed over into the real economy. And that's that's really
Speaker 1: what people are doing right now in terms of the
Speaker 1: growth forecast. Now, even the thing that I find it's
Speaker 1: not an intercessily stock market, it's investment grade credit spreads,
Speaker 1: and that's what really the Fed's gonna be watching. That's
Speaker 1: what we're watching, um. And right now, Yeah, if if
Speaker 1: the credit spreads say wide where they are, let's call it,
Speaker 1: you know, a hundred and fifth two d and sixty
Speaker 1: basis points over treasuries, Yeah, you could seek growth slowing
Speaker 1: to a low two percent as opposed to a mid
Speaker 1: two percent range. Are lenders being compensated for this spread? Um?
Speaker 1: You know? At this point, I think when you look
Speaker 1: at imbalances out there the economy, it's not like the
Speaker 1: household last time. It's corporate debt and so at a
Speaker 1: level right at record levels. But from the FED Senior
Speaker 1: Loan Officer to survey, they're still easing lending standards two corporates.
Speaker 1: So I don't know if lenders are being compensated just yet.
Speaker 1: Does that concern you? Um? Actually, is the fact that
Speaker 1: that there's still there's still be easing credit standards to
Speaker 1: corporates is a positive for cap bacs. And you know
Speaker 1: it's not like there you know, there's been a ton
Speaker 1: of demand out there. UM. So earlier on in for
Speaker 1: exactly earlier on in the cycle. So UM, you know,
Speaker 1: there's still profits are still at least in the deeper
Speaker 1: profits are up ten percent year over a year. Companies
Speaker 1: are doing fairly well, and you know, risk markets seem
Speaker 1: to have have sort of priced in now zero to
Speaker 1: negative profit growth next year. I think it's just gotten
Speaker 1: a little ahead of itself. The reality is probably somewhere
Speaker 1: in between. It's not going to be great, but it's
Speaker 1: not going to be off a cliff either. Speak a
Speaker 1: little bit about job growth and wage I guess you
Speaker 1: could call it inflation, but not really. What do you see?
Speaker 1: I mean, does that make it more difficult to do
Speaker 1: your job when you see almost full employment in the
Speaker 1: economy and yet you don't see a surge in acceleration
Speaker 1: and inflation? Yeah, I mean this has been you know,
Speaker 1: this has been the case throughout this cycle, and it's
Speaker 1: been sort of you know, confounded economists. Why is the
Speaker 1: Phillips curve so flat in this cycle versus other cycles?
Speaker 1: And you know, there are many arguments for that. I
Speaker 1: think the main thing to keep it not key in
Speaker 1: perspective here is that you know, at three point seven
Speaker 1: percent unemployment rate, we're generating non farm payroll growth in
Speaker 1: the private sectors one point nine percent year every year.
Speaker 1: With three percent wage inflation and thirty four and a
Speaker 1: half hours worked on average, that's generating four point nine
Speaker 1: percent year over year nominal income growth. So you know,
Speaker 1: not only nominal income growth is what what you make
Speaker 1: is then what you spend, right, and the combination of
Speaker 1: hours and wages and job growth, what you're gonna see
Speaker 1: is job growth slow because we're getting near the kind
Speaker 1: of the limits in terms of labor supply and wage growth.
Speaker 1: You're starting to see now take up and grind higher.
Speaker 1: UM three percent is generally what FED officials would consider
Speaker 1: um consistent with two percent core pc inflation targets. So
Speaker 1: it's taken a while, and it's but finally, yes, yes,
Speaker 1: but we're finally getting to a point where you're seeing
Speaker 1: their response in wages to a tight labor market. It's
Speaker 1: not roaring, but you know you're seeing the response. Do
Speaker 1: you think you could characterize it as a lost decade,
Speaker 1: just as there was a lost decade in Japan? Um? No,
Speaker 1: certainly not. Japan has had seven recessions over the last
Speaker 1: thirty years. Um. You know, the US has managed to
Speaker 1: avoid that. Uh, And all the while the US has
Speaker 1: been able to raise interest rates, so Japan has been
Speaker 1: stuck at zero. So I would I would certainly wouldn't
Speaker 1: say it's a bit of lost decade. And you know,
Speaker 1: it's quite impressive that we've come from a ten percent
Speaker 1: unemployment rate down to three point seven percent now, even
Speaker 1: though it took you know, initially a long while to
Speaker 1: get started. What do you think is the biggest challenge
Speaker 1: for the US economy in t I think it's it's
Speaker 1: it's really it's on the policy front. UM. I think
Speaker 1: we have you know, the things that are weighing on
Speaker 1: the market right now are one trade China US trade
Speaker 1: issue is UH, if you do if talks do not,
Speaker 1: you know, produce something on March one, and those tariffs
Speaker 1: go to two fifty billion goods, that's a seventy billion
Speaker 1: dollar tax on on US and that's gonna get passed
Speaker 1: onto businesses and consumers. UM. So that certainly hurts with
Speaker 1: in terms of investment or the uncertainty causes UM causes
Speaker 1: you to pause on capex plans, UH, that sort of thing. UM.
Speaker 1: Second I would say would be you know, obviously international Italy, Brexit, UM.
Speaker 1: Those issues that are kind of been been a constant
Speaker 1: you know in the background destabilizing issues. Um, and then
Speaker 1: you know, the last thing I would say is, uh,
Speaker 1: you know, really a corporate loss of confidence would be
Speaker 1: would be the the main thing where corporation is to say,
Speaker 1: you know, with all the policy and certainty, that's it.
Speaker 1: I'm I'm you know, hunkering down and not investing in
Speaker 1: my busines this or of being a layoff workers. But
Speaker 1: it doesn't seem we're far from that point. I mean
Speaker 1: the labor market there is nothing. There is very little
Speaker 1: signs that's slowly all right, thanks very much, really well done.
Speaker 1: I appreciate it. All three of those things going to
Speaker 1: be front and center. Appreciated that. Brett Ryan is Deutsche
Speaker 1: Bank's senior US economists, joining us here in the Bloomberg
Speaker 1: Interactor Brokers Studios mergers and acquisitions. The hallmark, perhaps foreen
Speaker 1: is going to be the mega deal. Those are the
Speaker 1: deals that have valuations of five billion dollars or more.
Speaker 1: Here to tell us what to expect in twenty nineteen,
Speaker 1: having learned everything about the mergers and acquisitions industry because
Speaker 1: he basically helped to create it, is Robert Profusak. He
Speaker 1: is the global chair of Mergers and Acquisitions at Jones Day.
Speaker 1: Thanks very much for being here, Rob Profusak much appreciated.
Speaker 1: Happy New Year to you. Happy New Year too, it was.
Speaker 1: It was a pretty happy new year for the world
Speaker 1: emerges and acquisitions, wasn't it too? Yeah, But it was
Speaker 1: sort of a tale of two halves. The first half
Speaker 1: was record setting, it was fabulous, and the third quarter
Speaker 1: started to get bumpy a little bit, I think, mostly
Speaker 1: because of the trade issues um and uncertainty about evaluation.
Speaker 1: And of course the last month or so has been
Speaker 1: very bumpy with all the volatility, but it's it was
Speaker 1: still a third third highest year ever, almost four trillion
Speaker 1: dollars of transactions. That's a mind boggling You can't even
Speaker 1: I don't know what I mean. Four trillion. Couldn't line
Speaker 1: up four trillion things, And actually I have no idea
Speaker 1: what it really means. A lot, a lot I like that.
Speaker 1: That's the technical term. You mentioned, the word valuation, and
Speaker 1: I want to call upon your expertise and your experience
Speaker 1: in the world of valuation, because when we quote daily
Speaker 1: stock prices or the price of any asset on a
Speaker 1: daily basis, it is not for the whole entity, whereas
Speaker 1: when a company or a buyout firm puts forth an
Speaker 1: offer to purchase an entire company. It's like buying a
Speaker 1: car versus buying the steering wheel. There's a whole different
Speaker 1: valuation process that is involved, and I'm just wondering if
Speaker 1: you could share a little detail about that. Yes, well,
Speaker 1: the valuation the M and A setting is different. It's
Speaker 1: very different. If you talk to your average analyst about
Speaker 1: on Wall Street, it's a multiple of earnings. It's earnings
Speaker 1: growth that sets them multiple. They look at that. That's
Speaker 1: not so important in M and A is it's a
Speaker 1: more fundamental valuation. It looks at the cash flow of
Speaker 1: the business and if we pay this and we spend
Speaker 1: that much capital, what return are we getting on our
Speaker 1: capital investment. In a sense, it's it's similar, but it
Speaker 1: really is a function of the return on the investment
Speaker 1: you're making. M and A really is just the alternative
Speaker 1: to building something yourself. So you could build that car
Speaker 1: if you bought a steering wheel, and you bought the
Speaker 1: tires and you bought all this stuff, But it would
Speaker 1: be pretty hard to do. You know, you'd have to
Speaker 1: spend a lot of time and you really wouldn't know
Speaker 1: what you were doing, and you weren't sure what you'd
Speaker 1: get when you came out with it. Out of it.
Speaker 1: If you go to the dealership and buy that car,
Speaker 1: you know what you're getting, so you're willing to pay
Speaker 1: a premium for that. That's what companies do. So the
Speaker 1: valuation in a sense is more fundamental. The markets are
Speaker 1: more fickle. Uh, they're They're just based on I'm willing
Speaker 1: to invest this much on the assumption somebody will buy
Speaker 1: it for more. That's it. It isn't a question of
Speaker 1: really and a hope that I got to return on
Speaker 1: my capital. But as we've seen in the last quarter,
Speaker 1: you know, it is what it is. Well, if it
Speaker 1: is what it is in the last quarter, what do
Speaker 1: you think the change in stock market valuations has done,
Speaker 1: if anything, to those efforts to buy and sell companies?
Speaker 1: Well things things look, the fundamentals of M and A
Speaker 1: are driven by this investment decision. Am I better off
Speaker 1: investing in a new plant or buying one? And to
Speaker 1: make it simple, um, and usually it's better to to
Speaker 1: buy than to build. You've got it happens quicker, you've
Speaker 1: got more certainty, you know what you're getting, at least
Speaker 1: you think you know what you're getting. Let me about
Speaker 1: it that way. Um, the by versus build decisions very simple.
Speaker 1: Um So, but when and M and A is driven
Speaker 1: in these in this world, that's why basis becomes so
Speaker 1: fundamental by technology and globalization. It isn't really the credit
Speaker 1: markets does that and the other thing stuff that guys
Speaker 1: like me talk about. Yeah, on the fringes that matters,
Speaker 1: but it's a more fundamental process than that. Um Right now.
Speaker 1: You know with with evaluation is being uncertain. If you're
Speaker 1: a seller and your ten percent higher a month ago,
Speaker 1: you're gonna say I better wait. So it will have
Speaker 1: a short term effect, not a long term effect. Now,
Speaker 1: some of the other things that are going on the
Speaker 1: headline issues probably will be stimulative. If there is a
Speaker 1: deal with China or if there's we say there's a
Speaker 1: deal with China, and there's a difference between saying it
Speaker 1: and having one. I think, um, you're gonna have a
Speaker 1: real spirit of activity. China was a big player in
Speaker 1: North American seen that door was it's safe to say,
Speaker 1: really slam shut in. It went from three hundred billion
Speaker 1: dollars of transactions in North America to just just a
Speaker 1: tiny fraction of that last year. If that door is reopened,
Speaker 1: there'll be a blizzard of activity here because Chinese companies,
Speaker 1: despite putting all the politics aside, want the market, they
Speaker 1: want the technology, they want to know how, they want
Speaker 1: all those things, and right now they are foreclosed from
Speaker 1: doing it. You know, the Broadcom situation last year was
Speaker 1: really important symbolically. It meant we need to reset this balance.
Speaker 1: What one thing that I find interesting is this sort
Speaker 1: of inner dynamics of this year's morgers and acquisitions, small
Speaker 1: deals one out Goldman Sacks one, for example, with being
Speaker 1: the top advisor by dealing with small deals, not big deals.
Speaker 1: Do you think that will continue next year as it
Speaker 1: becomes more politically fraught to get some of these big
Speaker 1: deals done. Well, it's hard to tell. This administration is
Speaker 1: much more accommodating in terms of anti trust issues. Um,
Speaker 1: much more accommodating. Now that isn't to say unless it's
Speaker 1: from China, right, or anything from China, um. But in
Speaker 1: terms of the China influence, it's the doors is shut.
Speaker 1: And you can say that's political if you want, doesn't matter.
Speaker 1: It's shut. So who cares? Who shut it? You know? Um?
Speaker 1: And I think if you know you there's going to
Speaker 1: be some sort of resolution of that. Whether that door
Speaker 1: is wide open or just partially opened, I don't know. Um,
Speaker 1: But there were fewer bigger deals. Um. There were a
Speaker 1: lot of big deals in the first half of the year. UM,
Speaker 1: and that was mostly I think because the sense of
Speaker 1: people like me, which you can get. You can get
Speaker 1: big deals through this administration, whereas the Obama's administration, especially
Speaker 1: in the end of it, was very difficult. So what
Speaker 1: we'll see, you know, I think there's there's so much capital,
Speaker 1: and there's so there's so much to do with it.
Speaker 1: I don't think it's it's right to look at a
Speaker 1: particular segment of a particular period and come to some conclusion. Um,
Speaker 1: you know, that's what we do. I know. The overall
Speaker 1: number of deals is still down year over year this year,
Speaker 1: which is kind of an interesting statistic, even though the
Speaker 1: third biggest year ever in terms of dollar volume. Talk
Speaker 1: if you can about activist investors and their role in
Speaker 1: mergers and acquisitions, Well, it's a we're in this we're
Speaker 1: in a quiet period of activism, so to speak. There
Speaker 1: is a without getting real technical about it, we're just
Speaker 1: about to enter a period that if an activist wants
Speaker 1: to nominate somebody to a board of directors, they get
Speaker 1: the right to do that. It's generally January and into
Speaker 1: part of February. You're going to see a lot of that.
Speaker 1: And you know, this story is easier with this decline
Speaker 1: in the marketplace. You know, show me the money and
Speaker 1: do something with it. Now. You know, the traditional refrain
Speaker 1: of the activists has been level up your balance, she
Speaker 1: pay out the cash. Well, companies have been doing that.
Speaker 1: I mean, last we're gonna have a trillion dollars buybacks
Speaker 1: this year. A trillion again once again, that number that
Speaker 1: we can't even fathom. We don't know what it means.
Speaker 1: So that's not so much. But there's still a lot
Speaker 1: to do. A lot of the story about activism probably
Speaker 1: will be sell the company, break it up, meaning more
Speaker 1: M and A. What are the top industries that are
Speaker 1: going to get beset by mergers and acquisitions in it's easy,
Speaker 1: it's easier to say which businesses won't be that active.
Speaker 1: I don't think we're gonna see we have despite the
Speaker 1: precipitous decline in oil prices. I don't think I think
Speaker 1: we're gonna a rush of M and a in the
Speaker 1: oil PA in the fracking patch, because it already happened, Yeah,
Speaker 1: it happened. It already happened to media, and they're not
Speaker 1: as levered as they were, you know, when this happened
Speaker 1: last time. So I don't think you're gonna have a
Speaker 1: lot of it and people are gonna look at the
Speaker 1: prices and say, not a good time to sell. Um.
Speaker 1: Everybody else is in about the same boat, you know,
Speaker 1: the oil the oil stocks are are different. I think
Speaker 1: you're gonna see a huge amount of technology that's just
Speaker 1: the name, that's just the name of the game and technology.
Speaker 1: When you look at the big tech companies, they are
Speaker 1: Bill Weathers for what goes on in the industry in general.
Speaker 1: You've got to keep buying things. You've got to get
Speaker 1: mark you've got to get additional name brands and all
Speaker 1: that stuff as part of your portfolio. Industrial companies are
Speaker 1: still are still globalizing. So you're going to see that
Speaker 1: Europe is a little bit less certain. I and think
Speaker 1: until we have some greater clarity on what Brexit means,
Speaker 1: hard to tell. It really is hard to tell. Thank
Speaker 1: you very much for being with us, Always a pleasure.
Speaker 1: Thanks for your thoughts and your insight and happy new
Speaker 1: year to Robert Profuseck. He is the global chair of
Speaker 1: Mergers and Acquisitions for Jones Day, giving us not only
Speaker 1: his outlook for but a little bit of description on
Speaker 1: what happened in We are broadcasting from the Bloomberg Interactor
Speaker 1: Broker's studios. And here's an acronym for you. C P
Speaker 1: t p P the Comprehensive and Progressive Agreement for Trans
Speaker 1: Pacific Partnership. It entered into force yesterday. Seven of the
Speaker 1: eleven members have ratified. This practice reduces tariffs among countries
Speaker 1: such as Mexico, Japan, New Zealand, Canada, Australia and Vietnam.
Speaker 1: Here to help us understand the implications, Meredith Sumter, Eurasia
Speaker 1: Group Head of Research, Strategy and Operations. Meredith, thank you
Speaker 1: very much for being with us. Happy new year to you,
Speaker 1: and will it be a happy new year for those
Speaker 1: member states that have actually ratified this agreement? What will
Speaker 1: happen as a result? Thanks for having met him. We
Speaker 1: should expect that it will be a happy new year
Speaker 1: and happy between nineteen four those member countries. We should
Speaker 1: expect a massive rush of immediate liberalization among those countries.
Speaker 1: As you said initial cuts. The majority of the initial
Speaker 1: cuts went into effect UM yesterday, but the substantial amount
Speaker 1: over of terrors will either be cut or eliminated by tomorrow.
Speaker 1: We're at the start of the process by which the
Speaker 1: remaining tariff lines for these countries will be drawn down
Speaker 1: annually over a period of several years. And when it's
Speaker 1: all said and done, perhaps over the next five or
Speaker 1: six years, we could see most cpt p P member
Speaker 1: countries will see nearly of tariffs amongst them eliminated. So
Speaker 1: will this be enough to I guess, create a new
Speaker 1: superpower or do kind of alliance when it comes to
Speaker 1: trade that does not include the US. It certainly will
Speaker 1: be an economic force. And the key question is when
Speaker 1: a Washington wake up to realizing that it is outside
Speaker 1: of what is likely to be the most high value, generating,
Speaker 1: cutting edge trade pacts UH that the twenty one century
Speaker 1: so far will see. This is it the third largest
Speaker 1: trade pack behind NAFTA and UH the European UM Single Market.
Speaker 1: But at the same time it comprises UH important crucial
Speaker 1: rules that are meant to address many of the industrial
Speaker 1: market access concerns of the compan administration. They're important chapters
Speaker 1: on leveling that the playing field with state owned enterprises.
Speaker 1: There are also critical new rules UH concerning trade and
Speaker 1: investment related to the digital economy. Now this is important
Speaker 1: because the digital economy, of course, is where economic activity
Speaker 1: is headed. But it's also notable that these sorts of
Speaker 1: rules don't necessarily exist elsewhere, either in international UH institutions
Speaker 1: like the w t O or another notable trade pacts.
Speaker 1: If the US wanted in, if they, using your words,
Speaker 1: wake up to what they are missing out on, would
Speaker 1: this pact have them? So there are certain several members
Speaker 1: that really do want the US to come back, because
Speaker 1: adding the US economy to this trade pact will significantly
Speaker 1: expand its dynamic force. But at the same time, the
Speaker 1: US will have to negotiate to get back into the pact.
Speaker 1: Several of these countries have because the US decided to
Speaker 1: leave the pack, many of these sort of stringent provisions
Speaker 1: that Washington had advocated for have effectively been suspended. So
Speaker 1: you see some reports that some of these member countries,
Speaker 1: because the US has pulled out of the pact, are
Speaker 1: not subject to as high levels of competition UH with
Speaker 1: US companies as they would have been otherwise. So Japan
Speaker 1: aside and some other key members aside, you may see
Speaker 1: some of the existing cpt p P members drag their
Speaker 1: feet a bit should Washington decide that it wants to
Speaker 1: re enter. What role do you believe countries such as Colombia, Thailand,
Speaker 1: South Korea, even Indonesia and maybe even the United Kingdom
Speaker 1: will play in the future of this pact. Well, certainly,
Speaker 1: now that we've had the cpt p P ratified member,
Speaker 1: countries are now looking at ways to expand the pack.
Speaker 1: So Columbia has already applied to join, Thailand is keenly interested,
Speaker 1: South Korea's indicated interest, uh, the UK and Indonesia have
Speaker 1: expressed interest. But watch here, because while Thailand has the
Speaker 1: most to lose from being outside the cpt p P
Speaker 1: given its heavy role in regional supply chains and the
Speaker 1: increased competition that will come to its economy from other
Speaker 1: Southeast Asia cpt P PEAK countries, except that Thailand will
Speaker 1: move first to try to enter, the UK joining will
Speaker 1: likely not happen for the foreseeable future, um as the
Speaker 1: United Kingdom will not be able to join until after
Speaker 1: the post Brexit transition phase. It's over the one country
Speaker 1: though that that people should watch over the long term
Speaker 1: is China. China is watching this trade pac closely, but
Speaker 1: for for now in the short term, will remain focused
Speaker 1: on the less ambitious trade pact it is negotiating with
Speaker 1: Asian countries and trading partners. This is the regional comprehensive
Speaker 1: and an economic partnership. Now that aside, Beijing's interests will
Speaker 1: be peaked by a successful cpt p P. However, as
Speaker 1: ultimately China's priority is to be at the center of
Speaker 1: the Asia Pacific's economic architecture. They will not want to
Speaker 1: be outside of this trade pact and will look for
Speaker 1: some way to align with it, if not to join. Meredith,
Speaker 1: I want to sort of ease the do able knowledge
Speaker 1: that you have having been a diplomat in Beijing, fascinating role.
Speaker 1: Especially right now, I'm trying to get a sense of
Speaker 1: how much we should really give credence to the softening
Speaker 1: of trade tensions between the US and China based on
Speaker 1: a Twitter post by President Trump and some utterances from
Speaker 1: officials in Beijing, is this real? I would say, for now,
Speaker 1: pay less attention to the tweets and more attention to
Speaker 1: any sort of announcements and the detail of announcements that
Speaker 1: actually come from the negotiators themselves. So with that I
Speaker 1: would watch closely in the US as to what U.
Speaker 1: S TR Bob Letitheiser might put out in terms of
Speaker 1: the progress of those negotiations coming through. Certainly, from my
Speaker 1: perspective watching China, I have seen little into no indication
Speaker 1: yet that President Shijun king uh is ready to make
Speaker 1: some of these significant structural reforms to his state backed
Speaker 1: economy that Washington is demanding. President Ji Jim Ping gave
Speaker 1: a notable policy speech on the eighteenth of December uh
Speaker 1: lauty in the forty Years of Reform and Opening, and
Speaker 1: he used that speech not to signal that there would
Speaker 1: be structural reforms to the economy, but rather to champion
Speaker 1: the Party's role in the economy and the success of
Speaker 1: China's economy under his watch. Murder The next year will
Speaker 1: mark seventy years since Maltzi Tong led the Communist Party
Speaker 1: to power. Is there any likelihood that nineteen will cause
Speaker 1: leaders in China to reassess their economic program or will
Speaker 1: it just bolster their efforts to push forward their China
Speaker 1: First program. Certainly, Hi Jim Ping is perhaps the most
Speaker 1: powerful leader that China has seen since and all indications
Speaker 1: thus far indicate that, while they're likely, is UH some
Speaker 1: grumbling and discontent among you know, party and policy circles
Speaker 1: with the direction that Juan Pain is taking the economy.
Speaker 1: So think less structural reform, certainly, more party control over
Speaker 1: the functioning and the state economy, more control over civil society.
Speaker 1: There are no alternatives to she UH, and it is
Speaker 1: unlikely even if there is this discontent, we have seen
Speaker 1: little sign that there is going to be anything but
Speaker 1: more power consolidation UH and more political stability for China
Speaker 1: under Juan Pain, which in a certain sense is positive
Speaker 1: for markets, But if you think about it from an
Speaker 1: economic reform perspective and with China's continued slowing and growth
Speaker 1: over the long term, that doesn't look so good. Thank
Speaker 1: you so much for being with us, Meredith start Uh,
Speaker 1: your head of research, strategy and operations for your Asia group.
Speaker 1: I want to bring in an expert when it comes
Speaker 1: to looking at investments. Jack Ablin is the chief investment
Speaker 1: officer and founding partner of Crescent Wealth Advisors. Jack Ablin,
Speaker 1: Happy New Year to you and thank you for being
Speaker 1: with us. Let's begin with your thoughts on US equities
Speaker 1: are they expensive? US equities, unfortunately, pim are still a
Speaker 1: little bit expensive when you look at them through the
Speaker 1: lens of history. Um, the the one thing that perhaps
Speaker 1: some bulls are latching onto is forward pees. That forward
Speaker 1: pees look reasonable based on the next twelve months earnings projections.
Speaker 1: But I would argue that only six months of those
Speaker 1: projections are real. Uh, the Q three and Q four
Speaker 1: probably haven't been revised downward to a point where they
Speaker 1: a lot of sense. All right, So if you believe
Speaker 1: that stocks in the United States are still perhaps expensive,
Speaker 1: when will they cease being expensive? How much further do
Speaker 1: they need to decline in value? It's you know, it's
Speaker 1: hard to tell, just because markets oftentimes overshoot. Also, um,
Speaker 1: you know, it's it's a timing thing. It's possible, for example, that, um,
Speaker 1: you know, if the forward earnings are in fact true
Speaker 1: and earnings could you know, miraculously be revised upward, which
Speaker 1: of course they've been being revised downward. Um we could
Speaker 1: we could also, um you know, get a cheap market
Speaker 1: without too much pain. But my sense is, um, you know,
Speaker 1: the foreign markets are actually fairly priced, and in fact,
Speaker 1: I would in fact go so far as to say
Speaker 1: emerging markets are down right cheap, down right cheap emerging
Speaker 1: markets when it comes to their export quality, or are
Speaker 1: you talking about companies that are focused on domestic consumption
Speaker 1: in emerging market Yeah, it's um, well, I'm looking at
Speaker 1: the index in general, but I would say, um, domestic
Speaker 1: consumption is certainly a part of it, a big in fact,
Speaker 1: an increasing part of it, which is encouraging news. But
Speaker 1: you're right, Um, a lot of emerging market companies do
Speaker 1: rely on global growth and global demand, and of course
Speaker 1: that's something that's been called in a question over the
Speaker 1: most recent couple of quarters. So now that leads you,
Speaker 1: I would imagine to thoughts about the value of the
Speaker 1: US dollar. It does, and I think here the US dollar,
Speaker 1: which have certainly been driving the the S and P
Speaker 1: versus emerging market trade over the last few years, UM
Speaker 1: has probably gone as high as it's gonna go, largely
Speaker 1: be because um, the central banks are now particularly broader,
Speaker 1: now starting to close down a lot of their aggressive
Speaker 1: policies and you know, who knows, maybe even start to tighten,
Speaker 1: which could help boost the value of foreign currencies relative
Speaker 1: to the US dollar over the coming twelve eighteen months.
Speaker 1: So would that suggest that if you are an investor
Speaker 1: that has dollars to spend, now is the time to
Speaker 1: do so when it comes to purchasing assets outside the US, well,
Speaker 1: you know that's uh. I think it's a tricky question
Speaker 1: because we look at a multiple of factors and valuations.
Speaker 1: Certainly one of them, I certainly wouldn't jump headlong into
Speaker 1: a market that I didn't think, which you know, was cheap.
Speaker 1: But in the other hand, there are fundamental factors like
Speaker 1: you know, the economic backdrop, liquidity uh, and of course
Speaker 1: moll entum um, none of which has really been too cooperative.
Speaker 1: I will say on a momentum front, we do look
Speaker 1: at the relative return of let's say international or emerging
Speaker 1: versus the US, and you know, probably not a surprise
Speaker 1: because the foreign markets did get hurt earlier in the year,
Speaker 1: that they've actually been out performing on a relative basis
Speaker 1: UH to the US. So I would say from that perspective,
Speaker 1: if you've got money already in the market and it's
Speaker 1: in US, yes, shifted it, keep your keep your position
Speaker 1: in place, and shifted to the international markets. If you've
Speaker 1: got dry powder and you're waiting to add risk, I
Speaker 1: think there's probably still a little more time left on this.
Speaker 1: On this move, you mentioned liquidity. What is your impression
Speaker 1: of liquidity conditions? Liquidity unfortunately appears to be tightening. I
Speaker 1: mean not just because of the FED, but also lenders
Speaker 1: willingness to extend hash to borrow spends and invest um. Here,
Speaker 1: we've seen credit conditions tighten if you look, for example,
Speaker 1: at credit spreads, which is one of the main metrics
Speaker 1: that I like to track, uh, and that really broke
Speaker 1: down from our perspective in the first or second week
Speaker 1: of October, uh, suggesting that uh, you know, it is
Speaker 1: getting a little bit more difficult to uh borrow money
Speaker 1: uh in these markets, not just on a you know,
Speaker 1: nominal basis, obviously with interest rates potentially moving higher, but
Speaker 1: also on a spread basis, as lenders require higher premium
Speaker 1: to extend credit to lower quality borrowers. Jack Avelin is
Speaker 1: the chief investment officer and founding partner of Crescent Wealth Advisors.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keene. Before
Speaker 1: the podcast, you can always catch us worldwide. I'm Bloomberg
Speaker 1: Radio