Latest / Bloomberg Intelligence / The Fed Is Guessing As it Plays With Fire: David Kotok

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The Fed Is Guessing As it Plays With Fire: David Kotok · Bloomberg Intelligence

0:02
Speaker 1: Welcome to the Bloomberg Penel podcast. I'm Paul swing you.
0:05
Speaker 1: Along with my co host Lisa Brahma Waits. Each day
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Speaker 1: we bring you the most noteworthy and useful interviews for
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Speaker 1: you and your money, whether at the grocery store or
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Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
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Speaker 1: podcast or wherever you listen to podcasts, as well as
0:17
Speaker 1: at Bloomberg dot com. It is the question Paul facing
0:23
Speaker 1: the bond market today, which is how much does the
0:26
Speaker 1: FEDS balance sheet roll off really affect markets? And frankly,
0:31
Speaker 1: there are people lined up on all sides of the issue,
0:33
Speaker 1: debating fiercely and away. In here is David Kotalk. I'm
0:37
Speaker 1: very pleased to say, joining us at ourteractive broker Studios,
0:39
Speaker 1: Chairman and chief investment officer of Cumberland Advisers. David, you
0:44
Speaker 1: spared yourself beautiful weather in Sarah Soda to come here
0:47
Speaker 1: in frigid at New York City. Thank you for joining
0:50
Speaker 1: us here. So what's your take on this? How important
0:52
Speaker 1: has the Fed's balance sheet rolloff been so far? Well,
0:56
Speaker 1: very important. Pleasure to be with you. I'm leaving tomorrow
0:59
Speaker 1: morning and going back from the five degree in New
1:02
Speaker 1: York weather as fast as I can. So this is
1:08
Speaker 1: the perhaps the most profound debate monetary policy. Never before
1:13
Speaker 1: have we seen a major central bank change an interest
1:17
Speaker 1: rate and shrink its balance sheet simultaneously. So we're in
1:21
Speaker 1: an experiment. Nobody's been here before, and we're doing it
1:25
Speaker 1: in very large sums. So you've got to look at
1:28
Speaker 1: the balance sheet. And as you know, you've got two
1:29
Speaker 1: sides of a balance sheet. Have the asset side in
1:32
Speaker 1: this case, it's now got long term and intermediate term
1:36
Speaker 1: and mortgages all federal credit. But that's the asset side,
1:41
Speaker 1: and the asset side of this balance sheet for fifty
1:44
Speaker 1: years never looked like this until the financial crisis. It's
1:47
Speaker 1: the liability side where the debate needs to be held.
1:52
Speaker 1: And the liability side of that balance sheet bank reserves
1:57
Speaker 1: excess bank reserves four five hundred billion to operate the
2:02
Speaker 1: Treasury of the United States a few small items. Currency
2:08
Speaker 1: in circulation will be two trillion by the end of
2:12
Speaker 1: next year. And what do you do about the alternative
2:16
Speaker 1: to bank reserves REPO? And that is a debate. So
2:21
Speaker 1: the bottom line of that complex to is you can
2:25
Speaker 1: get a range of three and a half trillion high
2:28
Speaker 1: to two and a half trillion low as to the
2:31
Speaker 1: proper size of the balance sheet, and debate all sides
2:35
Speaker 1: of it. How do you think the FED has done
2:38
Speaker 1: in terms of managing the wind down of the balance sheet?
2:41
Speaker 1: And then if you have an opinion, where do you
2:43
Speaker 1: think they should go? Well, showed is always a difficult word.
2:48
Speaker 1: How have they done? They attempted to communicate what they're
2:52
Speaker 1: gonna do. They published the schedule and and said, here's
2:56
Speaker 1: how we're gonna do it. Here's the amount, here's the
3:00
Speaker 1: time table. We're going to scale it up slowly. So
3:03
Speaker 1: the FED tried to communicate that. What they didn't communicate
3:08
Speaker 1: and haven't clearly is here's the end game, here's what
3:13
Speaker 1: it has to look like when we're done, and here
3:16
Speaker 1: are the metrics which will cause us to change. So
3:21
Speaker 1: you have this divided opinion within the FED communicated therefore
3:26
Speaker 1: in a confusing way. And I think that's what's needed.
3:30
Speaker 1: I hope Pal tomorrow is questioned and question and question
3:35
Speaker 1: on these metrics so he explains them, and he may
3:39
Speaker 1: have a divided house which will make it very difficult
3:42
Speaker 1: for So David, I'm looking right now by the numbers
3:46
Speaker 1: the fed's balance sheet had a high of four point
3:49
Speaker 1: five trillion dollars nearly that in April. It's currently a
3:53
Speaker 1: little bit more than four trillion dollars, so a little
3:55
Speaker 1: bit less than five billion dollar reduction in the balance
3:58
Speaker 1: sheet over those early two years. Now, you make a
4:02
Speaker 1: really important point that the balance sheet kind of cannot
4:05
Speaker 1: shrink below two and a half trillion dollars based on
4:08
Speaker 1: just the currency that we have out standing in circulation
4:10
Speaker 1: right now, as well as some of these other obligations.
4:14
Speaker 1: How much of an effect would it be if the
4:16
Speaker 1: FED stopted at three and a half or two and
4:18
Speaker 1: a half trillion? Is that sort of a seismic difference?
4:22
Speaker 1: I think so? So I think one the FED doesn't
4:26
Speaker 1: know how the market expectation is changing because of the
4:29
Speaker 1: size of the balance sheets. Guessing too, what's the hurry.
4:35
Speaker 1: Why are you in such a rush to take the
4:37
Speaker 1: balance sheet down only to have to start to take
4:41
Speaker 1: it out up in the future. As Bernanke pointed out,
4:45
Speaker 1: it naturally will grow at the rate of two billion
4:48
Speaker 1: a year. So if we go down, we're gonna be
4:50
Speaker 1: going up soon. What's the big deal? Slow it down,
4:54
Speaker 1: take your time. You're in an experiment, and you're playing
4:58
Speaker 1: with fire because you're playing with the credit markets to
5:01
Speaker 1: the world in the US economy. What's your hurry. How
5:05
Speaker 1: much do you think that the FED right now is
5:07
Speaker 1: is focusing on our weighing the geopolitical issues in China
5:11
Speaker 1: and Europe and Brexit and how that impacts their policy,
5:15
Speaker 1: or they really just focused on more more internal data. Well,
5:20
Speaker 1: they always have to put the US economy first, But
5:22
Speaker 1: how do you possibly set policy in this list that
5:27
Speaker 1: you just articulated. It's so difficult to do. Imagine that
5:32
Speaker 1: meeting when you're gonna go round that table twice. The
5:36
Speaker 1: first round is going to report on all the influences
5:40
Speaker 1: of the world. You're gonna see them in Beijing book reports,
5:43
Speaker 1: you're gonna see them in data. You're going to be
5:46
Speaker 1: in the midst of shutdown issues, trade ward tissues issues,
5:50
Speaker 1: tariffs all at once, and you've got to go around
5:53
Speaker 1: the room twice, and you've got two three four minutes
5:56
Speaker 1: each for people sitting around the table who then have
6:00
Speaker 1: to conclude a policy statement, and in between they've been
6:03
Speaker 1: negotiating in between meetings to get to it. It's incredible.
6:07
Speaker 1: And now they all bring in a hundred staffers from
6:10
Speaker 1: twelve reserve banks plus the board of Governors, and they
6:13
Speaker 1: have diverse models and opinions, and none of them work.
6:17
Speaker 1: That's where we are. That's where we are. None of
6:19
Speaker 1: them work. David Kotak David's chairman, chief investment officer from
6:23
Speaker 1: Cumberland Advisors based in Sarasota, Florida, where he is very
6:27
Speaker 1: much looking forward to returning to tomorrow as we look
6:29
Speaker 1: to enter in to the polar vortex here in New York. Up. So, David,
6:33
Speaker 1: we're about maybe a third a halfway through earnings. Is
6:36
Speaker 1: what are some of the themes that you've taken out
6:38
Speaker 1: of here as you think about your portfolio, any themes
6:41
Speaker 1: that have been kind of causing you maybe to rethink
6:43
Speaker 1: a little bit where your positioned. Well, we're we're an
6:46
Speaker 1: ETF shop, not a single stock shop, but we look
6:50
Speaker 1: at weights within the E t F space. For example,
6:53
Speaker 1: this week xl E has the largest percentage component reporting
6:59
Speaker 1: the n G sector. So you look at it the
7:01
Speaker 1: d S because you look at the contents earnings cross currents.
7:08
Speaker 1: Shutdown anticipation is shutdown tariff. You saw it with Harley.
7:13
Speaker 1: You see this constant flow of this crazy narrative world.
7:18
Speaker 1: We live in, impacting with surprises in all directions, and
7:24
Speaker 1: you say, what is normal? Where is a trend? How
7:27
Speaker 1: do we stabilize the earnings? I think if we can
7:29
Speaker 1: get to the second quarter of this year and we
7:32
Speaker 1: don't have another shutdown, and we make a trade deal
7:35
Speaker 1: of some type or the trade truce continues, we will
7:40
Speaker 1: begin again to see the earnings power of American companies
7:45
Speaker 1: in a more stable environment. And without that, we're guessing.
7:50
Speaker 1: So I'm not surprised by the volatility of the reporting.
7:53
Speaker 1: I'll give you our numbers. We see about a hundred
7:55
Speaker 1: and seventy or so for this year for the SMP index,
8:00
Speaker 1: but there's a band around that and we see a
8:02
Speaker 1: higher number. We don't see a recession, and that's how
8:06
Speaker 1: we're basing a market overviews level. So I guess that.
8:11
Speaker 1: Then I was gonna ask you or stock investors too
8:14
Speaker 1: optimistic or too pessimistic right now about the US economy? Yes, yes, right,
8:19
Speaker 1: I mean I think that you answered it with a
8:20
Speaker 1: sense of we're just guessing. So then why shouldn't investors
8:24
Speaker 1: just sit on their hands? If you think interest rates
8:28
Speaker 1: are going to go substantially higher from here, then you
8:33
Speaker 1: might say, wait a minute, my cash is going to
8:35
Speaker 1: earn more. I'm worried about valuation mechanics. I'm going to
8:40
Speaker 1: have to value against a four percent treasury instead of
8:43
Speaker 1: a three percent treasury or whatever. I don't see it,
8:48
Speaker 1: and I don't see the forces that make that happen.
8:53
Speaker 1: They may make it happen five years from now. We
8:55
Speaker 1: have a large deficit that's going to compound, but for
8:58
Speaker 1: the next two or three or four years, it's not
9:00
Speaker 1: a shock. So without a shock, you say, what are
9:03
Speaker 1: the shocks? Trade ward is the biggest shock. The two
9:07
Speaker 1: giant economies of the world, China in the US are
9:10
Speaker 1: embroiled in a breujaha. Let's get it over. Let's have
9:14
Speaker 1: the truth's extend. Both sides want to make that happen.
9:17
Speaker 1: If that happens, business gets better, sentiment improves, we all
9:23
Speaker 1: will like it, and stock market will go higher and
9:27
Speaker 1: reflect it. So what do you think I mean if
9:28
Speaker 1: you just put December versus January, and you know just
9:32
Speaker 1: the volatility of December in particular on the downside, and
9:35
Speaker 1: I know you your experience, you've experienced volatile markets before.
9:39
Speaker 1: Do you think the market just overshot itself on the
9:42
Speaker 1: downside in December, and you know, the five or six
9:44
Speaker 1: percent increase we're seen in the SMP this year is
9:46
Speaker 1: just trying to get us back to a new normal,
9:48
Speaker 1: because if you think about that, the late November December period,
9:51
Speaker 1: it was the volatility was just breathtaking, I would think. So,
9:55
Speaker 1: you know, the Christmas Eve massacre was the bottom? Was
9:59
Speaker 1: it the bottom? It certainly was a climactic bottom, and
10:04
Speaker 1: we have recovered from it more or less. So now
10:07
Speaker 1: we're back, and you take the v out of the
10:10
Speaker 1: bottom and say, let's look at where we are. We
10:14
Speaker 1: look like we're on trend for around a hundred and
10:17
Speaker 1: seventy dollar earnings. That's a guestimate, but a close one
10:21
Speaker 1: that seems to be on track. How would you value
10:24
Speaker 1: the SMP five index if it's got a hundred and
10:27
Speaker 1: seventy bucks is earnings, that's cheap, it's not expensive. So
10:33
Speaker 1: the idea of US equities rallying is that predicated on
10:37
Speaker 1: the idea that US bond yields stay low and stay
10:39
Speaker 1: around where they are right now, stay close to where
10:42
Speaker 1: they are right now. If you think that the the
10:47
Speaker 1: thirty year Treasury bund is going to be four and
10:49
Speaker 1: a half instead of three. You don't want to own
10:52
Speaker 1: the stock market. If you think cash is going to
10:54
Speaker 1: earn three or three and a half, you don't want
10:57
Speaker 1: to own the stock market. What's the threshold? Was the
10:59
Speaker 1: tipping point? Well, I don't know. Three is sort of
11:01
Speaker 1: a magic kind of number that everybody kicks around and
11:04
Speaker 1: we kick it around to When we get there, we'll
11:06
Speaker 1: find out. Do you think the FED has Do you
11:08
Speaker 1: think the FED has the capability to kind of engineer
11:12
Speaker 1: soft ish landing in a two and a half percent
11:14
Speaker 1: range which will support a lot of the forecasts and
11:18
Speaker 1: earnings estimates that that are out there. Oh my gosh,
11:21
Speaker 1: everybody's that's the question. Can they do it? The record
11:25
Speaker 1: of the FED is mixed at best poor under certain circumstances.
11:30
Speaker 1: And when they try to do two things at once,
11:32
Speaker 1: which is what they've been doing, balance shrink, raise interest
11:36
Speaker 1: rates simultaneously. They're trying to do two things. They can't
11:40
Speaker 1: get one right, let alone too. If the FED stops
11:43
Speaker 1: raising rates, and if the trade war is sort of eased,
11:48
Speaker 1: how much longer does this credit cycle have before? We
11:50
Speaker 1: could have years. We could have years at least we
11:53
Speaker 1: don't have high inflation upward pressures. As long as we
11:58
Speaker 1: have low end for AH and low rate gradual recovery
12:02
Speaker 1: two hundred thousand kind of job number, unemployment rate low
12:07
Speaker 1: below what we used to think about. These kinds of
12:11
Speaker 1: this cycle could go on for years. It would be
12:15
Speaker 1: the Fed overshoot that could kill it, or ratcheting up
12:20
Speaker 1: tariffs and full blown trade war could kill it. Those
12:24
Speaker 1: are the two killers in my view. David ko talk,
12:28
Speaker 1: wonderful having you on. Thank you so much for being here,
12:30
Speaker 1: Thank you for warming up my day. Good luck getting
12:34
Speaker 1: back to the warm haven of of of sunshine in Sarasota, Florida,
12:39
Speaker 1: which is very appealing to me right now considering what
12:43
Speaker 1: the temperature is in New York City. David Kotalk, Chairman
12:46
Speaker 1: and Chief Investment Officer of Cumberland Advisors. And certainly the
12:49
Speaker 1: optimism it's being felt in up markets today. A sort
12:52
Speaker 1: of risk on day for sure, at least in the
12:55
Speaker 1: down not so much the NASDAC ahead of those earnings
12:58
Speaker 1: down four tenths of one per cent, So again all
13:01
Speaker 1: eyes on Apple and on the big tech giants. Another day,
13:15
Speaker 1: another most important vote ever for Brexit joining US now
13:19
Speaker 1: raise at Raphael. I am very glad to say, Bloomberg
13:21
Speaker 1: Opinion editor, coming to us from London. Raise, there is
13:25
Speaker 1: a vote in Parliament today and you had some scathing
13:30
Speaker 1: words for it in your recent column that was titled
13:33
Speaker 1: had enough of Brexit? How about ten more years? So Raise,
13:37
Speaker 1: what are you expecting? What's at sake today? And how
13:40
Speaker 1: much should we pay attention to this vote? Well, yet
13:42
Speaker 1: again we're all sort of at the edges of our
13:45
Speaker 1: seat waiting to see what Parliament decides to do. And
13:48
Speaker 1: yet again, what comes out of this vote doesn't tell
13:52
Speaker 1: us very much about what kind of Brexit we're going
13:55
Speaker 1: to get, when we're going to get Brexit, or very
13:58
Speaker 1: much of anything else. So basically, the primary sister has
14:01
Speaker 1: now thrown her weight behind one of the seven amendments
14:05
Speaker 1: that Parliament would be voting on, and uh she has
14:09
Speaker 1: she has indicated that she would like parliament support to
14:12
Speaker 1: go back to Brussels and reopen the deal that she's
14:15
Speaker 1: previously said cannot be reopened and that took nearly two
14:19
Speaker 1: years to negotiate. So what's really happening here? Um, this
14:23
Speaker 1: is the government trying to reduce the size of the
14:26
Speaker 1: division within its own party and within Parliament in an
14:30
Speaker 1: attempt to go back to Brussels and say, okay, right,
14:32
Speaker 1: you've been asking us what do we really really want,
14:35
Speaker 1: and now we're telling you. What we really really want
14:37
Speaker 1: is a change to this Irish backstop, this provision that
14:41
Speaker 1: keeps the border open but ties the UK into a
14:44
Speaker 1: long term custom junion, potentially with the EU. And so
14:48
Speaker 1: Teresa May, having you know, been roundly defeated in her deal,
14:53
Speaker 1: is now trying to get some kind of um unity,
14:57
Speaker 1: or at least to reduce the size of disunity in
15:00
Speaker 1: Parliament so she can try to put more pressure on
15:03
Speaker 1: the EU. But we're what we're not going to get
15:05
Speaker 1: from tonight's vote is a clear sign of what Parliament wants.
15:09
Speaker 1: We may see none of these amendments passed, and I
15:11
Speaker 1: don't think we're going to get anywhere close to a
15:14
Speaker 1: sort of conclusion to this brexit Sanga. We're going to
15:17
Speaker 1: have to come much closer to the March twenty nine
15:20
Speaker 1: exit date before we get any more clarity. So Terres,
15:24
Speaker 1: you know, it's I keep thinking about the European Union
15:27
Speaker 1: and I'm not sure if it's rhetoric or negotiating tactic
15:30
Speaker 1: or whether they're really serious, but they have been adamant
15:33
Speaker 1: that they are not going to renegotiate this deal. How
15:36
Speaker 1: do you view their rhetoric? Is that in fact should
15:38
Speaker 1: we take that at face value? Or do you think
15:39
Speaker 1: that is more of a negotiating tactic. Well, you know,
15:42
Speaker 1: I think the it's it's serious on a number of levels.
15:45
Speaker 1: The Irish border issue is one that the EU takes
15:49
Speaker 1: extremely seriously, and it's one that Ireland takes extremely seriously.
15:53
Speaker 1: And for all the argument that you get from the UK,
15:57
Speaker 1: particularly from brexitters, to say, look, this is really a
15:59
Speaker 1: non issue. If they really want to, they can just
16:02
Speaker 1: you know, they can scratch it out, put it in
16:05
Speaker 1: the future political declaration, you do not hear that in
16:08
Speaker 1: the EU. You do not hear that in Ireland. Today
16:10
Speaker 1: I was speaking to the CEO of Enterprise Ireland, which
16:13
Speaker 1: looks after Irish exporters, and you know, I asked her, well, look,
16:16
Speaker 1: if push comes to slot to shove, won't these won't
16:20
Speaker 1: the CEOs of these exporting companies say please please get
16:23
Speaker 1: rid of that backstop so that we can get a deal.
16:25
Speaker 1: And she said that she had not heard from a
16:27
Speaker 1: single one of them anything close to that, that they
16:29
Speaker 1: all understand the backstops important that ended. Uh that that
16:33
Speaker 1: that is there to support the Good Friday Agreement, which
16:36
Speaker 1: was agreement that ended a quarter century of of violence
16:41
Speaker 1: and conflict in Northern Ireland. And nobody wants to experiment
16:46
Speaker 1: with what happens if you start putting border infrastructure back.
16:50
Speaker 1: So I think the EU has room to maneuver. I'm
16:53
Speaker 1: not saying that there's nothing that the EU can give,
16:56
Speaker 1: but it's not going to be a wholesale plucking out
16:59
Speaker 1: of that that controversial Backstop putting it in the trash
17:03
Speaker 1: can and saying, okay, guys, you know, we understand this
17:05
Speaker 1: is hard for you. We'll give you what you wanted.
17:07
Speaker 1: It's not going to go that far. Tores. I think
17:09
Speaker 1: a lot of investors and analysts would agree with you
17:11
Speaker 1: that one thing is certain with Brexit, and that is
17:14
Speaker 1: that it will be a big muddle for a long
17:16
Speaker 1: time and that we're not going to get resolution anytime soon.
17:19
Speaker 1: What does that do to any leader Theresa May, Theresa May, uh,
17:24
Speaker 1: you know, her successor, etcetera, trying to sort of herd
17:27
Speaker 1: cats here get some sort of agreement. What does that
17:31
Speaker 1: do to their negotiating power with the European Union. Given
17:33
Speaker 1: the fact that everybody knows it's just going to be
17:35
Speaker 1: an ongoing muddle for a long time. Yeah. I mean
17:38
Speaker 1: think that that's the key question here. That's what we
17:40
Speaker 1: all miss when we get caught up in the sort
17:42
Speaker 1: of drama of you know, the vote. It does two things.
17:45
Speaker 1: First of all, the the the European Union knows that
17:48
Speaker 1: this is not the last negotiation. It knows that it's
17:51
Speaker 1: going to be entering into a series of negotiations over
17:54
Speaker 1: everything from you know, financial services to UH certification, non barriers, goods,
18:02
Speaker 1: you name it. The whole panoply of of trade relations, UH,
18:07
Speaker 1: security relations, all of that is going to be negotiated
18:09
Speaker 1: for years to come. The EU is not going to
18:12
Speaker 1: want to just roll over on a key red line
18:14
Speaker 1: right now, knowing that that could set a precedent. UH.
18:17
Speaker 1: The other thing that this UH signals is that Britain
18:22
Speaker 1: is is you know, the whole world knows right now
18:25
Speaker 1: is incredibly divided on this issue. The two main parties
18:28
Speaker 1: are divided on this issue. And because we're going to
18:31
Speaker 1: now have negotiation after negotiation after negotiation, no matter what
18:35
Speaker 1: Brexit outcome we get, UH, this signals that that that
18:39
Speaker 1: a lot of this is going to play out in
18:41
Speaker 1: the public. It's going to play out in the very
18:43
Speaker 1: robust British media and that is going to most likely
18:47
Speaker 1: weaken the hand of any leader who's going to get
18:50
Speaker 1: criticism from all sides. So the EU understands that it
18:54
Speaker 1: will want to try to ease the path here so
18:57
Speaker 1: it's not blamed. At the same time, uh, it needs
19:01
Speaker 1: it needs to uh to stand firm because there are
19:04
Speaker 1: more negotiations to come. So to what I'm not hearing
19:07
Speaker 1: in the rhetoric over the past a couple of days,
19:09
Speaker 1: and I didn't hear it in some of the opening
19:11
Speaker 1: statements today in Parliament is the second referendum that seems
19:15
Speaker 1: to have lost a lot of momentum. Where do you
19:17
Speaker 1: think that is as an option? Yeah, well observed. So
19:21
Speaker 1: the second referendum was all the rage a few weeks ago.
19:25
Speaker 1: It has really died down as something people are talking
19:29
Speaker 1: about and talking up. I don't think it's gone away.
19:32
Speaker 1: I think if, uh, if, if other pathways fail, that
19:36
Speaker 1: it's still there. The one of the amendments sponsored by
19:39
Speaker 1: Evett Cooper seeks to force Parliament to extend Article fifty
19:44
Speaker 1: with a view to putting it to a people's vote
19:47
Speaker 1: as as proponents of a second referenum call it. I think,
19:50
Speaker 1: you know, the Prime Minister really doesn't want that, the
19:52
Speaker 1: Labor Party leader really doesn't want that, and it's very
19:55
Speaker 1: hard to see it happening when the heads of the
19:58
Speaker 1: two major parties you know, quite clearly don't want it
20:01
Speaker 1: to happen. Y is just real quick here, how much
20:03
Speaker 1: more time does Prime Minister Theresa may have? Probably till
20:07
Speaker 1: mid February. That's I think that's the uh sort of
20:11
Speaker 1: end of what the hard line in her own party
20:15
Speaker 1: will give her. And then she's got to come back
20:17
Speaker 1: and say what she wants to do, and then we'll
20:19
Speaker 1: start to see some some votes that will probably matter
20:21
Speaker 1: a lot more than tonight's. And just quickly trays the
20:25
Speaker 1: note no brexit that does seem to be off the
20:27
Speaker 1: tables that you read as well, Uh, no brexit at
20:31
Speaker 1: all is not off the table yet, neither was no deal.
20:35
Speaker 1: You know, sorry to disappoint, but all options are still there.
20:38
Speaker 1: If it goes to a second referendum, which we've as
20:40
Speaker 1: we've just said it might people could vote to remain.
20:44
Speaker 1: Very good Tres Rafael Bloomberg, opinion editor covering European politics
20:48
Speaker 1: and economics. For Bloomber calling in from the London bureau
20:51
Speaker 1: giving us some great color on what is a very
20:54
Speaker 1: you know, fluid story. It's a long playing story. It's
20:58
Speaker 1: a mess. Thank you. Just looking at our monitor here
21:01
Speaker 1: of our members of parliament kind of going back and
21:03
Speaker 1: forth and how long they've been uh doing that, and
21:06
Speaker 1: it just you know, Tres says, it's you know, even
21:09
Speaker 1: if you get something, you got another ten years or
21:14
Speaker 1: of just kind of negotiating all types of side deals here.
21:17
Speaker 1: So you know, we'll stay on top of it as
21:19
Speaker 1: we always do. Also focused in Washington, d C. We're
21:32
Speaker 1: expecting trade talks at this point at some point between
21:35
Speaker 1: the US and China, but a US court has gone
21:40
Speaker 1: after Huawei to accuse them criminally of some of their actions.
21:45
Speaker 1: Joining us down to talk about this is and Stevenson Yang,
21:47
Speaker 1: co founder and research director at Jay Capital Research, also
21:51
Speaker 1: a Bloomberg opinion contributor, and thank you so much for
21:53
Speaker 1: being with us. This seems like a very big deal
21:57
Speaker 1: because it seems like the US is going after on
22:00
Speaker 1: a criminal level the biggest or one of the biggest
22:04
Speaker 1: China technology companies. Can you give us a sense of
22:07
Speaker 1: what the charges are and whether they are politically motivated,
22:13
Speaker 1: you know, they're they're two different. Um, there there are
22:16
Speaker 1: two different sets of charges. One has to do with
22:20
Speaker 1: Huawei's evasion of US sanctions on Iran and other countries,
22:24
Speaker 1: and the other one is an indictment in Washington State
22:28
Speaker 1: for Huawei's attempts to steal technology from T Mobile. And
22:32
Speaker 1: I would say that the latter, which has gotten less attention,
22:35
Speaker 1: is kind of more and is not related to the
22:38
Speaker 1: case of of Mong One Joe, who is being held
22:41
Speaker 1: in Canada. UM I would say that one is more interesting.
22:45
Speaker 1: And if you read the indictment, it's really damning. I mean,
22:49
Speaker 1: you know, Huawei actually giving bonuses to employees to incentivize
22:53
Speaker 1: them to steal technology from American companies, Huawei guaranteeing employees
23:00
Speaker 1: in writing that they wouldn't be punished if they if
23:02
Speaker 1: they broke US laws. I mean, it's pretty it's pretty damning.
23:06
Speaker 1: So is it politically motivated? I mean you do have
23:09
Speaker 1: to say that there's been a sea change in h
23:13
Speaker 1: in the political view of China and in companies like
23:17
Speaker 1: Huawei in Washington and probably in other capitals as well.
23:22
Speaker 1: But you know, is this are these indictments justified by
23:25
Speaker 1: the law absolutely, so they're justified by the law. But
23:29
Speaker 1: from the Chinese perspective, I mean, what is your sense
23:32
Speaker 1: as to how this particular issue, the Huawei issue, and
23:35
Speaker 1: the press that that's receiving, to what extent do you
23:38
Speaker 1: think that will in fact impact the trade talks between
23:41
Speaker 1: the U S and China. Well, one of the interesting
23:45
Speaker 1: things about all of this is how how China has
23:48
Speaker 1: gone absolutely ballistic on this UM and how they've um,
23:53
Speaker 1: you know, detained three Canadians because Canada, you know, trying
23:58
Speaker 1: to pressure Canada not to act stradite mung Wan Joe,
24:01
Speaker 1: who is the of a CFO of of Huawei and
24:06
Speaker 1: the daughter of the Hawawi founder UM and uh, you know,
24:10
Speaker 1: including it in the trade talks, and how all that
24:13
Speaker 1: the Chinese public commentary is all like, oh, the U
24:17
Speaker 1: S and Canada are just trying to crush China and
24:20
Speaker 1: put us down. So any pretenses of having this be
24:23
Speaker 1: a be called a private company have just been dropped.
24:27
Speaker 1: So what does that say about just sort of the
24:29
Speaker 1: broader fight for tech dominance between the US and China.
24:34
Speaker 1: You know, what does it say that China seems to
24:36
Speaker 1: be doubling down on its support of Huawei and making
24:40
Speaker 1: this more political while not really necessarily addressing the main complaints.
24:44
Speaker 1: And what does it say about the US that they're
24:46
Speaker 1: continuing to go after this even while they try to
24:49
Speaker 1: come to some kind of trade resolution. Well, you know,
24:53
Speaker 1: I think that that's actually the appropriate path for the U.
24:57
Speaker 1: S UM. I think what's not appropriate is this big
25:00
Speaker 1: focus on the trade deficit UM, which actually, you know, ironically,
25:04
Speaker 1: during all of this UH discussion and these trade talks
25:08
Speaker 1: has been rising sharply, And the biggest trade deficit for
25:12
Speaker 1: for the US with China in history was last year. UM.
25:16
Speaker 1: So I think that part is misguided. But the focus
25:21
Speaker 1: on technology and evading US law I think is really
25:25
Speaker 1: quite overdue. Um As for technology competition, you know, I've
25:31
Speaker 1: never really seen that argument. The problem with with Chinese
25:35
Speaker 1: tech companies is is precisely the problem that that is
25:39
Speaker 1: kind of um evinced by by this UH, this this
25:43
Speaker 1: Huawei indictment UH over the Team Mobile case, which is
25:47
Speaker 1: that if you put all of your energy and focus
25:50
Speaker 1: into stealing technology, you don't develop new stuff yourself. And
25:54
Speaker 1: you know, Huawei has some of the most talented engineers
25:56
Speaker 1: in the country. They have a culture of really really
26:00
Speaker 1: hard work, they get really highly educated people, they incentivize them,
26:04
Speaker 1: and then they just like steel technology. And Stevenson Yang,
26:09
Speaker 1: thank you so much for that insight on what is
26:10
Speaker 1: a you know, a very complex issue, UH made even
26:14
Speaker 1: more complex with some of the legal issues that Hahwei
26:16
Speaker 1: is facing here in the US. That was and Stevenson
26:19
Speaker 1: Yang co founder, research director J Capital Research and is
26:23
Speaker 1: also a Bloomberg Opinion contributor UH and and it's based
26:27
Speaker 1: in Washington, D C. And Hong Kong. So we'll have
26:30
Speaker 1: to see. UM. I think what we're gonna find is
26:32
Speaker 1: that these negotiations are going to, UH I think be
26:34
Speaker 1: very very difficult. I think there is in fact going
26:37
Speaker 1: to be a political uh tinge to them. That's kind
26:40
Speaker 1: of at least what we're seeing in some of these
26:41
Speaker 1: recent events. Well, Apple reports earnings after the Clothes eagerly awaited,
26:56
Speaker 1: but let's face it, the text earning season has not
26:59
Speaker 1: started off very well. Both Intel and Nvidio reported disappointing results.
27:04
Speaker 1: A more importantly, their outlook was not much better. So
27:06
Speaker 1: let's let's kind of dive into it a little bit.
27:08
Speaker 1: We're fortunate to have once again our good friends Shire
27:10
Speaker 1: over Day UH Technology columnists for Bloomberg Opinion here with Lisa,
27:14
Speaker 1: myself and a Bloomberg Interactive Broker studio. So shure this
27:18
Speaker 1: is as it is every quarter of Apples earnings. You know,
27:21
Speaker 1: I think very much anticipated, in large part because people
27:24
Speaker 1: are trying to get a sense of boy, where is
27:26
Speaker 1: what's that next step? For Apple? They pre announced earnings
27:29
Speaker 1: weak earnings for the first time and forever, Uh, what
27:32
Speaker 1: do you expect to hear from the company this afternoon?
27:34
Speaker 1: So I think there there are two things that I'm
27:36
Speaker 1: going to pay attention to. One is the forecast. Apple
27:40
Speaker 1: doesn't forecast for the full year, but they'll give a
27:43
Speaker 1: forecast for the March quarter. And I think that's really
27:46
Speaker 1: going to set the tone not only for Apple this year,
27:48
Speaker 1: but for the rest of the technology industry, because the
27:51
Speaker 1: forecast will give us a little bit of insight into
27:54
Speaker 1: what is really happening. Is is there, as I believe,
27:58
Speaker 1: a kind of secure alert change in the smartphone market
28:03
Speaker 1: where all the growth is gone and Apple is just
28:05
Speaker 1: going to have to contend with you know, two thirds
28:08
Speaker 1: of their revenue is coming from a secularly declining industry,
28:11
Speaker 1: or is there something else that Apple thinks is going on?
28:14
Speaker 1: Temporary weakness in China or other places. And the other
28:17
Speaker 1: thing is will Apple say anything substantive about what they're
28:21
Speaker 1: doing to offset some of these revenue weaknesses in iPhones?
28:24
Speaker 1: So I guess one one question that I have is
28:27
Speaker 1: how much is Apple representative of the broader smartphone industry
28:32
Speaker 1: of big tech? And how much is Apple really an
28:35
Speaker 1: idiosyncratic story that has to do with where they price
28:38
Speaker 1: their iPhone ten, that has to do with their appeal
28:42
Speaker 1: for luxury consumers and kind of their their missteps in China.
28:46
Speaker 1: I'm gonna cheat and say that Apple is both. They
28:50
Speaker 1: are representative. I'm sorry, they are representative of the smartphone
28:54
Speaker 1: industry again, because you have this phenomenon where a majority
28:58
Speaker 1: of people in the world now have a smartphone, and
29:00
Speaker 1: they're replacing them less often, and so that affects new
29:03
Speaker 1: device sales. And that's happening not only for Apple, but
29:06
Speaker 1: for every other smartphone manufacturer out there, particularly those like
29:10
Speaker 1: Apple that are focused on, you know, relatively affluent consumers
29:15
Speaker 1: in the developed world. So um, So there is both
29:19
Speaker 1: a kind of smartphone industry read on Apple as well
29:22
Speaker 1: as a kind of Apples specific given the corner of
29:25
Speaker 1: the market where they concentrate. So one question that people
29:28
Speaker 1: have started to ask them is doesn't make sense for
29:30
Speaker 1: Apple to do something unusual for the company, and that's
29:33
Speaker 1: starts to lower their prices in order to get into
29:37
Speaker 1: markets like India, for example, which has been a high
29:39
Speaker 1: growth smartphone market, one of the few pockets of growth
29:43
Speaker 1: in the smartphone industry. But their Apple's iPhones are not
29:47
Speaker 1: competitively priced in India, and the same is true in China.
29:51
Speaker 1: And so will Apple be more aggressive with prices and
29:54
Speaker 1: they really haven't shown that in the past a willingness
29:58
Speaker 1: at all like China is probably a great example. So
30:00
Speaker 1: in terms of we but if you think about the
30:03
Speaker 1: Indian market, where they are essentially nowhere, have they ever
30:06
Speaker 1: talked about all right, we are going to strategically make
30:09
Speaker 1: a change and bring in a mid priced or low
30:12
Speaker 1: priced phone. Not really. I mean, if you recall a
30:16
Speaker 1: couple of years ago, a few years ago, Apple released
30:18
Speaker 1: the iPhone SC, which was more of a mid market
30:21
Speaker 1: price phone, and that has been a device that they've
30:23
Speaker 1: pushed in places like India, although even the iPhone SC
30:27
Speaker 1: is still too expensive for India. And and look, I
30:30
Speaker 1: will say that I think it's debatable whether Apple needs
30:34
Speaker 1: to compete on price. They have done some select price
30:37
Speaker 1: cuts kind of under the covers in in China, for example. Um,
30:41
Speaker 1: but Apple has never been a company that has tried
30:44
Speaker 1: to get all the market share in the world. Right.
30:46
Speaker 1: They've been content selling a relatively relatively small fraction of
30:51
Speaker 1: the world's personal computers, for example. But they still have
30:55
Speaker 1: a majority of the share of revenue in the personal
30:58
Speaker 1: computer industry because the max they sell our high prices.
31:03
Speaker 1: So if Apple is content to do that in smartphones,
31:06
Speaker 1: maybe it should set that out as a strategy instead
31:09
Speaker 1: of letting people guess what the heck Apple is trying
31:12
Speaker 1: to do. All Right, so we have Apple sort of
31:14
Speaker 1: setting the tone for the media intensive tech side big tech.
31:19
Speaker 1: Later today, we have already gotten the data from Intel
31:23
Speaker 1: and Nvidia, and I'm wondering, what's your big takeaway other
31:26
Speaker 1: than bad? I think bad is my big takeaway? UM,
31:33
Speaker 1: I think I think it remains to be seen. You
31:36
Speaker 1: pointed out that Apple is a little bit of an
31:38
Speaker 1: idiostocratic company at least as we think about the rest
31:41
Speaker 1: of big tech. Right, So my question for UM that
31:46
Speaker 1: came from Intel and Nvidia is one reason that those
31:50
Speaker 1: companies gave for relatively weak financial results was their biggest
31:54
Speaker 1: customers um for computer server chips, which are you know,
31:58
Speaker 1: the kind of high end um superpowered computers that are
32:02
Speaker 1: used by the big Internet companies like Google and Amazon
32:04
Speaker 1: and so on, those come those customers are taking a
32:08
Speaker 1: bit of a pause in buying chips for their data centers.
32:11
Speaker 1: And the question is is that a temporary pause because
32:15
Speaker 1: they pre bought a whole bunch of computer chips and
32:17
Speaker 1: are now kind of working through that, or do those
32:20
Speaker 1: companies see there's some growth hiccups on the horizon, maybe
32:24
Speaker 1: we should pair back our supplies or purchases of the
32:27
Speaker 1: raw materials for our internetwork networks. And so that's something
32:31
Speaker 1: that I'm going to be listening for from Amazon and
32:34
Speaker 1: Google and Facebook for the rest of this year, is
32:36
Speaker 1: are they seeing signs of weakness in their growth and
32:40
Speaker 1: that's being reflected in their orders to companies like in
32:43
Speaker 1: Video and Intel. Yeah, that's I I think that's a
32:46
Speaker 1: critical issue that you share. Wrote an article a column
32:49
Speaker 1: two days ago about you know, the Canary and coal
32:51
Speaker 1: mind these these chip makers and what does that mean
32:53
Speaker 1: for the big text story? You know, I think my
32:55
Speaker 1: question is, you know, and when we think about the
32:57
Speaker 1: Some of the biggest growth areas uh in heck, over
33:00
Speaker 1: the last five six years has been the cloud. And
33:02
Speaker 1: the question that I'm wondering is if have we seen
33:05
Speaker 1: peak cloud um or or is again is it is
33:08
Speaker 1: that something structural or is it something that's just temperate.
33:11
Speaker 1: And I'll tell you if if it is structural, that
33:13
Speaker 1: is a seismic shift for the entire tech ecosystem. Are
33:16
Speaker 1: you are you hearing any of that or seeing any event?
33:19
Speaker 1: I'm not. I'm not. I think from all that we've
33:21
Speaker 1: seen there there's an imperative for companies to continue to
33:27
Speaker 1: spend on um on pushing more of their digital information
33:32
Speaker 1: into these cloud computing services. I still wonder what happens
33:36
Speaker 1: if we get um a global recession or a recession
33:40
Speaker 1: in in some parts of the world. UM. I think
33:42
Speaker 1: there's a belief that the cloud is not going to
33:44
Speaker 1: be affected by that because there are financial imperatives, some
33:47
Speaker 1: financial savings removing to things to the cloud. I just
33:50
Speaker 1: don't know if companies are gonna be willing to do
33:53
Speaker 1: those kinds of information technology projects if we do see
33:56
Speaker 1: signs of economic hiccups, and so I think that is
34:00
Speaker 1: a big question of the peak cloud question. And there's
34:03
Speaker 1: also of course the question of carmakers, right will they
34:06
Speaker 1: simply cut costs by not investing as much in the
34:09
Speaker 1: sort of tech side of the chips and buying as
34:12
Speaker 1: much of those types of issues. So really, um, a
34:15
Speaker 1: lot of in an intersection of a lot of different
34:18
Speaker 1: industries kind of coming together that we're going to find out, uh,
34:21
Speaker 1: some insight into after the bell today, tomorrow and in
34:25
Speaker 1: the upcoming days. Shara Overday, thank you so much for
34:27
Speaker 1: being with us. As always, Shara Oviday is a Bloomberg
34:30
Speaker 1: opinion columnist covering all things tech. Thanks for listening to
34:35
Speaker 1: the Bloomberg P and L podcast. You can subscribe and
34:37
Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform
34:40
Speaker 1: you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney.
34:44
Speaker 1: I'm Lisa Abram Woids I'm on Twitter at Lisa A.
34:46
Speaker 1: Bram Woyds one. Before the podcast, you can always catch
34:49
Speaker 1: us worldwide on Bloomberg Radio.