Latest / Bloomberg Intelligence / Netflix Must Cut Prices To Compete: Needham's Martin

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Netflix Must Cut Prices To Compete: Needham's Martin · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you,
• 0:05
  Speaker 1: along with my co host Lisa Brahma wits. 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
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penil 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. Taking a look at Netflix here
• 0:21
  Speaker 1: to date the stocks up only eleven percent, lagging the market.
• 0:24
  Speaker 1: We had a downgrade today Laura Martin need Um Company
• 0:26
  Speaker 1: downgrading the stock to equivalent of a cell stocks off
• 0:29
  Speaker 1: about one point four percent today two dollars. Again, only
• 0:32
  Speaker 1: up about year to date. So we are fortunate to
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  Speaker 1: have the one and only Laura Martin in our Bloomberg
• 0:38
  Speaker 1: and an Actor Broker studio. She's a senior annalyst for
• 0:40
  Speaker 1: Needham and Company. Laura, thanks so much for being here.
• 0:43
  Speaker 1: Um why the downgrade? So what we're saying is that um,
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  Speaker 1: Netflix must have a second tier that is in the
• 0:50
  Speaker 1: five to seven dollar price point, not not just it's
• 0:55
  Speaker 1: nine six dollar premium tier. Now that Disney and Apple
• 0:58
  Speaker 1: haves five and seven dollar tears and that's where Peacock
• 1:01
  Speaker 1: is rumored to come as well when it launches in May.
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  Speaker 1: And we think the best way to do that is
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  Speaker 1: not to lower their core price, but to add add advertisements.
• 1:10
  Speaker 1: And we calculate that if they added six minute ad load,
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  Speaker 1: they could generate six dollars per sub per month, so
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  Speaker 1: that way new people could be attracted to this service.
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  Speaker 1: A lot of people steal the signal. Now they borrow
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  Speaker 1: their parents passwords and they borrow their friends passwords. They
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  Speaker 1: could start paying directly, but it wouldn't hurt the average
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  Speaker 1: out of Netflix. We could could stay at thirteen dollars
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  Speaker 1: a share um because and we calculate that if they
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  Speaker 1: don't have a price point commensurate with other streaming options,
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  Speaker 1: they will lose four million U S subscribers, which are
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  Speaker 1: three times as profitable as international subscribers. So you said
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  Speaker 1: sell uh and and you point to some fundamental problems
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  Speaker 1: with its capital structure. I'm wondering what you think the
• 1:52
  Speaker 1: trigger would be for the significant decline in prices too.
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  Speaker 1: I think your target is two hundred and sixty dollars
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  Speaker 1: to share two d sixty yep, So what's the catalyst?
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  Speaker 1: So our our concern is that if Netflix begins losing
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  Speaker 1: US US subscribers, given that it lost a hundred and
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  Speaker 1: twenty six thousand subs in Q two and it was
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  Speaker 1: down ten percent and twenty four hours, is that the
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  Speaker 1: stock would be revalued. It would lose its growth stock
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  Speaker 1: credentials and become traded on e V to ebit DA.
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  Speaker 1: So the closest company, and we cover all the fangs,
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  Speaker 1: the closest company to them is a fifteen times e
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  Speaker 1: V to EBITDA, which is a two sixty dollar price.
• 2:30
  Speaker 1: There you go. Alright, so talk to us about it's
• 2:32
  Speaker 1: really really early days of this increased competitive environment for streaming.
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  Speaker 1: Disney just launched. You mentioned Peacock from Comcast coming next year.
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  Speaker 1: Any early sense of how this might shake out in
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  Speaker 1: the streaming wars? Yeah, I think we do have a
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  Speaker 1: sense because Disney is already at Disney has announced it
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  Speaker 1: added ten million subscribers in the first twenty four hours.
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  Speaker 1: We have app um Nextus saying it's added sixteen million
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  Speaker 1: subs um adding a million subs a day. So our
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  Speaker 1: point of view is that some of those subs will
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  Speaker 1: churn out of Netflix for some period, and all you
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  Speaker 1: need is fort of you Netflix subs to churn out
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  Speaker 1: for an extra three months and Voi LA four million
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  Speaker 1: subs times twelve months a year at thirteen dollars each
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  Speaker 1: leave your revenue. So that's and that's really harsh. And
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  Speaker 1: a company that's trading at seven point two times revenue,
• 3:21
  Speaker 1: which is where Netflix trades. All right, I'd love to
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  Speaker 1: take a bigger picture look at this field as we
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  Speaker 1: do get the advent of all of these new streaming services.
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  Speaker 1: How many do you think each household can legitimately pay for?
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  Speaker 1: What's the threshold? I mean, are there just going to
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  Speaker 1: be three big survivors that everge from this? Yes, So
• 3:42
  Speaker 1: the average household today it takes three point two. And
• 3:45
  Speaker 1: when you ask them, they don't put Amazon Prime in
• 3:47
  Speaker 1: there because they think they're paying for Prime subscription, not
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  Speaker 1: at Prime TV subscription. So it's three point to excluding
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  Speaker 1: Amazon Prime TV. Okay, so three point two. So then
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  Speaker 1: I think if you are one of the fort of
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  Speaker 1: American consumers that owns an iPhone, which is the wealth
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  Speaker 1: is you're going to add a service or two, no problem.
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  Speaker 1: The problem is the other and that six of homes
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  Speaker 1: either A doesn't pay for TV at all because they're
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  Speaker 1: not they can't afford any TV, or they're gonna churn
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  Speaker 1: faster out of Netflix to substitute Disney this year, or Disney,
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  Speaker 1: like The Mandalorian is a huge show right now, Disney
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  Speaker 1: for three months, they're gonna watch The Mandalorian then go
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  Speaker 1: back to Netflix. They're going to be more cautious with
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  Speaker 1: their money and not just add an ad an ad.
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  Speaker 1: And that adds to Netflix churn, which is horrible at
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  Speaker 1: a seven multiple of revenue for Netflix all let's which
• 4:34
  Speaker 1: scares a little bit. Viacom and CBS UH just close
• 4:37
  Speaker 1: their deal to this week now trading on their simple
• 4:40
  Speaker 1: V I A C. I think you've covered both companies
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  Speaker 1: for a long time. You were there when they were together,
• 4:45
  Speaker 1: when they were split, now they're back together. What's your
• 4:47
  Speaker 1: view of this recombined viacom so, I think people are
• 4:50
  Speaker 1: underestimating the margin expansion potential here. I think there's a
• 4:53
  Speaker 1: lot of costs they can take out. Obviously they understate
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  Speaker 1: that for employee benefits, but I think you'll see them
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  Speaker 1: take out third percent more costs than they've admitted to
• 5:01
  Speaker 1: the street, which means that they're going to be able
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  Speaker 1: to grow the Ibada and EPs line. And I do
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  Speaker 1: think it's a stock that trades on EPs UM. I'll
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  Speaker 1: be very interested. I think they're going to have a
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  Speaker 1: stronger streaming service together than they did a part, and
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  Speaker 1: I think they're going to basically dominate the TV if
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  Speaker 1: you like Fox, which is dependent on the linear TV ecosystem.
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  Speaker 1: I mean it trades are a huge higher premium to
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  Speaker 1: these two stocks. But these two, these two companies together
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  Speaker 1: have a much bigger portion of Comcast and Charter and
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  Speaker 1: Altiice's bundle. Just real, quick ten seconds. Do you think
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  Speaker 1: that Netflix has a chance of going out of business
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  Speaker 1: if it does not adapt to the modern environment. I
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  Speaker 1: think more likely as they start losing US subs, which
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  Speaker 1: are three times as profitable, and then they have trouble
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  Speaker 1: growing international subs fast enough that are profitable because their
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  Speaker 1: international subs they're adding today are three dollar subs in India,
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  Speaker 1: so they can grow the revenue. But if they get
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  Speaker 1: marked down to not be a a stock um, bankruptcy
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  Speaker 1: is a long way. But I do think that the
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  Speaker 1: US profits are really buying the business helping the business today.
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  Speaker 1: A very uh thoughtful answer, analytical and thoughtful and insightful,
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  Speaker 1: Laura Martin, Thank you so much for being with us.
• 6:16
  Speaker 1: Laura Martin is senior analyst at Native and Company. Joining
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  Speaker 1: us here in our interactive broker studios. Well underneath the
• 6:36
  Speaker 1: market calm is a growing concern that the repo market,
• 6:40
  Speaker 1: the sort of plumbing of the financial system, has not
• 6:43
  Speaker 1: been fixed by the FEDS temporary repo facility, and that
• 6:48
  Speaker 1: going into year end we will see a lot more tumult.
• 6:51
  Speaker 1: Joining us here in our interactive broker studios David Kotalk
• 6:54
  Speaker 1: He's chairman and chief investment Officer at Cumberland Advisors, and
• 6:57
  Speaker 1: I was struck by this note that Sultan Posar of
• 7:00
  Speaker 1: Credit Sweez put out where he was saying he thinks
• 7:03
  Speaker 1: that people are underpricing the risk of a severe liquidity
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  Speaker 1: shortage that ends up driving the FED to have to
• 7:09
  Speaker 1: buy coupon treasuries in another QUEWI four type move. Well,
• 7:14
  Speaker 1: I think he's right. Um Zoltan does marvelous work. Number one.
• 7:20
  Speaker 1: He may not be known to all listeners, but he
• 7:24
  Speaker 1: is highly skilled technical. He has huge capacity to understand
• 7:31
  Speaker 1: the flows worldwide in this particular front end high grade
• 7:38
  Speaker 1: market number one. Number two is it a very complex issue,
• 7:43
  Speaker 1: so maybe we can simplify the issue and think of
• 7:46
  Speaker 1: it in the following are we're used to banking systems,
• 7:49
  Speaker 1: bank deposits, bank reserves, banks making loans. That's how we
• 7:54
  Speaker 1: think about the banks. There's a whole parallel system of
• 7:58
  Speaker 1: liquidity management, and it's in repo or reverse repo, and
• 8:03
  Speaker 1: it's an alternate form of cash management or financing or borrowing,
• 8:11
  Speaker 1: and that's outside the bank channel, but it's linked to
• 8:15
  Speaker 1: the bank channel, so it's intricate. Now we've got a
• 8:18
  Speaker 1: set of rules that govern the banks, and they are
• 8:22
  Speaker 1: creating a constraint for the banks to take all this
• 8:26
  Speaker 1: excess liquidity and use it in the repo market. And
• 8:31
  Speaker 1: we saw that in September because the repo market had
• 8:34
  Speaker 1: a problem at ACUP, so an interest rate on a
• 8:37
  Speaker 1: riskless overnight security went to from to in a quarter.
• 8:43
  Speaker 1: Think about that. It's not supposed to happen. Why didn't
• 8:46
  Speaker 1: it happen? Why didn't the banks intervene? And we now
• 8:49
  Speaker 1: have some understanding of why, but we haven't fixed the
• 8:53
  Speaker 1: why all right, So without getting into the nitty gritty,
• 8:56
  Speaker 1: I highly recommend that you seek out this credit sweeze
• 8:59
  Speaker 1: and pose our note. It's fantastic. There's a great story
• 9:01
  Speaker 1: on the Bloomberg about it as well. I'm wondering what
• 9:04
  Speaker 1: the consequence is as an investor in risk assets heading
• 9:07
  Speaker 1: into your end. Do you think that people are not
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  Speaker 1: prepared for a sell off and risk assets that could
• 9:12
  Speaker 1: ensue from this type of disruption. I don't know how
• 9:16
  Speaker 1: prepared people are, at least what I do know is
• 9:20
  Speaker 1: in the technical money management analytical community, there's a lot
• 9:27
  Speaker 1: of conversation about it. In the general press, in the
• 9:31
  Speaker 1: general investment community, it's ignored because we're being inundated with
• 9:36
  Speaker 1: impeachment and trade war and all the headlines. So you
• 9:40
  Speaker 1: have you have two discussions going on at once. The
• 9:43
  Speaker 1: narrow one is the unknown. It has risk of a shock.
• 9:49
  Speaker 1: What do you do if you have a fail you
• 9:51
  Speaker 1: have a collateral that doesn't deliver, You overstep some limit,
• 9:56
  Speaker 1: some threshold, and then you have a default, You have
• 9:59
  Speaker 1: a k And therein lies a risk if the system
• 10:03
  Speaker 1: is if the system fails, And the question and is
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  Speaker 1: how much will the central banks intervene in advance prospectively
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  Speaker 1: to avoid that. They'll intervene at once after the fact,
• 10:18
  Speaker 1: but what do they do to avoid the shock? And
• 10:21
  Speaker 1: how well, by the way, are we going to learn
• 10:23
  Speaker 1: from this FED meeting? Are they prepared for it? What
• 10:27
  Speaker 1: are they gonna say? So? What do we know about
• 10:30
  Speaker 1: I guess our listeners are probably saying, I'm just trying
• 10:33
  Speaker 1: to frame the risk here. Is this a December nineteen
• 10:37
  Speaker 1: kind of risk to the financial markets? Or is this
• 10:39
  Speaker 1: is kind of what we saw in September of this year,
• 10:41
  Speaker 1: which was it's kind of a short term thing, and
• 10:44
  Speaker 1: and the FED kind of calm the markets and I'm
• 10:46
  Speaker 1: not gonna worry about it too much. I think market
• 10:48
  Speaker 1: agents who are pricing securities are looking at this and say,
• 10:52
  Speaker 1: at worst it will be a repeated September Paul one
• 10:56
  Speaker 1: or two days. Everybody will get excited and then we'll
• 10:58
  Speaker 1: go on to something else. And probably that's accurate. The
• 11:03
  Speaker 1: FED was caught flat footed in September. They've been warned. Now,
• 11:09
  Speaker 1: if we get a spike in repo again, way above
• 11:12
  Speaker 1: what market rates should be, and that's only a few
• 11:15
  Speaker 1: basis points movement, what would it say says the FED failed,
• 11:20
  Speaker 1: they had warning, they had a shock, and they didn't
• 11:22
  Speaker 1: fix the problem. That would be more serious in my opinion.
• 11:26
  Speaker 1: All right, let's shift geared a little bit to the outlooks.
• 11:29
  Speaker 1: Let's uh pass over the December potential turmoil or any
• 11:34
  Speaker 1: other disruption, and when are you actually congratulations, got it
• 11:38
  Speaker 1: totally right? Said that you went all in on markets.
• 11:41
  Speaker 1: The market rallied quite a bit. Where are you now
• 11:44
  Speaker 1: in terms of the cautious versus risk on spectrum heading
• 11:48
  Speaker 1: into we raise some cash in the quantitative strategies, were
• 11:53
  Speaker 1: back in cash. In the regular managed et F accounts,
• 11:58
  Speaker 1: we have cash reserved, and in the fixed income accounts
• 12:02
  Speaker 1: we have a barbell and we are happy with some
• 12:05
  Speaker 1: of the short end because we think we're going to
• 12:07
  Speaker 1: be able to deploy it at higher interest rates. You
• 12:11
  Speaker 1: had a little no doubt or tweet on how tight
• 12:15
  Speaker 1: the triple spread was okay, and it went everywhere, So
• 12:21
  Speaker 1: you were vibral viral with a triple B. So you
• 12:24
  Speaker 1: think about viral dn quote unless you've been sick. Yeah,
• 12:28
  Speaker 1: but we don't want we don't want anybody sick. So
• 12:30
  Speaker 1: you think about what your note said. What it said
• 12:32
  Speaker 1: is we've got such a flood of liquidity worldwide, these
• 12:36
  Speaker 1: spreads are not reflecting credit risk. Someday, sometime before the year,
• 12:43
  Speaker 1: there's going to be credit risk repriced in the market,
• 12:46
  Speaker 1: and we want to be in a place to take
• 12:47
  Speaker 1: advantage of it. So do you have any kind of
• 12:50
  Speaker 1: recession outlooking one kind of outlook? Here, we're starting to
• 12:54
  Speaker 1: get some signs maybe that's some stabilization in some of
• 12:57
  Speaker 1: the European economies, but I'm just not sure if it's
• 12:59
  Speaker 1: a green shoot or not. Now, well, we're in no recession,
• 13:03
  Speaker 1: slow growth camp Paul. We've been there for a while
• 13:07
  Speaker 1: and there's no reason to change that. We think that
• 13:10
  Speaker 1: there are enough shoots, whether you want to call him
• 13:14
  Speaker 1: green or something else, to see rising labor income taking
• 13:19
  Speaker 1: away from return on capital in the US saw a
• 13:22
  Speaker 1: little and you did a deep dive in the productivity numbers,
• 13:25
  Speaker 1: they reveal it. You look at the employment report that
• 13:29
  Speaker 1: there are a number of signs that this labor market
• 13:32
  Speaker 1: is finally tightening enough to begin to get upward costs
• 13:38
  Speaker 1: of labor, and labor costs long time coming. But if
• 13:43
  Speaker 1: it's coming, that means capital profits get the pressures. All right,
• 13:48
  Speaker 1: So David, real quick here thirty seconds, and then we'll
• 13:51
  Speaker 1: let you go. What's gonna be the best performing as
• 13:53
  Speaker 1: at Class I Like the US healthcare sector, it's terrific
• 14:01
  Speaker 1: risk aside, policy risk aside, insulated from the trade war,
• 14:05
  Speaker 1: and the sleeper might be in the energy patch, which
• 14:09
  Speaker 1: is so beaten down and killed that it's got no
• 14:12
  Speaker 1: room to go down anymore. It's on the floor, he plays.
• 14:16
  Speaker 1: David Kotak, thank you so much for joining us. David's
• 14:18
  Speaker 1: chairman and chief investment officer of Coumbling Advisors, coming all
• 14:21
  Speaker 1: the way up from Sara Sota, Florida, going against the
• 14:23
  Speaker 1: migration that happens this time of a year. But he
• 14:26
  Speaker 1: joins us here in a Bloomberg Interactive broker studio, and
• 14:28
  Speaker 1: we appreciate that. Not a lot of action in markets today. However,
• 14:47
  Speaker 1: if you do look at an index, the main index
• 14:50
  Speaker 1: of Mexican stocks, you could see that they are up
• 14:53
  Speaker 1: one point three percent. This comes on the heels of
• 14:55
  Speaker 1: an announcement of a U S m C, a agreement
• 14:58
  Speaker 1: that Mexico, Canada, the US are all planning to sign today.
• 15:02
  Speaker 1: The U S. House of Representatives is expected to take
• 15:04
  Speaker 1: it up next week and pass it. Joining us now
• 15:07
  Speaker 1: to understand the significance of this deal is Christopher Wilson,
• 15:10
  Speaker 1: Deputy director of the Mexico Institute for the Wilson Center
• 15:14
  Speaker 1: based in Washington, d C. Christopher, thank you for being
• 15:17
  Speaker 1: with us. Let's just get started in terms of who
• 15:19
  Speaker 1: are the big winners from this deal and who are
• 15:21
  Speaker 1: the big losers. Yes, thanks very much for having me.
• 15:25
  Speaker 1: I mean, i'd say the business community in general is
• 15:27
  Speaker 1: a winner. I mean, the American people and the people
• 15:31
  Speaker 1: across North America are winners in a certain sense. And
• 15:33
  Speaker 1: that big sense there is that having a deal now
• 15:36
  Speaker 1: restores certainty to an area in which we've had so
• 15:39
  Speaker 1: much uncertainty over the last couple of years. Trade policy
• 15:42
  Speaker 1: has been you know, a big focus point for markets
• 15:44
  Speaker 1: for the last couple of years, and it will remain
• 15:46
  Speaker 1: to be given everything that's going on with China. But
• 15:48
  Speaker 1: this little piece of it across North America is basically
• 15:51
  Speaker 1: wrapped up now. It means that all of the companies
• 15:54
  Speaker 1: who have built up a continental system of production across
• 15:57
  Speaker 1: North America with parts and materials going back and forth
• 15:59
  Speaker 1: across borders, so auto parts that you know, move across
• 16:03
  Speaker 1: the border to then be put into a you know,
• 16:05
  Speaker 1: fully assembled into a vehicle. Hundreds of billions of dollars
• 16:08
  Speaker 1: of investments have been made to create that system, and
• 16:10
  Speaker 1: the competitive it's the north of North America that comes
• 16:14
  Speaker 1: along with that system are now safe again. So that's
• 16:17
  Speaker 1: the most important thing. Now some there are some more
• 16:20
  Speaker 1: specific winners and losers. So the one of the bigger
• 16:22
  Speaker 1: changes was again on autos in terms of an increase
• 16:26
  Speaker 1: in rules for regional content. So you have to have
• 16:29
  Speaker 1: a greater portion of an automobile made within North America
• 16:32
  Speaker 1: and specifically made within the United States or Canada in
• 16:36
  Speaker 1: order to comply with usmc A rules. So that will
• 16:39
  Speaker 1: create some a few new jobs in the US auto
• 16:41
  Speaker 1: sector and potentially the Canadian auto sector as well, but
• 16:44
  Speaker 1: it will make cars more expensive as a result. It
• 16:47
  Speaker 1: will be a drag on the overall economy at the
• 16:49
  Speaker 1: gain of sort of a much narrower sector. You know,
• 16:52
  Speaker 1: we can look at agricultural sector as well. The United
• 16:55
  Speaker 1: States will get a little bit more access to the
• 16:57
  Speaker 1: Canada's dairy market, for example, So there's a in there.
• 17:00
  Speaker 1: There's also a modernization that's happening with the agreement. So
• 17:03
  Speaker 1: it's a lot of little changes to update NAFTA for
• 17:06
  Speaker 1: the twenty feet century. Is their provisions on data storage,
• 17:10
  Speaker 1: e commerce, things like that. I mean, products now are
• 17:13
  Speaker 1: increasingly being delivered as much via email as they are
• 17:16
  Speaker 1: via truck, and we needed rules to govern that across
• 17:19
  Speaker 1: North America. Things that just didn't exist in the original
• 17:22
  Speaker 1: NAFTA twenty five years ago. You know, it's interesting, Chris,
• 17:25
  Speaker 1: since President Trump, you know, essentially scrapped NAFTA, calling it
• 17:29
  Speaker 1: the worst deal of all time, We've had three years
• 17:32
  Speaker 1: of uncertainty, three years of negotiations. This deal doesn't look
• 17:35
  Speaker 1: that much different than NAFTA. It's NAFTA. I mean, this
• 17:40
  Speaker 1: is you know, and that's why I say the most
• 17:42
  Speaker 1: important thing that's happening here is just removing some of
• 17:45
  Speaker 1: that uncertainty. You know, there are important differences between NAFTA
• 17:49
  Speaker 1: and U s m c A, but we have to
• 17:51
  Speaker 1: start from a baseline that this is basically just the
• 17:53
  Speaker 1: restoration of the certainty surrounding NAFTA itself. We still have
• 17:57
  Speaker 1: free trade across North America. We will have protections for
• 18:01
  Speaker 1: investors that are investing across the borders in North America,
• 18:04
  Speaker 1: and that, you know, is way bigger than any of
• 18:06
  Speaker 1: the specific changes that are made now. It's it's absolutely
• 18:09
  Speaker 1: important that Mexico had to undertake a labor reform, you know,
• 18:13
  Speaker 1: for example, in order to comply with usmc A rules.
• 18:15
  Speaker 1: That's going to be good for workers in Mexico. It
• 18:18
  Speaker 1: may increase costs of productions lightly in Mexico. But you know,
• 18:22
  Speaker 1: the bigger thing here is absolutely what's staying the same,
• 18:25
  Speaker 1: much more than what's changing. All Right. I get the
• 18:27
  Speaker 1: point that everybody wins in the business community community kumbaya,
• 18:31
  Speaker 1: hold hands, sing songs. But we are is hearing a
• 18:34
  Speaker 1: bit of pushback from specific slices of different industries, in
• 18:37
  Speaker 1: particular the U S and Canadian Aluminum group saying that
• 18:41
  Speaker 1: Mexico is looking after its own interests with some of
• 18:45
  Speaker 1: the requirements within US m c A. Is there anything
• 18:48
  Speaker 1: legitimate here? Are there any industries where there is going
• 18:51
  Speaker 1: to be a lot of back and forth and dissonance
• 18:53
  Speaker 1: in terms of the winners and losers. Yeah, Well, there
• 18:56
  Speaker 1: was a you know, sort of last hour proposal to
• 18:59
  Speaker 1: try to strengthen some of the rules around aluminum production
• 19:03
  Speaker 1: that would have favored US aluminum producers, and Mexico was
• 19:06
  Speaker 1: successful and sort of stopping that from moving forward. And
• 19:09
  Speaker 1: so that's you know, what that specifically is about. There
• 19:12
  Speaker 1: was another sort of ultimate our proposal regarding steel, and
• 19:16
  Speaker 1: that one does stay in the agreement with the transition period.
• 19:20
  Speaker 1: But you know, there was basically concerns that you'd have
• 19:23
  Speaker 1: partially finished steel and aluminum coming into Mexico from other countries.
• 19:27
  Speaker 1: They would do just a tiny bit of work on
• 19:29
  Speaker 1: it and then call that Mexican aluminum and steel on steel. Uh,
• 19:33
  Speaker 1: Mexico you know was less successful, the US was more successful,
• 19:36
  Speaker 1: and vice versa on aluminum. So absolutely there, you know,
• 19:39
  Speaker 1: there are winners and losers in this, but it comes
• 19:42
  Speaker 1: down to those you know, sort of very specific sectors
• 19:45
  Speaker 1: that you're bringing up there, Chris, what we have you
• 19:47
  Speaker 1: want to get maybe your broader take on just how
• 19:50
  Speaker 1: things are going in Mexico. You know, all we see,
• 19:53
  Speaker 1: or a lot of what we see in the States
• 19:55
  Speaker 1: is just you know, the stories about the extreme violence
• 19:58
  Speaker 1: there and the government doesn't seem to be able to
• 20:00
  Speaker 1: had a handle on it. How how does that impact
• 20:03
  Speaker 1: the economy of Mexico. Just the uncertainty and the violence
• 20:06
  Speaker 1: and the you know, all the government issues. What's the
• 20:10
  Speaker 1: real bottom line that you're seeing. Yeah, So, I mean,
• 20:12
  Speaker 1: Mexico is just completing the first year with its new president,
• 20:15
  Speaker 1: Andres Lopez over or president from the left, after many
• 20:19
  Speaker 1: years of sort of center or center right rule in Mexico,
• 20:22
  Speaker 1: and so there's a lot of changes under way in
• 20:24
  Speaker 1: the country and a lot of you know, additional uncertainty
• 20:26
  Speaker 1: related to that. That's one of the reasons why U
• 20:28
  Speaker 1: S m c A and having this wrapped up was
• 20:30
  Speaker 1: so important for Mexico. Is you know, in the context
• 20:32
  Speaker 1: of so much uncertainty, here's a little piece that's coming back.
• 20:36
  Speaker 1: But yeah, Mexico. You know, twenty nineteen is going down
• 20:39
  Speaker 1: on record as one of the most violent years historically
• 20:41
  Speaker 1: in Mexico, and it's going down as a year with
• 20:44
  Speaker 1: you know, almost zero growth in terms of GDP in Mexico.
• 20:48
  Speaker 1: So this is a very challenging year from Mexico. I
• 20:51
  Speaker 1: think we should expect the government to be able to
• 20:53
  Speaker 1: mobilize a little bit more in terms of investment in
• 20:56
  Speaker 1: the coming year. Transitions are always tough in Mexico in
• 20:58
  Speaker 1: terms of keeping government investor moving. Uh So that's a
• 21:01
  Speaker 1: positive thing to look forward to. But this, you know,
• 21:05
  Speaker 1: the bigger question is just the governing style of the
• 21:08
  Speaker 1: current president and I think the a lot of the
• 21:10
  Speaker 1: private sector in Mexico is very concerned about the future
• 21:14
  Speaker 1: of Mexico, in the Mexican economy. But you know, there's
• 21:17
  Speaker 1: still a compelling case to be made that production in
• 21:19
  Speaker 1: Mexico is you know, one of the most important ways
• 21:23
  Speaker 1: for companies across North America to cut their costs and
• 21:26
  Speaker 1: be more competitive. So that's that you know continental system
• 21:29
  Speaker 1: of production that I was talking about, that's you know,
• 21:32
  Speaker 1: that value proposition is still out there and it's still
• 21:34
  Speaker 1: bringing investment into Mexico. So it's it's a mixed story. Absolutely,
• 21:37
  Speaker 1: there are big challenges domestically in Mexico, but there's also
• 21:40
  Speaker 1: a strong logic to continuing to invest there, and we'll see.
• 21:44
  Speaker 1: I think the companies who are already in Mexico who
• 21:47
  Speaker 1: know how to operate in that complex business environment staying there,
• 21:50
  Speaker 1: reinvesting their profits, growing their business in Mexico, while we
• 21:54
  Speaker 1: see others maybe stay on the sidelines and wait and see.
• 21:56
  Speaker 1: Christopher Wilson, thank you so much for your commentary there.
• 21:59
  Speaker 1: Christopher Wilson, Deputy Director of the Wilson Centers Mexico Institute.
• 22:17
  Speaker 1: Time to check in with Bloomberg Opinion. We're joined by
• 22:20
  Speaker 1: opinion calumnist Andy Brown. He's editorial director for the Bloomberg
• 22:23
  Speaker 1: New Economy. Just held a big conference in China recently
• 22:28
  Speaker 1: joins us here in a Bloomberg Interactive Broker studio. So Andy,
• 22:32
  Speaker 1: it's a trade day here. Today, we have some movement
• 22:34
  Speaker 1: on the U S m c A. We've got some
• 22:36
  Speaker 1: positive commentary coming out about the December fifteen China tariffs.
• 22:40
  Speaker 1: But let's focus on something different as it relates to trade,
• 22:42
  Speaker 1: maybe the trade in the past, which is the World
• 22:45
  Speaker 1: Trade Organization. Tell us just summarize what the w t
• 22:49
  Speaker 1: O is and what's happening to it right now sets
• 22:53
  Speaker 1: the rules for global trade and provides the referees and umpires.
• 22:58
  Speaker 1: And what's happening today is that two of the three
• 23:01
  Speaker 1: remaining judges on the appellate board, which is the w
• 23:05
  Speaker 1: t O S Supreme Court, are going to retire and
• 23:08
  Speaker 1: the US has frozen their replacements. And so without an
• 23:11
  Speaker 1: appellate board, the work, the substance, the real arbitration work
• 23:16
  Speaker 1: of the w t O stops. Although in many ways,
• 23:20
  Speaker 1: the w t O had been defanged a long time ago, right,
• 23:23
  Speaker 1: I mean basically it had been losing importance over the
• 23:25
  Speaker 1: past few years, correct, right, And so losing relevance in
• 23:29
  Speaker 1: the sense that whole areas of global trade for instance
• 23:32
  Speaker 1: e commerce, and not covered under w t O rules
• 23:35
  Speaker 1: because the w t O came into came into being
• 23:38
  Speaker 1: before all that. That's the problem. It's also ossified in
• 23:42
  Speaker 1: the sense that it can only proceed change the rules
• 23:45
  Speaker 1: through consensus, unanimous decisions among all the members, and it's
• 23:49
  Speaker 1: almost impossible to get that to to to work. The
• 23:53
  Speaker 1: big problem really is the arrival of China, and China
• 23:58
  Speaker 1: is quite simply playing by a different set of rules,
• 24:02
  Speaker 1: and the w t O was not set up to
• 24:06
  Speaker 1: to accommodate an economy of the size of China, which
• 24:10
  Speaker 1: is not a liberal, free market, capitalist driven economy. It
• 24:14
  Speaker 1: is in many respects they call it. We call it
• 24:17
  Speaker 1: a state capitalist system. Exactly what that is is not clear,
• 24:22
  Speaker 1: but it's not free market. So give us a little
• 24:25
  Speaker 1: bit of history about when China came into the w
• 24:28
  Speaker 1: t O. What happened. So the Chinese economy starts opening
• 24:32
  Speaker 1: up in in the nineteen seventy eight with dnshell Ping's reforms,
• 24:36
  Speaker 1: and it's doing pretty well. The reforms unleshal animal spirits
• 24:40
  Speaker 1: in China. The economies keeps growing, uh, and then you
• 24:44
  Speaker 1: get to two thousand and one where China joins the
• 24:47
  Speaker 1: World Trade Organization and it just gets its growth is supercharged. Right,
• 24:52
  Speaker 1: So you now remove a lot of uncertainty from China's
• 24:55
  Speaker 1: trade and investment, and you get this wave of in
• 25:00
  Speaker 1: esmen from the U S. So, you know, factories dismantle
• 25:04
  Speaker 1: in in places like you know, the US Northeast and
• 25:09
  Speaker 1: reassemble in places like Donguan in southern China, in Guangdong,
• 25:13
  Speaker 1: and Guangdong becomes the factory floor of the world. That's
• 25:17
  Speaker 1: the w t O. China has got more out of
• 25:20
  Speaker 1: global trade than almost any other country. That of course
• 25:23
  Speaker 1: is the beginning of all the beginning of the new
• 25:25
  Speaker 1: era of globalization, where you have global supply change which
• 25:29
  Speaker 1: now start which now overwhelmingly go through China. All right, Andy,
• 25:34
  Speaker 1: when you came into the studio here, I ask you,
• 25:37
  Speaker 1: how big of a deal is this really? Because the
• 25:39
  Speaker 1: w g O has been dead for a while, or
• 25:41
  Speaker 1: not dead, but dying and sort of losing relevancy. And
• 25:44
  Speaker 1: you said, this is a big deal, And it's because
• 25:46
  Speaker 1: it comes at a time when you're having difficulty coming
• 25:50
  Speaker 1: to just simple trade agreements. But now you don't have
• 25:52
  Speaker 1: the overseer to immediate any arguments. Can you explain what
• 25:56
  Speaker 1: the potential consequences could be? Okay? So you know this
• 26:00
  Speaker 1: is this is what we the the w t O
• 26:03
  Speaker 1: and the Appellate Court is the heart of what we
• 26:06
  Speaker 1: call the rules based global trading order, and we do
• 26:10
  Speaker 1: not now have a global set of rules that are enforceable.
• 26:14
  Speaker 1: So we say, of course, we've just said that. You know,
• 26:17
  Speaker 1: in many respects, this was coming for a long time.
• 26:21
  Speaker 1: But in the absence of global rules, what you have
• 26:24
  Speaker 1: essentially is law of the jungle. Might equals rights. So
• 26:27
  Speaker 1: you're going to have the US, China, the big players
• 26:30
  Speaker 1: will essentially dictate the terms of trade increasingly through bilateral
• 26:35
  Speaker 1: trade agreements, which is going to disadvantage smaller economies. Is
• 26:40
  Speaker 1: there talk within the global trade community of any type
• 26:42
  Speaker 1: of replacement body that could function, as you know, kind
• 26:46
  Speaker 1: of an arbiter, right, So the the EU would like
• 26:50
  Speaker 1: to keep this arbitration mechanism going, and so they're they're
• 26:54
  Speaker 1: putting in place a sort of a temporary patch or
• 26:58
  Speaker 1: work around at in in Europe. Uh And we've just
• 27:02
  Speaker 1: heard that the Chinese may be interested in signing up
• 27:07
  Speaker 1: to that. Andy Brown, thank you so much for being
• 27:10
  Speaker 1: with us. It's really interesting to see how much change
• 27:12
  Speaker 1: there is happening on the international trade front. And thanks
• 27:16
  Speaker 1: for listening to the Bloomberg P and L podcast. You
• 27:18
  Speaker 1: can subscribe and listen to interviews at Apple Podcasts or
• 27:21
  Speaker 1: whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter
• 27:24
  Speaker 1: at pt Sweeney. I'm Lisa abram Woyds. I'm on Twitter
• 27:27
  Speaker 1: at Lisa A. Bram wits one. Before the podcast, you
• 27:30
  Speaker 1: can always catch us worldwide. I'm Bloomberg Radio