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P&L: The Bloomberg Pessimist's Guide to 2017 · Bloomberg Intelligence

0:04
Speaker 1: Welcome to the Bloomberg pm L podcast. I'm pim Fox.
0:08
Speaker 1: Along with my co host Lisa Abramowitz. Each day we
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Speaker 1: bring you the most important, 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 the Bloomberg p L Podcast on iTunes,
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Speaker 1: SoundCloud and at Bloomberg dot com. Well, how to greet
0:29
Speaker 1: the year two thousand seventeen by being a pessimist. One
0:33
Speaker 1: of the things you probably would do is you would
0:34
Speaker 1: call up our next guest, John fra Her. He is
0:38
Speaker 1: executive editor for the International Government division of Bloomberg News.
0:41
Speaker 1: He's a pest Well clearly now he is a pessimist
0:45
Speaker 1: because he is responsible for our Pessimists Guy to seventeen. John,
0:51
Speaker 1: all right, tell us, when you know, do we take cover,
0:53
Speaker 1: should we build a shelter? What what's going to happen?
0:56
Speaker 1: But part of the exercise of the pessimist guy does
0:58
Speaker 1: not necessarily a series of predict is. What what we're
1:00
Speaker 1: trying to do is encourage readers to think outside the box.
1:04
Speaker 1: I just can I interrupt you for one second, though,
1:07
Speaker 1: last year's guide to the Pessimistic Guide pretty much entirely
1:10
Speaker 1: came true, right, I mean the base case of Trump
1:13
Speaker 1: becoming president. So this time last year, it definitely did
1:16
Speaker 1: pay to be a presimist, yes, because we we put
1:18
Speaker 1: in front of readers the idea that breggs that could
1:20
Speaker 1: actually happen. And actually the most controversial I think that
1:23
Speaker 1: we had last year, the one that caused most internal
1:25
Speaker 1: debates and arguments as we were debating it, was should
1:28
Speaker 1: we put in front of readers the possibility of Donald
1:31
Speaker 1: Trump winning the winning the White House? And it was
1:33
Speaker 1: actually the last thing that we put in because there
1:35
Speaker 1: was so much heated debate about it. We were told,
1:37
Speaker 1: this is a joke, it's going to be over by February.
1:39
Speaker 1: It's going to make us look stupid. But sometimes outlandish
1:43
Speaker 1: things do happen. As the last the last filve months
1:45
Speaker 1: is taught, did you make the correlation between Donald Trump
1:48
Speaker 1: being elected president and the doubt being up more than
1:51
Speaker 1: ten percent and the S and P up more than
1:53
Speaker 1: seven and a half percent. I think that bit we
1:55
Speaker 1: sort of wed. We we didn't quite factor that in,
1:58
Speaker 1: but again it goes to show you that all of
2:00
Speaker 1: these events have have unintended consequences, and what we're encouraging
2:03
Speaker 1: people to do is keep an open mind not only
2:06
Speaker 1: about the events that can happen, but how markets will
2:08
Speaker 1: react to it as well. Okay, so John, here we
2:10
Speaker 1: have our crystal ball. You can look into it. What's
2:12
Speaker 1: going to happen next year? If you're a pessimist, if
2:14
Speaker 1: you're if you're a pessimist. Um Well, one of the things,
2:17
Speaker 1: one of the sort of the threads that runs through
2:20
Speaker 1: at the coverage, for example, is this idea of of
2:22
Speaker 1: of America puming back from from the rest of the world.
2:26
Speaker 1: Um And one of the things that we've thought about
2:29
Speaker 1: is what if on the morning of Donald Trump's inauguration
2:32
Speaker 1: he decides to label China a currency manipulator over Twitter. Now,
2:37
Speaker 1: it actually nearly happened last Friday night about believe it
2:39
Speaker 1: or not again, which causing another sort of range of
2:42
Speaker 1: you know, huge debate with me and my co my
2:45
Speaker 1: my sort of fellow pessimists. I got one email on
2:48
Speaker 1: Friday night saying we need to get this thing published
2:50
Speaker 1: now because this could happen. So that's one thing to
2:53
Speaker 1: think about Trump starting a trade war with China. But
2:56
Speaker 1: then the flip side of that, and I think it
2:57
Speaker 1: really important to see that Donald Trump may well be
3:00
Speaker 1: thinking about and certainly people in Washington are thinking about it.
3:03
Speaker 1: Is this North Korea angle, right, So there are people
3:05
Speaker 1: in South Korea who say the whole notion of North
3:08
Speaker 1: Korea building a missile that could hit the West coast
3:10
Speaker 1: on which you could fit and miniaturized nuclear device is
3:13
Speaker 1: not that outlandish at all, which then raises the question
3:16
Speaker 1: for Donald Trump. Okay, fine, you want to go hard
3:18
Speaker 1: on China on trade, but if you're really genuinely worried
3:21
Speaker 1: about North Korea, you need Beijing on board. You need
3:25
Speaker 1: Beijing to help you deal with this, with this rogue regime.
3:28
Speaker 1: So again one of the things that worked in the past. Well,
3:31
Speaker 1: it's very difficult. I mean, China is sort of access
3:34
Speaker 1: North Korea's protector, and certainly they are very reluctant to
3:38
Speaker 1: be seen to be how thin America out on the
3:41
Speaker 1: North Korea issue. But it just goes to show you
3:43
Speaker 1: how all of these issues that are interrelated. If you
3:45
Speaker 1: do want to go hard on China trade, you also
3:47
Speaker 1: need to think the back of your mind that you
3:49
Speaker 1: might need China to help you out with North Korean's well,
3:52
Speaker 1: and talking about China if there were a trade war,
3:56
Speaker 1: I believe in this Pessimists Guide, you talked about a
3:59
Speaker 1: potential recession and in China that could result from this. Right,
4:02
Speaker 1: that's right, And you have to remember all at the
4:03
Speaker 1: same time that this is happening, there's a big leadership
4:06
Speaker 1: reshuffle happening in China this this time next year, so
4:09
Speaker 1: that the Standing Committee, which sort of sits on the
4:12
Speaker 1: very apex of Chinese power, is all going to be reshuffled,
4:15
Speaker 1: and Ping and as Prime Minister will stay, but everyone
4:17
Speaker 1: else will probably get rotated out. And of course Chinese
4:20
Speaker 1: politics is very opaque, but you can bet that there's
4:22
Speaker 1: going to be a lot of people in Beijing are
4:23
Speaker 1: going to be focusing on the succession to see when
4:26
Speaker 1: perhaps they should be spending more time on keeping the
4:28
Speaker 1: economy going. And they will also be dealing with the
4:31
Speaker 1: US President, who you know is going to be on
4:34
Speaker 1: orthodox at the very least. Well, we're going to speak
4:37
Speaker 1: later on in the program with Arthur Kroeber. He is
4:39
Speaker 1: a founding partner at the Gave Call Dragon Nomics, also
4:43
Speaker 1: a fellow at the Brookings Chingao Center for Public Policy.
4:47
Speaker 1: He'll be talking about China later on in the program.
4:49
Speaker 1: Can we just go to Germany for a moment, what's
4:51
Speaker 1: what's the prognosis, what's the pessimist So the pestim scenario there,
4:55
Speaker 1: I mean Angela Merkel of course is on is on,
4:57
Speaker 1: is on the back back foot big time in Jerem
5:00
Speaker 1: and she's facing her own populist insurgency there. She's got
5:02
Speaker 1: her own elections in September next year. So one of
5:05
Speaker 1: the scenarios we put out there is that she loses.
5:07
Speaker 1: She loses that election. Now we're not saying that the
5:09
Speaker 1: populace will come to power, but she could be so
5:12
Speaker 1: her authority could could be so heavily dented by this
5:15
Speaker 1: election that she's forced to stand down. Angel America has
5:19
Speaker 1: been the glue that's kept Europe together eatly for the
5:21
Speaker 1: last decade, whether it's Greece or whether it's the refugee crisis,
5:24
Speaker 1: So that in and of itself, her leaving would be
5:27
Speaker 1: a hugely destabilizing event for event for Europe. And then
5:30
Speaker 1: turning back to the US, how about sort of social
5:34
Speaker 1: backdrop in the United States with Donald Trump as the president?
5:38
Speaker 1: I mean, could there be a sort of radical movement
5:41
Speaker 1: that evolves and what would the effect to be there?
5:43
Speaker 1: So we are we have looked at that we could
5:45
Speaker 1: you could see a sort of a coalition of the
5:47
Speaker 1: left or the center left in the streets. Also, we
5:50
Speaker 1: talked about, for example, Californian billionaire liberal Californian billionaires deciding
5:55
Speaker 1: to group together to sort of form a resistance movement
5:58
Speaker 1: if you like. That's then entire group is Californian billionaires,
6:02
Speaker 1: billionaire And then what happens in Congress? Yes, so, I
6:05
Speaker 1: mean there is I'm just curious when they found that group,
6:07
Speaker 1: are they going to be subject to the same kinds
6:10
Speaker 1: of conditions at a foreign state would be subject to
6:14
Speaker 1: if they want government contracts for any of their products
6:16
Speaker 1: or services. That's a very good question. But I mean
6:18
Speaker 1: it's called calex it, right, calex is this idea that
6:22
Speaker 1: sort of been brewing, brewing since the election. Um. But
6:26
Speaker 1: one of the things to think about as well is
6:27
Speaker 1: if you did get if you did get broad social
6:30
Speaker 1: unrest or deep unhappiness with Trump's domestic agenda, what would
6:35
Speaker 1: that do to unity and Congress when he tries to
6:37
Speaker 1: get a fiscal fiscal stimulus through. So something it's worth
6:40
Speaker 1: connecting those dots together. And I'm not saying this this
6:44
Speaker 1: pessimist guide, will you know it is predicting the future,
6:46
Speaker 1: although it has it has a pretty good track record
6:48
Speaker 1: at this point. But it's encouraging leaders to think about
6:51
Speaker 1: all of these differentencies and how they could link together. Putin,
6:56
Speaker 1: Vladimir Putin and President elect Donald Trump new best friends forever.
7:00
Speaker 1: What's going to happen here? I think it's pretty interesting, actually,
7:02
Speaker 1: I mean, if you look at that's certainly the narrative
7:05
Speaker 1: has been the narrative through the campaign. But who then
7:07
Speaker 1: would have thought that Donald Trump would have packed his
7:09
Speaker 1: cabinet with with former Goldman Sachs employees. So in theory,
7:15
Speaker 1: you know, Donald Trump has had he wants a better
7:17
Speaker 1: relationship with Putin, but you know, Putin himself is a
7:21
Speaker 1: very hard to predict guy who will only act in
7:24
Speaker 1: Russia's self interest, So that romance, it could be a
7:27
Speaker 1: short lived one. But one thing to think about is
7:30
Speaker 1: that if if Trump does carry through on his pledge
7:34
Speaker 1: to sort of really question how much Europe spends on defense,
7:37
Speaker 1: he could he could he could basically give Angela Merkel
7:40
Speaker 1: and European leads a very difficult choice to make. Do
7:43
Speaker 1: we decide to ramp up spending on defense good for
7:47
Speaker 1: defense companies um or without America support. Do we have
7:51
Speaker 1: to learn to do deals with the Vladimir Putin in
7:54
Speaker 1: Eastern Europe? Do we have to accept the fact that
7:56
Speaker 1: Vladimir Putin is serious about the fact that Ukrainis is
7:59
Speaker 1: in his of influence? Is Vladimir? Do we have to
8:02
Speaker 1: recognize the fact that history of influence doesn't he go
8:05
Speaker 1: right up to name of naval's borders. Those can be
8:07
Speaker 1: very difficult decisions fans of Americans to make. This is
8:22
Speaker 1: the segment that I have been waiting for. This is
8:26
Speaker 1: a question that we have been talking about a lot.
8:28
Speaker 1: With all of the populist uprisings that we've seen around
8:32
Speaker 1: the world, What does this potential civil unrest and in
8:37
Speaker 1: some places actual what effect does it have on markets?
8:40
Speaker 1: With us to answer that question is Irene Finelle Hanigman, Magic,
8:44
Speaker 1: Professor of International Affairs at Columbia University, and Nick Kolas,
8:48
Speaker 1: chief market strategist at converge x UM. Nick, I want
8:52
Speaker 1: to start with you. So far, we saw a bit
8:55
Speaker 1: of a reaction. We saw three month reaction, three week
8:58
Speaker 1: reaction at Brexit, we saw three day reaction to Trump,
9:01
Speaker 1: and we saw a three minute reaction to Italy's referendum vote.
9:06
Speaker 1: Do markets does not care. You know, as you look
9:09
Speaker 1: at the data back to the nineteen twenties and look
9:12
Speaker 1: at the whole cadence of history from the Great Depression
9:14
Speaker 1: to now, I think the data shows us that the
9:17
Speaker 1: markets anticipates a lot of this change long before it
9:21
Speaker 1: actually occurs. So if you look at the Great Depression,
9:24
Speaker 1: the SMP five hundred and its predecessors were down seventy
9:27
Speaker 1: from night to nineteen thirty two, and then we had
9:30
Speaker 1: this very long wave of social unrest afterwards, culminating in
9:33
Speaker 1: World War Two. If you look at the financial crisis,
9:36
Speaker 1: down thirty six percent back in two thousand and eight,
9:39
Speaker 1: and we've had this kind of rolling set of crises
9:41
Speaker 1: ever since. So I think the bottom line is markets
9:44
Speaker 1: to some degree create the conditions to this unrest and
9:47
Speaker 1: to some degree anticipate what it's going to mean. Some
9:49
Speaker 1: by the time it actually occurs, a lot of it's
9:51
Speaker 1: baked into investor expectations. Irene, give us your thoughts. I
9:57
Speaker 1: basically agree with with Nick. I think also the situation
10:01
Speaker 1: in Europe is the markets did react very strongly and
10:04
Speaker 1: negatively uh in two thousand ten that March May period
10:08
Speaker 1: of enormous and certitude about greece potential default once it
10:12
Speaker 1: became clear in the next year or so that this
10:15
Speaker 1: was constantly ongoing, and that every crisis was awful in
10:20
Speaker 1: and of itself, and yet did not necessarily mean that
10:22
Speaker 1: the euro was failing or that Europe was failing, but
10:25
Speaker 1: that in a way, unfortunately was constantly pushed the can
10:29
Speaker 1: down the road or muddled through. So this seems to
10:32
Speaker 1: be again the case Italy. There is built in cynicism,
10:35
Speaker 1: building skepticism. We have looked at sixty different governments, of
10:39
Speaker 1: which Tibert Lusconi was the longest in Italy since World
10:42
Speaker 1: War two. UH. The assumption was that this probably would
10:46
Speaker 1: go as a no against the constitutional changes that Rensey
10:50
Speaker 1: wanted to impose, and we're really not understood. The thing
10:54
Speaker 1: that is to me also very interesting is, for example,
10:56
Speaker 1: in France right now, we've seen France go through all
11:00
Speaker 1: sorts of dry rations with alone deciding he will not
11:03
Speaker 1: present his candidacy again, with a new UH candidate, EMANUELA mccollon,
11:09
Speaker 1: former finance minister, creating a new party with unexpectedly coming
11:13
Speaker 1: to the forefront of his repay a center right. Yet
11:16
Speaker 1: there doesn't really seem to be an impact from that.
11:19
Speaker 1: Everyone is sort of a weight and see and I
11:21
Speaker 1: think this weight and see mood is kind of everywhere.
11:24
Speaker 1: Um we also and again I certainly agree we have
11:27
Speaker 1: a lot of it basically baked in. Uh, there will
11:30
Speaker 1: be volatility and as long as some of the economic
11:34
Speaker 1: fundamentals don't look that dramatic, well just assume we don't
11:38
Speaker 1: really know where the political situation is going right now, Okay,
11:40
Speaker 1: so just go sticking. In Europe, one of the biggest
11:43
Speaker 1: to wild cards that a lot of people talk about
11:45
Speaker 1: for next year is the status of the euro and
11:48
Speaker 1: the fact that a lot of anti European Union factions
11:51
Speaker 1: in Europe have been gaining power. I mean, that is
11:54
Speaker 1: not priced into the market right now. The breakup of
11:56
Speaker 1: the Eurozone. Correct, that is correct, because I don't think
11:59
Speaker 1: it will occur. I think again, the fascinating thing about
12:02
Speaker 1: it is just like in Greece, they absolutely hated what
12:06
Speaker 1: Brussels or Europe was imposing on them, but they did
12:09
Speaker 1: not want to get out of the Eurozone. To come
12:11
Speaker 1: back to the Drachma. In Italy it seems largely to
12:15
Speaker 1: be the same thing there is in the Northern faction,
12:18
Speaker 1: et cetera. In some of the very extreme factions more
12:21
Speaker 1: of an anti euro, anti EU sentiment, But fundamentally the
12:25
Speaker 1: Italian electorate does not want to get out of the
12:27
Speaker 1: Euro and certainly returned to the lira and its gyrations.
12:31
Speaker 1: So I think there's a very bizarre paradox between people,
12:35
Speaker 1: oddly enough not really wanting to break things apart, yet
12:39
Speaker 1: being very unhappy with the way things are. Nicholas, Yeah,
12:44
Speaker 1: I was actually looking at the data back to say
12:47
Speaker 1: World War two, which is an interesting, much more violent analog.
12:51
Speaker 1: Obviously what's going on in Europe now, And for U
12:53
Speaker 1: S stocks it wasn't early all that bad. S and
12:56
Speaker 1: P returned down etcent and that was it. After that
13:02
Speaker 1: defense spending and all that stimulus ended up having the
13:05
Speaker 1: equity markets up between nineteen and twenty five percent, with
13:10
Speaker 1: being up thirty six percent when the victor was actually one.
13:13
Speaker 1: So looking at a much more extreme version of unrest
13:16
Speaker 1: in Europe and you see US equities actually did pretty well.
13:20
Speaker 1: So what's the trade, Nick Cholis? Everyone seems to be
13:22
Speaker 1: pessimistic offering up all these dire scenarios. You're telling me
13:27
Speaker 1: that the analysis says you can make some money here. Yeah,
13:31
Speaker 1: the bottom line is markets climb that clichee wall of uncertainty.
13:35
Speaker 1: And we have so any particular sector, any specific ideal
13:38
Speaker 1: or do you just do you know an SMP index. No,
13:40
Speaker 1: we're seeing, you know, among our clients, we're seeing a
13:42
Speaker 1: ton of rotation. I mean, like I haven't seen five
13:46
Speaker 1: years from tech out of tech into financials first and foremost,
13:50
Speaker 1: and then industrials and healthcare pretty much in that order.
13:53
Speaker 1: If you look at et F flows over the past month,
13:56
Speaker 1: nine billion dollars, nine billion dollars into industrials and then
14:00
Speaker 1: between two and three into short into financials and industrials
14:04
Speaker 1: and healthcare is two to three billion dollars tech negative
14:07
Speaker 1: draws for example. Irene, and I'd love to get your
14:09
Speaker 1: perspective on at what point in history civil unrest has,
14:14
Speaker 1: if it has ever bled into markets that I think
14:19
Speaker 1: is really uh interestingly enough, often there's there's really not
14:23
Speaker 1: a lot of correlation. I mean, yes, we we can
14:27
Speaker 1: certainly look at at even as Nick mentioned, during the
14:31
Speaker 1: Great Depression, there seemed to be a sort of a
14:35
Speaker 1: slow revival. Uh. The issue is right now and what
14:40
Speaker 1: we have seen basically in in many decades is that
14:44
Speaker 1: the euro dollar parody has not been that we have
14:49
Speaker 1: not gone through that many disruptive moments, and at even
14:53
Speaker 1: when the crisis in Europe were occurring, we were not
14:56
Speaker 1: really going through a currency crisis, and intr stanly enough
15:00
Speaker 1: in September after there was a near no vote on
15:05
Speaker 1: the Mastrok referendum where there actually was a currency crisis
15:09
Speaker 1: and most of the currency had to drop out of
15:11
Speaker 1: actually the parody bands within the European Union what would
15:15
Speaker 1: become the Eurozone. Uh. Interestingly enough, that did not necessarily
15:19
Speaker 1: lead to a political crisis. So the interesting issue is
15:23
Speaker 1: that we don't really have a set correlation. The one
15:27
Speaker 1: thing that I'm still quite concerned about because I don't
15:30
Speaker 1: know how it plays out or how it will finally
15:32
Speaker 1: play at long is Brexit whether that will have longer
15:36
Speaker 1: impact on banks on the UK banks wet Irene, we
15:40
Speaker 1: gotta leave it there, but thank you very much, Professor
15:42
Speaker 1: Irene Finel Hanegmann, Adjunct Professor, International Affairs, Columbia University, and
15:47
Speaker 1: our thanks also the Nick Culis, chief market strategist at
15:50
Speaker 1: converge x. Well. Imagine that you wanted to know everything
16:06
Speaker 1: that you could about China, you would probably call Arthur Kroeber.
16:10
Speaker 1: He is a founding partner of Gavical dragon Omics, and
16:14
Speaker 1: he joins US now. He's also the author of the
16:16
Speaker 1: new book entitled China's Economy What Everyone Needs to Know. Arthur,
16:20
Speaker 1: thank you very much for being with us. So what
16:22
Speaker 1: do we need to know about China right now? Well?
16:26
Speaker 1: I think two things. First of all, um economic growth
16:31
Speaker 1: is reasonably stable. Isn't going to stay so for the
16:34
Speaker 1: next year because the government is heading towards a major
16:37
Speaker 1: political event Party Congress about a year from now, and
16:41
Speaker 1: they're gonna want to have very stable, calm growth between
16:44
Speaker 1: now and then to set the stage for that. But
16:47
Speaker 1: then the second thing is that I think President Trump
16:50
Speaker 1: has thrown a wild card into that by getting collected,
16:54
Speaker 1: and he has the potential to to make things a
16:57
Speaker 1: little bit more volatile by throwing some trade ancents at China.
17:00
Speaker 1: And so it'll be interesting to see how the Chinese
17:03
Speaker 1: respond to that if if in fact occurs, Arthur. You know,
17:06
Speaker 1: there's been a lot of discussion about how a potential
17:09
Speaker 1: trade war would negatively impact the US. What about China.
17:13
Speaker 1: How much does China have to lose by this type
17:16
Speaker 1: of trade argument? Well, they have a fair amount, because
17:19
Speaker 1: it's a it's a very trade dependent economy. They have
17:22
Speaker 1: a trade surplus, it's about five percent of GDP, and
17:25
Speaker 1: they do rely heavily on exports. But I think when
17:27
Speaker 1: you look at at this, it seems pretty clear that
17:30
Speaker 1: the US has a lot more to lose from a
17:33
Speaker 1: trade war with China than China does. Just a simple,
17:36
Speaker 1: simple example, one of the biggest exports that China since
17:39
Speaker 1: the United States is the iPhone, which is not a
17:42
Speaker 1: product that ultimately is from a Chinese company, is from
17:45
Speaker 1: an American company. So if you impose tariffs across the board,
17:48
Speaker 1: you'll be hurting American companies at least as much as
17:50
Speaker 1: Chinese companies, and maybe more so. At this point, I mean,
17:54
Speaker 1: given the rhetoric that we've seen from President elect Trump,
18:00
Speaker 1: will what will it take for China to respond with
18:04
Speaker 1: a sort of heavy hand, because so far they've taken
18:05
Speaker 1: a pretty light approach in response. Well, I think on
18:09
Speaker 1: the economic stuff, they're just waiting to see what he
18:11
Speaker 1: actually does. Is he and he said all kinds of things,
18:13
Speaker 1: But we don't know what he will actually do in
18:16
Speaker 1: terms of economic sanctions or tariffs or whatever until he
18:19
Speaker 1: takes office. So I think the Chinese are playing cool
18:22
Speaker 1: on that. What we saw over the weekend was this
18:25
Speaker 1: conversation between Trump and the president of Taiwan. Yeah, the
18:29
Speaker 1: Chinese are playing that very cool. Also, again, I think
18:32
Speaker 1: they're taking the calculation that what Trump Trump does as
18:36
Speaker 1: president elect when he's still really a private citizen, may
18:39
Speaker 1: be somewhat different than what he does when he's actually
18:41
Speaker 1: in office. So I think they're just going to wait
18:43
Speaker 1: and see. Arthur, if you've got a call from the
18:46
Speaker 1: CEO of a major U. S industrial company, or indeed
18:50
Speaker 1: someone in the United States that has a product or
18:52
Speaker 1: a service that they'd like to sell into China, what
18:55
Speaker 1: would you be telling them about how to navigate the
18:57
Speaker 1: business world right now and what kind of insights can
19:00
Speaker 1: you offer to get a deal done well. First of all,
19:04
Speaker 1: I think you have to understand whether you're entering into
19:07
Speaker 1: a market that's growing in a market that's stable. So
19:09
Speaker 1: China has a lot of different markets and they're behaving differently.
19:13
Speaker 1: The key is to have products and services that focus
19:16
Speaker 1: on the needs of what we would call upscale consumers,
19:19
Speaker 1: and these are households that have at least twenty dollars
19:21
Speaker 1: in income each year. This is the fastest growing part
19:25
Speaker 1: of the population. So if you're selling higher end products
19:28
Speaker 1: that appeal to these affluent consumers, you're doing well, you know.
19:31
Speaker 1: And it's that in major cities, because you know, when
19:33
Speaker 1: you think about a big country, it can be very
19:35
Speaker 1: daunting to go and do business there. But if you
19:37
Speaker 1: narrow it down to specific cities, then you can maybe
19:40
Speaker 1: do a little bit better. Well. But I think it's
19:42
Speaker 1: important to understand that this this population of affluent consumers
19:46
Speaker 1: exist not just in two or three cities, but probably
19:48
Speaker 1: in about fifty or sixty cities sprinkled up and down
19:50
Speaker 1: the coast. So I think you you do need to
19:53
Speaker 1: have a broader strategy. But the other thing is, if
19:56
Speaker 1: you're just entering China, don't go in with a grand idea.
19:59
Speaker 1: Go in with something small, something managementle that you can control,
20:02
Speaker 1: and then scale it up gradually over time. The biggest
20:05
Speaker 1: mistake that companies make when they go into China is
20:08
Speaker 1: they think it's a giant market and they're going to
20:09
Speaker 1: take it by storm and they have a grand plan,
20:12
Speaker 1: and that usually comes to grief. Arthur, China's un has
20:16
Speaker 1: been sort of in the backdrop this year, but there
20:19
Speaker 1: still is the possibility for a very disorderly uh devaluation
20:23
Speaker 1: of the currency. There still are a lot of outflows
20:27
Speaker 1: capital outflows from China. How worried are you about this?
20:30
Speaker 1: I'm not worried in the short term. If you look
20:33
Speaker 1: at the recent capital outflow numbers, basically they're not real outflows.
20:37
Speaker 1: They reflect the fact that China's holdings of things like
20:40
Speaker 1: the euro and the yen have gone down in value
20:43
Speaker 1: as the dollar has rallied over the last a couple
20:45
Speaker 1: of months. So we don't really see strong capital outflows now.
20:49
Speaker 1: And the other thing that we've seen is that when
20:50
Speaker 1: f flows do occur, that Chinese are very effective at
20:53
Speaker 1: imposing capital controls to keep things under wraps. So I
20:56
Speaker 1: think for the next few months, not a big worry.
21:00
Speaker 1: The worry I do have is, let's say we have
21:01
Speaker 1: another six or eight months of the dollar rising very rapidly.
21:06
Speaker 1: That will create a lot of incentives for Chinese investors
21:09
Speaker 1: to switch from rem and b ASTs the dollar. ST's
21:11
Speaker 1: move money out. But we're not there yet. Arthur Krober,
21:14
Speaker 1: thank you so much for being with us. Arthur Kroeber,
21:16
Speaker 1: founding partner of Gavacal dragon Omics, China focused economic research
21:20
Speaker 1: consultancy in Beijing, and joining us here in studio is
21:37
Speaker 1: Shelley Bancho, Bloomberg Gadfly columnist, to tell us all about
21:41
Speaker 1: shopping at an Amazon store. I thought that was only
21:44
Speaker 1: going to be online, but apparently eventually I'm going to
21:47
Speaker 1: be walking in and out of a store and not
21:49
Speaker 1: having to take out my wallet and somehow Amazon will
21:52
Speaker 1: still be involved. Yeah, you just walk in, put the
21:55
Speaker 1: things in your pocket or your card or your bag,
21:58
Speaker 1: and walk out. And the way that it was build
22:01
Speaker 1: was that it's all sensor technology artificial intelligence. Basically, they
22:06
Speaker 1: have little sensors on all the on all the items,
22:08
Speaker 1: and they can tell when you're buying them, and then
22:10
Speaker 1: they credit it to your Amazon Prime account and charge you.
22:14
Speaker 1: You know, it's just like Amazon already dominated retailers on
22:18
Speaker 1: the online space, and now just to sort of take
22:21
Speaker 1: some salt and rub it in those wounds, they're going
22:24
Speaker 1: to have a brick and mortar place that's running better
22:26
Speaker 1: than the ones that are in existence already. I mean,
22:30
Speaker 1: how much do you retailers have to fear from this
22:32
Speaker 1: sort of Amazonian invasion of their you know, bread and butter.
22:37
Speaker 1: I think a lot, because you know, Amazon has done
22:40
Speaker 1: so well at so many things. They've also not done
22:42
Speaker 1: very well at at many things. But but this is
22:45
Speaker 1: something you know, just focusing on checkout for example. Check
22:48
Speaker 1: Out is something that all these big traditional retailers have
22:51
Speaker 1: struggled with for decades and no one's been able to
22:54
Speaker 1: kind of figure it out. And here comes Amazon basically
22:56
Speaker 1: being like, ha ha, we have solved your biggest brick
22:59
Speaker 1: and mortars big problems just like that with our first store.
23:02
Speaker 1: But so this is my other question. How is Amazon
23:04
Speaker 1: able to do this? I mean, if you go into
23:06
Speaker 1: CVS or if you go into some of these other
23:08
Speaker 1: stores they try these self checkout counters that often are
23:11
Speaker 1: counterproductive because you end up having as many people standing
23:13
Speaker 1: by them to fix any technical glitches as you actually
23:16
Speaker 1: do just letting it to work, you know. But how
23:19
Speaker 1: is this going to work? Yeah? I think that it'll
23:21
Speaker 1: remain to be seeing what happens with Amazon. Like it
23:23
Speaker 1: could completely fail and that would probably be fine with Amazon.
23:27
Speaker 1: Which is the difference between some of these traditional brick
23:29
Speaker 1: and mortar retailers. Um Walmart, for example, launched this thing
23:32
Speaker 1: called Scan and Go a couple of years ago where
23:34
Speaker 1: you would literally take your cell phone and scan have
23:36
Speaker 1: to scan each item of each product and for that's
23:39
Speaker 1: fine if you're going into a CBS, but when you
23:41
Speaker 1: go to Walmart, you pick up a hundred items in
23:43
Speaker 1: one big swoop. Um, it didn't work well for people,
23:47
Speaker 1: so they scraped that. And you know, people have been
23:49
Speaker 1: struggling with this. Why does Amazon want to do this?
23:53
Speaker 1: Amazon wants grocery for sure, They need to learn grocery.
23:56
Speaker 1: It's this huge Do they really like going to the
24:00
Speaker 1: Rose three stores that I mean? They've said, okay, so
24:02
Speaker 1: they want to be able to supply both because a
24:04
Speaker 1: lot of grocery stores, for example, Kroger, you can go
24:06
Speaker 1: to the store, you can pick it up, It'll all
24:08
Speaker 1: be boxed for you. They've got an internet connection program
24:11
Speaker 1: already in place. Yeah, I don't think it's ever going
24:14
Speaker 1: to be Amazon's gonna replicate Walmart with these two hundred
24:17
Speaker 1: thousand square foot you know, huge supercenters for grocery. They're
24:21
Speaker 1: going to do it their own way. You know, they
24:23
Speaker 1: have they might have a few hundred of these stores
24:25
Speaker 1: with um, you know, just a certain amount of items
24:29
Speaker 1: that they can actually learn about how people a shot
24:31
Speaker 1: for groceries. Because right now Amazon is really good at
24:34
Speaker 1: a lot of things, but grocery is not one of them,
24:36
Speaker 1: and it's something they've they've been trying to do for
24:39
Speaker 1: a decade now and have not managed to crack. So
24:42
Speaker 1: how do you avoid people stealing things? I don't understand
24:45
Speaker 1: this tracking sensor? Do you have like a little tracker
24:47
Speaker 1: on you that you have to carry around that's connected
24:50
Speaker 1: to your cell phone? That I mean, I'm just trying
24:53
Speaker 1: to understand that. Yeah, I think every item has some
24:56
Speaker 1: sort of tracker sensor thing in it. And so if
24:59
Speaker 1: you walk out of your of the store without it,
25:02
Speaker 1: you know, having you know, been linked to your smartphone,
25:06
Speaker 1: then you know, maybe that'll set off bells or whistles
25:09
Speaker 1: or something like that, if the whole place to start screaming,
25:12
Speaker 1: like all the bells and whistles coming from every corner
25:14
Speaker 1: of it. But this is supposed to be, I thought,
25:16
Speaker 1: exclusively for Amazon Prime customers, So they're gonna know exactly
25:19
Speaker 1: who you are almost before you get into the store.
25:22
Speaker 1: When you walk in, you're supposed to turn your phone on,
25:25
Speaker 1: you know, kind of the store mode that actually a
25:27
Speaker 1: lot of retailers have already, and so that knows who
25:30
Speaker 1: you are and then it can touch and you can
25:33
Speaker 1: consents what you're putting into your car or your bag.
25:35
Speaker 1: Then as you walk out, it kind of all rings up.
25:38
Speaker 1: Where's the first store going to be? The first door
25:40
Speaker 1: is in Seattle on Amazon's kind of downtown campus there,
25:44
Speaker 1: and so it's already been it's already up and running
25:47
Speaker 1: for employees, and employees have been using it. So they
25:49
Speaker 1: made this kind of big announcement yesterday that they're going
25:52
Speaker 1: to open it in early January to the public. So
25:54
Speaker 1: we'll see, you know, kind of what happens, and if
25:57
Speaker 1: it goes well, they'll, you know, they'll open. And they're
26:00
Speaker 1: also testing out all sorts of different concepts and so
26:02
Speaker 1: I don't think this is the end of brick and
26:04
Speaker 1: mortar for Amazon yet. Well, when you come out of
26:06
Speaker 1: the store that can drop the products on you that
26:08
Speaker 1: you forgot to buy on the exactly, or send a
26:11
Speaker 1: little drone after you to follow you, I gotta say
26:13
Speaker 1: those stock is up. Stock up seven dollars right now,
26:17
Speaker 1: seven hundred and sixty six dollars for a share of Amazon.
26:20
Speaker 1: It's up more than three percent since they announced this.
26:23
Speaker 1: Uh this new foray. Can you imagine a drone going
26:25
Speaker 1: after you you forgot vegetables? You didn't have enough vegetables.
26:29
Speaker 1: Sally Banjo Bloomberg gad Fly column is covering the retail sector.
26:33
Speaker 1: Thank you so much for joining us. Thanks for listening
26:40
Speaker 1: to the Bloomberg P and L podcast. You can subscribe
26:43
Speaker 1: and listen to interviews at iTunes, SoundCloud, or whatever podcast
26:48
Speaker 1: platform you prefer. I'm pim Fox. I'm out there on
26:51
Speaker 1: Twitter at pim Fox. I'm out there on Twitter at
26:54
Speaker 1: Lisa Abramo. It's one before the podcast. You can always
26:57
Speaker 1: catch us worldwide on Bloomberg Radio. Y de Lord