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Ludicrous To Attack China For Supporting Its Own Economy: Roach · Bloomberg Intelligence

• 0:06
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
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  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
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  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Late yesterday,
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  Speaker 1: the White House said that broad tariffs on steel and
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  Speaker 1: they were given an extension until June of first talks
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  Speaker 1: continuing to rewrite the North American Free Trade Agreement. Here
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  Speaker 1: to tell us more about trade and China is Stephen
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  Speaker 1: Rocchi is a senior fellow and lecture at Yale University,
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  Speaker 1: also a Bloomberg View columnist. Uh Stephen Roach, give us
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  Speaker 1: your perspective on the trip that Stephen Manuch In, the
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  Speaker 1: Treasury Secretary is taken to China and whether they will
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  Speaker 1: actually accomplish any resolution to the trade dispute between China
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  Speaker 1: and the United States. Well, I worry that this is
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  Speaker 1: a waste of taxpayer money to send these guys over
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  Speaker 1: to Beijing. There's no real strategy that they have to
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  Speaker 1: UH negotiate a meaningful concession with the Chinese, and they
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  Speaker 1: go over with a with an approach that really has
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  Speaker 1: nothing in the way of macro coherence, doesn't understand the
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  Speaker 1: role that deficits play in um UH is a symptom
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  Speaker 1: of America's own macro economic imbalances. So I'm not too
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  Speaker 1: optimistic this trip is going to accomplish anything. Pim Stephen,
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  Speaker 1: you wrote a column for Bloomberg where you were saying,
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  Speaker 1: the US needs China more than China needs the US.
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  Speaker 1: Does Beijing know this? You know this is this is
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  Speaker 1: not you know um astrophysics. They know that they provide
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  Speaker 1: American consumers with a lot of low cost goods that
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  Speaker 1: they need to make to make ends meet. They know
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  Speaker 1: they buy a lot of treasuries, and they know that
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  Speaker 1: China is now the third largest and most rapidly growing
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  Speaker 1: market for U S exports. None of these are big
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  Speaker 1: state secrets. China understands all of that. These are these
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  Speaker 1: are issues, of course, that we haven't spent a whole
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  Speaker 1: lot of time absorbing at the policy level in Washington. Well,
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  Speaker 1: the reason why I ask is because Beijing came out
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  Speaker 1: and said, yeah, we're happy to negotiate with the United States.
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  Speaker 1: We're just not willing to discuss a mandatory when hundred
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  Speaker 1: billion dollar cut in America's three hundred seventy billion dollar
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  Speaker 1: annual trade deficit with China, or curbs on Beijing's three
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  Speaker 1: hundred billion dollar plan to bankroll the country's industrial upgrade
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  Speaker 1: into advanced technologies, which are the two main issues that
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  Speaker 1: the US wants to talk about. What do you make
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  Speaker 1: of that? Well, Um, first of all, you know, the
• 3:21
  Speaker 1: the idea that you know, we can make America great
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  Speaker 1: again by cutting a bilateral deficit with China anybody else
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  Speaker 1: is totally ludicrous. I mean, if we don't rebuild our
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  Speaker 1: national savings, and of course we're going the other way
• 3:33
  Speaker 1: with these big Trump administrastration budget deficits, we can slash
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  Speaker 1: a hundred billion, two hundreds even three hundred billion off
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  Speaker 1: the Chinese bilateral deficit will just go to someone else.
• 3:43
  Speaker 1: And that someone else is a higher cost producer that
• 3:46
  Speaker 1: will end up taxing American workers. And in terms of
• 3:50
  Speaker 1: asking China to capitulate on its industrial policy, I mean,
• 3:54
  Speaker 1: are we prepared to do that with our own industrial policy?
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  Speaker 1: Or did did Japan do it? Or as Germany on it.
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  Speaker 1: It's a ludicrous to accuse China of of of going
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  Speaker 1: after supporting innovations based initiatives when we all do it.
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  Speaker 1: Stephen Roach, give us your thoughts on the dispute over
• 4:14
  Speaker 1: intellectual property rights with China. Intellectual property is the core
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  Speaker 1: of any modern innovations based society. But I've looked him
• 4:25
  Speaker 1: at the accusations that have been leveled at China in
• 4:30
  Speaker 1: the two page document produced by the US Trade rep
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  Speaker 1: on March it's not a It's not a good case
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  Speaker 1: at all. Um. They make three main points that China
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  Speaker 1: UH steals technology through joint ventures. Um, that's ludicrous. I
• 4:52
  Speaker 1: was in a joint venture, and you know when you
• 4:54
  Speaker 1: you're in a joint venture, you join with your partner
• 4:56
  Speaker 1: and you build and share operating system and innovation. There's
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  Speaker 1: nothing forced about it. Then they go after China for
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  Speaker 1: UH being a predator in these going out outward bound UM.
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  Speaker 1: Foreign direct investment initiatives like made in China. We've just
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  Speaker 1: talked about that. I think that is ludicrous. There is
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  Speaker 1: a case to be made for UH China using cyber
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  Speaker 1: espionage to um uh go after US innovation UH, and
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  Speaker 1: that that certainly was a compelling case that the President
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  Speaker 1: Obama presented to a Shijun Ping at the Sunny Land
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  Speaker 1: Summit in two thousand and fifteen. But now I think
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  Speaker 1: a fair amount of that UH type of activity is subsided.
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  Speaker 1: So there is a case, but you know, is it
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  Speaker 1: a credible case? This is a strong case, is a
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  Speaker 1: compelling case, I don't think so. See, you know, I
• 5:56
  Speaker 1: want to push back a little bit because every economist
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  Speaker 1: that we've talked to agrees that that the trade negotiations
• 6:03
  Speaker 1: between the U S and China haven't been leveled for
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  Speaker 1: a long time, or that the trade just agreements in general.
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  Speaker 1: Given the fact that China really is a closed economy
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  Speaker 1: and they do have bands on US companies coming in
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  Speaker 1: too much, you know, are owning too much of their
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  Speaker 1: presence in China, what areas do you see room for
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  Speaker 1: improvement to level the playing field here? Do you think
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  Speaker 1: things are just fine? Well, you know, there's so much
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  Speaker 1: generalization going on right now. You know, everyone feels this way,
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  Speaker 1: everyone feels it's unequal um. This probably, you know, is
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  Speaker 1: exactly the way um we dealt with the communist threat
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  Speaker 1: in the nineteen fifties under the inquisitions led by Senator
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  Speaker 1: Joseph McCarthy. It becomes something that is unpatriotic to openly debate. UH.
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  Speaker 1: China has certainly been tough in competing for market share
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  Speaker 1: around the world. There are things that they don't do
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  Speaker 1: that are not fair, that are inequable, that we may
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  Speaker 1: not like, and they need to be held accountable for that.
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  Speaker 1: But but to condemn them for literally everything they're trying
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  Speaker 1: to do to grow a large, developing economy is ludicrous.
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  Speaker 1: The areas that I think we should focus on our
• 7:21
  Speaker 1: market access, making certain that our companies have just as
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  Speaker 1: much access to their markets as they do to ours.
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  Speaker 1: And I've been long in favor of pushing ahead negotiations
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  Speaker 1: on a bilateral investment treaty between the U. S and China.
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  Speaker 1: This is stalled out, UH, And for the the Trump
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  Speaker 1: administration that prides itself as being a great dealmakers, why
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  Speaker 1: not do a deal on this is the obvious thing
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  Speaker 1: to do. Thank you so much for being with us
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  Speaker 1: and for your insights. Stephen Roach, Senior Fellow and lecture
• 7:54
  Speaker 1: at Yale University, also a Bloomberg View columnist. Well, since
• 8:13
  Speaker 1: the kickoff of earning season basically April, we've seen energy
• 8:18
  Speaker 1: companies perform the absolute best among SMP five hundred corporations.
• 8:23
  Speaker 1: Here to talk about the future outlook is Liab Denning,
• 8:27
  Speaker 1: energy Mining and commodities columnist for Bloomberg gad Fly. So
• 8:31
  Speaker 1: we have seen an outperformance in oil companies, and I'm
• 8:34
  Speaker 1: just wondering, do you think that there is a lot
• 8:37
  Speaker 1: of room for it to continue? I think so. Um Uh,
• 8:43
  Speaker 1: it's it's partly an oil price uh phenomenon. Obviously, all
• 8:47
  Speaker 1: prices are up and that does a lot of good.
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  Speaker 1: But the thing we shouldn't forget is what these companies
• 8:53
  Speaker 1: have been doing to UM to actually make themselves just
• 8:56
  Speaker 1: better companies. We've seen this from the majors in terms
• 9:00
  Speaker 1: of scaling back on very bloated investment budgets, trying to
• 9:04
  Speaker 1: get more efficient in terms of which projects they do
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  Speaker 1: and how they build them. But we've also seen it
• 9:10
  Speaker 1: with the independent guys. You know, there is a lot
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  Speaker 1: more talk now of UM smaller exploration and production companies
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  Speaker 1: actually trying to live within their means generate returns rather
• 9:21
  Speaker 1: than just grow as fast as they possibly can. We'll
• 9:24
  Speaker 1: see whether that lasts if all prices go higher, but
• 9:28
  Speaker 1: for now they seem to be making the right noises.
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  Speaker 1: The US production of oil eleven million barrels a day, Yeah,
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  Speaker 1: this is I mean, this is a big this historic,
• 9:38
  Speaker 1: it is historic. Yeah, I mean it's it's the probably
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  Speaker 1: the biggest thing that's happened in the old market in
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  Speaker 1: the last decade. Okay, And any chance that we're going
• 9:45
  Speaker 1: to see even increased production, because what we've heard in
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  Speaker 1: the past is oh maybe they'll get to eleven million,
• 9:51
  Speaker 1: we could be headed a lot higher. The issue is
• 9:53
  Speaker 1: just getting the oil out from where it is, let's
• 9:55
  Speaker 1: say West Texas, nor pipelines nor roots. Yeah, and we're
• 9:59
  Speaker 1: the logistical bottlenecks in West Texas will be eased within
• 10:03
  Speaker 1: about eighteen months, I would say, um. As to how
• 10:07
  Speaker 1: high it goes, um, I mean, there are all sorts
• 10:09
  Speaker 1: of estimates out there. It certainly doesn't seem to be
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  Speaker 1: slowing down anytime soon. And I think the key thing
• 10:15
  Speaker 1: to watch out for is with prices where they are
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  Speaker 1: that kind of sixties seventy range. A lot of producers
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  Speaker 1: are well able to keep growing production, to keep hedging
• 10:26
  Speaker 1: their production. The thing to watch out for is this
• 10:29
  Speaker 1: this kind of geopolitical premium that is creeping back into
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  Speaker 1: the market, which for the guys in West Texas is
• 10:36
  Speaker 1: just a windfall because you know, none of that stuff
• 10:38
  Speaker 1: actually affects any of their production. It all happens very
• 10:41
  Speaker 1: far away. And the more supply shocks you see elsewhere
• 10:45
  Speaker 1: that the more room that creates for US barrels. You
• 10:48
  Speaker 1: know that that I want to pick up on that
• 10:49
  Speaker 1: point because I think it's a really interesting one. Just
• 10:52
  Speaker 1: how much of a geopolitical risk premium are we actually
• 10:56
  Speaker 1: seeing baked into the market right now? Okay, so now
• 10:58
  Speaker 1: you're asking me how long a piece of string is?
• 11:02
  Speaker 1: So how long is a piece of string special? Okay, Sorry,
• 11:06
  Speaker 1: I forgot to bring my piece of string to the studio,
• 11:09
  Speaker 1: so it's impossible to say how much exactly. Okay. What
• 11:16
  Speaker 1: I would say is that this has become much more
• 11:21
  Speaker 1: of a narrative over the past six months or so
• 11:23
  Speaker 1: than it was for the proceeding three or four years.
• 11:26
  Speaker 1: In some ways, the crash that happened which was you know,
• 11:32
  Speaker 1: in large part driven by the shale boom, sort of
• 11:35
  Speaker 1: inoculated the market against geopolitical shocks, or at least it
• 11:38
  Speaker 1: seemed like it no one really seemed to care about, uh,
• 11:42
  Speaker 1: you know, the latest intrigues in Saudi Arabia or you
• 11:45
  Speaker 1: know what was happening in the Middle East. People are
• 11:48
  Speaker 1: caring more about it now, partly because inventories have come down,
• 11:52
  Speaker 1: because demand has been pretty strong, partly in response to
• 11:56
  Speaker 1: lower prices, and because obviously Opec, Russia and some other
• 11:59
  Speaker 1: countries have been holding supply off the market. And if
• 12:02
  Speaker 1: you bring inventories down, then people start to worry a
• 12:04
  Speaker 1: bit more about supply shocks, etcetera, etcetera. It creates a
• 12:08
  Speaker 1: certain danger in the market. Um. Right now, we're in
• 12:12
  Speaker 1: a position where there is a lot of speculative money
• 12:16
  Speaker 1: that is very long crude or prices. UM demand, while
• 12:21
  Speaker 1: strong globally, is showing signs of responding to higher prices.
• 12:25
  Speaker 1: The US demand data for February just came out yesterday,
• 12:29
  Speaker 1: and one of the things that struck me about it
• 12:31
  Speaker 1: was that oil demand was up about half a million
• 12:34
  Speaker 1: barrels a day, but none of that was actually what
• 12:37
  Speaker 1: we tend to think of as oil demand actual refined
• 12:40
  Speaker 1: products like gasoline and that sort of thing. It was
• 12:42
  Speaker 1: all natural gas liquids. Gasoline demand was actually down. And
• 12:46
  Speaker 1: if you look back at what's happened to gasoline demand
• 12:49
  Speaker 1: since late s which is when prices began to rise
• 12:52
  Speaker 1: at the pump, that's kind of flattened out. Again. Are
• 12:56
  Speaker 1: you loading up the car to take that summer trip
• 12:58
  Speaker 1: because it's going to question more two dollars eighty one?
• 13:01
  Speaker 1: Since is the triple a average gasoline price per gallon? Yeah,
• 13:05
  Speaker 1: And if you look in a lot of cities it's
• 13:07
  Speaker 1: it's already bus People are gonna be paying more this summer. Absolutely,
• 13:12
  Speaker 1: and I think that does begin to feed into demand.
• 13:14
  Speaker 1: And that's the risky get with these quote unquote geo
• 13:17
  Speaker 1: political premiums. Thanks very much for being with us as always,
• 13:20
  Speaker 1: Liam Denning Energy Mining and Commodities columns for Bloomberg gad Play.
• 13:24
  Speaker 1: Read all about it at Bloomberg dot com. How bad
• 13:42
  Speaker 1: will it be? That is the question with Apple, which
• 13:46
  Speaker 1: is set to report earnings after the bell today. Uh.
• 13:48
  Speaker 1: And people are worried that they are seeing slowing demand
• 13:53
  Speaker 1: for smartphones, which have provided them with seemingly unlimited amount
• 13:57
  Speaker 1: of cash filling their coffers. Joying us now, Stephen Milanovitch.
• 14:01
  Speaker 1: He is managing director and technology analystic e b S,
• 14:04
  Speaker 1: joining us from EBS headquarters in New York. Stephen, thank
• 14:07
  Speaker 1: you so much for joining us. So what are you
• 14:10
  Speaker 1: expecting and how much bad news is being already baked
• 14:13
  Speaker 1: into shares of Apple? Well, you have to assume a
• 14:16
  Speaker 1: fair amount is baked in, just because practically every Apple
• 14:19
  Speaker 1: supplier has projected June quarter disappointment indirectly blaming Apple. On
• 14:25
  Speaker 1: the other hand, the stock is held up quite well,
• 14:26
  Speaker 1: so this quarter might be a bit of a tug
• 14:28
  Speaker 1: of war between on one hand, disappointing iPhone units and
• 14:32
  Speaker 1: on the other hand significant buy back and positives like
• 14:35
  Speaker 1: services growth. So there's there's some built in, but there's
• 14:39
  Speaker 1: still some room for disappointments. Give us your revenue estimates
• 14:42
  Speaker 1: for what you think Apple is going to do. So
• 14:44
  Speaker 1: we think the company is going to do a little
• 14:46
  Speaker 1: over sixty one billion in the March quarter, and remember
• 14:50
  Speaker 1: that they rarely have ever missed their guidance for a quarter.
• 14:53
  Speaker 1: The real issue, though, is what's the guidance going to
• 14:55
  Speaker 1: be for June and for June were just over fifty
• 14:58
  Speaker 1: billion dollars. We're looking for, or about forty one million
• 15:01
  Speaker 1: units for the iPhone. I think the concern is that
• 15:04
  Speaker 1: some of the lower numbers on the streets suggest it
• 15:06
  Speaker 1: could be as low as thirty five millions, So that's
• 15:08
  Speaker 1: going to be a number of people are looking closely at.
• 15:10
  Speaker 1: I'm trying to understand whether we can interpret all of
• 15:14
  Speaker 1: this hype about declining smartphone sales as a failure of
• 15:18
  Speaker 1: the iPhone ten or is this just a natural part
• 15:21
  Speaker 1: of the cycle. I tend to think of it more
• 15:24
  Speaker 1: as a market issue. Now. There is a narrative that
• 15:26
  Speaker 1: the ten has been disappointing, that the company's overpriced it um.
• 15:29
  Speaker 1: I'm not sure that's the case, in the sense that
• 15:31
  Speaker 1: we find that users are moving up the Apple price curve,
• 15:34
  Speaker 1: that is, the percentage of buyers by a phone s
• 15:37
  Speaker 1: over seven hundred dollars. We think has doubled the cycle,
• 15:40
  Speaker 1: and if you don't like the ten, there's plenty of
• 15:42
  Speaker 1: other options for you. I'm a bit more concerned that
• 15:44
  Speaker 1: the markets mature, that geographies like China, which we thought
• 15:48
  Speaker 1: would really bounce back for Apple, are coming back very gradually,
• 15:51
  Speaker 1: and as we continue to see an elongation of the
• 15:54
  Speaker 1: upgrade cycle. So I think it's as much a market
• 15:56
  Speaker 1: issue as it is an Apple problem. Can you speak
• 15:58
  Speaker 1: a little bit more about China, because there are some
• 16:02
  Speaker 1: estimates that between seventy between sixty and seventy million Chinese
• 16:06
  Speaker 1: consumers are due to upgrade their phones over the next
• 16:09
  Speaker 1: twelve to eighteen months. That's right. You know, Apple sold
• 16:13
  Speaker 1: about seventy million phones in fiscal fifteen as China Mobile
• 16:16
  Speaker 1: came on and you had a big screen phone, it's
• 16:18
  Speaker 1: a huge year. We're nowhere close to that. Um, Hong
• 16:21
  Speaker 1: Kong has pretty much gone. So we're talking about mainland China,
• 16:24
  Speaker 1: which is around forty million units a year. We and
• 16:27
  Speaker 1: others thought that there'd be a lot of people waiting
• 16:29
  Speaker 1: to upgrade, and therefore we'd see you some sort of
• 16:32
  Speaker 1: double digit growth this year. We're beginning to think that's
• 16:35
  Speaker 1: less likely. We think that the number of people who
• 16:38
  Speaker 1: can afford an iPhone in China is fairly flat, that
• 16:41
  Speaker 1: Apple is pretty much splitting the hind of the market
• 16:43
  Speaker 1: with Huawei, and that you are seeing elongation of upgrade
• 16:47
  Speaker 1: cycles even in China. So um, we still expect to
• 16:50
  Speaker 1: see some revenue growth for Apple in China with a
• 16:52
  Speaker 1: higher a sp but we've kind of gotten off the
• 16:54
  Speaker 1: idea that we're going to see a huge bounce back.
• 16:56
  Speaker 1: So this is such a fascinating issue to me, and
• 16:59
  Speaker 1: just of confirmed with Sony's earnings overnight where they reported
• 17:03
  Speaker 1: a massive decline and production of of cameras for smartphones,
• 17:07
  Speaker 1: and I'm just wondering what can Apple do to diversify
• 17:12
  Speaker 1: their business that there is less focus on the smartphone
• 17:16
  Speaker 1: supercycle and its potential death. Well, first of all, I
• 17:20
  Speaker 1: think the smartphone is not a terrible position for Apple
• 17:23
  Speaker 1: because their installed base has been growing, so it's a
• 17:25
  Speaker 1: question of when, not if people are going to buy
• 17:27
  Speaker 1: another iPhone. But to diversify, you've seen them certainly boost
• 17:31
  Speaker 1: their services business, so services is moving towards profitability. We
• 17:35
  Speaker 1: expect it's going to grow over this evening, so that's
• 17:39
  Speaker 1: very helpful. They also have a seven billion dollar wearables business,
• 17:42
  Speaker 1: you know, with the watch, the HomePod, the arabuds, so
• 17:45
  Speaker 1: they're you know, starting to diversify a little bit there.
• 17:48
  Speaker 1: And as the watch, you know, really doesn't excuse me
• 17:50
  Speaker 1: as the iPhone doesn't really grow much in the future,
• 17:52
  Speaker 1: getting a couple points of corporate grows from wearables is
• 17:54
  Speaker 1: going to be noticeable. I don't think you're going to
• 17:57
  Speaker 1: see tremendous new hardware from the company for the next
• 17:59
  Speaker 1: day two years, but eventually you could see augmented glasses,
• 18:03
  Speaker 1: augmented reality glasses, for example. That will help diversify revenue
• 18:06
  Speaker 1: a bit as well augmenting the investors pocketbook. How about
• 18:09
  Speaker 1: returning money to shareholders, Well, we expect a pretty big number. Tonight,
• 18:14
  Speaker 1: they have about a billion of excess cash. We expect
• 18:17
  Speaker 1: a good bump to the dividend and discussion of you know,
• 18:20
  Speaker 1: up to a hundred billion dollar incremental buy back um.
• 18:23
  Speaker 1: The question is over what period would that happen. I
• 18:25
  Speaker 1: would say three to five years. I think it's going
• 18:27
  Speaker 1: to be a little bit more on the gradual side.
• 18:29
  Speaker 1: Some people have a concern that maybe they'll keep more
• 18:31
  Speaker 1: dry powder for M and A possibly, but I don't
• 18:34
  Speaker 1: expect the company is going to be that acquisitive, at
• 18:36
  Speaker 1: least in the new yer term. So I think they
• 18:38
  Speaker 1: feel the stock here is is very undervalued, particularly due
• 18:41
  Speaker 1: to the services business, so I expect they'll be relatively
• 18:43
  Speaker 1: aggressive on a buyback. Does anyone care about apples for
• 18:47
  Speaker 1: a into that newspaper service and other types of subscription offerings, entertainment. Well,
• 18:54
  Speaker 1: it helps the services side. You know. It's funny the
• 18:57
  Speaker 1: the company has said that the vast majority of ifall,
• 19:00
  Speaker 1: customers pay nothing for Apple services. So if they get
• 19:03
  Speaker 1: people starting to use services, our work fines that they
• 19:06
  Speaker 1: actually increase their number of transactions at rate annually. So
• 19:10
  Speaker 1: it is through new kinds of video and the newspaper
• 19:13
  Speaker 1: and so forth that they are hoping to get people
• 19:15
  Speaker 1: into that services ecosystem, and history suggests that once they
• 19:18
  Speaker 1: get in, they get pretty active. Stephen Milanovitch, thank you
• 19:21
  Speaker 1: so much for being with as. Steven Milanovich is Managing
• 19:24
  Speaker 1: director and technology Analysts at you b AS, coming to
• 19:28
  Speaker 1: us from eb S headquarters. It is time to dig
• 19:45
  Speaker 1: a little deeper into fixed income. Focus on fixed income
• 19:48
  Speaker 1: brought to you by PIMCO for investors who demand more
• 19:51
  Speaker 1: than the markets deliver. All investments contain risk and may
• 19:54
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• 19:58
  Speaker 1: of people in the fixed income markets are focused on
• 20:00
  Speaker 1: the Federal Reserve, which is starting a two day meeting
• 20:03
  Speaker 1: that ends tomorrow, but also a lot of focuses on
• 20:07
  Speaker 1: the US Treasure Department that is going to announce its
• 20:10
  Speaker 1: quarterly refunding plans at eight thirty tomorrow morning in New York.
• 20:16
  Speaker 1: Ira I red Jersey, chief US industrate strategist for Bloomberg Intelligence,
• 20:20
  Speaker 1: joins us. Now, I want to start with the refunding
• 20:23
  Speaker 1: announcement because frankly, a lot of people think that the
• 20:27
  Speaker 1: increase in the amount of debt that the US Treasure
• 20:29
  Speaker 1: Department is is issuing, uh, is part of the reason
• 20:34
  Speaker 1: why we've seen yields actually rise. Steve minus In, the
• 20:36
  Speaker 1: Treasury Secretary, of course, totally dismissing that yesterday at the
• 20:39
  Speaker 1: Malkin conference. What's your perspective, what's your expectation for how
• 20:44
  Speaker 1: much the Treasure Department is going to increase is debt
• 20:46
  Speaker 1: sales in the next quarter. Yes. So what's interesting is
• 20:49
  Speaker 1: that the Treasury departments already said, um, how much they
• 20:52
  Speaker 1: think that they're going to have to borrow over the
• 20:55
  Speaker 1: course of the next two months and then the following
• 20:57
  Speaker 1: three months. So um, they think this quarter or so
• 21:00
  Speaker 1: the quarter that actually started a month ago, Uh, they
• 21:02
  Speaker 1: think they're gonna borrow seventy billion dollars of new marketable debt,
• 21:07
  Speaker 1: which is not particularly high. The second quarter, of course,
• 21:11
  Speaker 1: you just had taxes that were paid, so you you
• 21:13
  Speaker 1: actually have uh. The month that just ended in April
• 21:16
  Speaker 1: tends to be a surplus month, but then and the
• 21:19
  Speaker 1: next couple of months tend to be pretty flat. There's
• 21:22
  Speaker 1: not big budget deficits that really um uh, that really
• 21:26
  Speaker 1: have to be funded over the next few months. So
• 21:29
  Speaker 1: will Treasury Department do something with saying that they're going
• 21:32
  Speaker 1: to issue more debt? Yes, they have to because later
• 21:34
  Speaker 1: this year they're going to have to issue a lot
• 21:37
  Speaker 1: more um, but it's going to be incremental again, so
• 21:40
  Speaker 1: it will be another billion or two of a lot
• 21:42
  Speaker 1: of different instruments of what I'm really looking for, quite frankly,
• 21:45
  Speaker 1: or tips. So um. They didn't do anything with with
• 21:48
  Speaker 1: the Treasury Inflation Protected Security Program last time, and they
• 21:52
  Speaker 1: asked their advisory committee, Hey, what should we do with this?
• 21:55
  Speaker 1: And there was a whole you know, forty page power
• 21:58
  Speaker 1: point presentation that that that committee made to the Treasury Department.
• 22:02
  Speaker 1: So the Treasury has been mulling that over over the
• 22:04
  Speaker 1: last few months. That's really interesting. And we did, of
• 22:06
  Speaker 1: course get the first quarter results as far as how
• 22:09
  Speaker 1: much debt the U. S. Treasury sold four d eight
• 22:12
  Speaker 1: billion dollars a record and exceeding the estimates that the
• 22:16
  Speaker 1: Treasury Department previously came out with. How much credibility do
• 22:20
  Speaker 1: these estimates have if they have exceeded them in the past. Yeah,
• 22:24
  Speaker 1: there's always been. There's always big, big variants in it,
• 22:27
  Speaker 1: and and part of that is they might pivot and
• 22:30
  Speaker 1: decide to do something a little bit different in UH
• 22:32
  Speaker 1: in between. So so that the one thing about that
• 22:34
  Speaker 1: four eight billion is they basically pre funded some of
• 22:38
  Speaker 1: the borrowing that they would have to do this quarter.
• 22:41
  Speaker 1: So um. So, the previous estimate for this quarter, for example,
• 22:44
  Speaker 1: was about a hundred and seventy five billion dollars of
• 22:47
  Speaker 1: issuance during the second quarter of eighteen. Now it's only
• 22:50
  Speaker 1: seventy five because the last quarter they issued an extra
• 22:53
  Speaker 1: hundred billion dollars that was unexpected. So so these estimates
• 22:57
  Speaker 1: are are just that their estimates, they always missed them
• 23:00
  Speaker 1: by a little um But you know, at the same time,
• 23:03
  Speaker 1: they're they're kind of useful guides as to the magnitude
• 23:06
  Speaker 1: of increase that they're expecting or the magnitude of of
• 23:09
  Speaker 1: UH pay down that they're expecting in in the different markets.
• 23:13
  Speaker 1: So when you're trying to forecast exactly how much they're
• 23:16
  Speaker 1: going to issue for T bills all the way through
• 23:18
  Speaker 1: thirty year bonds. Um. You need to you need to
• 23:20
  Speaker 1: know that, UM, and and so it is helpful information.
• 23:24
  Speaker 1: I read Jersey. Is the market raising interest rates and
• 23:27
  Speaker 1: therefore the Federal Reserve won't have to you know that.
• 23:30
  Speaker 1: That's a good question him. My view is no, Uh,
• 23:33
  Speaker 1: you know, the interest rates are somewhat higher, you know,
• 23:35
  Speaker 1: certainly you know three percent? Is this the you know
• 23:38
  Speaker 1: number that I know a lot of people, um, look
• 23:40
  Speaker 1: at I think in the rates market, you know, pretty
• 23:42
  Speaker 1: much everyone yawned and said, oh, three percent. It's not
• 23:44
  Speaker 1: important because three point six is an important technical level
• 23:47
  Speaker 1: and three percent just another number. UM. But I do
• 23:50
  Speaker 1: think that that Wait a minute, Wait a minute. You've
• 23:52
  Speaker 1: got people who are looking at three point oh six
• 23:55
  Speaker 1: and they're having, you know, over lunch discussions about that,
• 23:59
  Speaker 1: and yet around number like three percent is not interesting.
• 24:03
  Speaker 1: I mean, come on, really for real? Yeah, I'm not
• 24:06
  Speaker 1: getting um. The But but to go back to your
• 24:10
  Speaker 1: question about whether or not you know the Fed doesn't
• 24:12
  Speaker 1: have to hike because the markets doing it for them.
• 24:14
  Speaker 1: I think one of the reasons why we're here one
• 24:16
  Speaker 1: of the reasons why two year notes are two and
• 24:18
  Speaker 1: a half percent, and the reason why you know ten
• 24:20
  Speaker 1: year notes are hovering right around three is because is
• 24:24
  Speaker 1: because the Federal Reserve is expected to hike. If the
• 24:26
  Speaker 1: Federal Reserve we're not expected to hike a few more
• 24:29
  Speaker 1: times this year and three times next year, then you'd
• 24:32
  Speaker 1: wind up with certainly front end yields. So two year
• 24:35
  Speaker 1: notes and five year notes would probably be at somewhat
• 24:37
  Speaker 1: lower yields than they are today. Um, you know ten
• 24:40
  Speaker 1: year notes, and that scenario might actually move move move
• 24:43
  Speaker 1: somewhat higher and make potentially new yield ties for this cycle.
• 24:47
  Speaker 1: So let's say the Treasure Department does announce some kind
• 24:50
  Speaker 1: of new TIPS issue in what will that tell you
• 24:52
  Speaker 1: with respect to the US is expectations regarding inflation. Yeah,
• 24:57
  Speaker 1: not a lot for inflation. Now that the b issue
• 24:59
  Speaker 1: with the TIPS program is that there is that it
• 25:01
  Speaker 1: tends to have very spotty liquidity. So because they don't
• 25:05
  Speaker 1: issue them as regularly as they issue other instruments, there
• 25:08
  Speaker 1: there is not as much of them outstanding. Um, they
• 25:11
  Speaker 1: only have one or two new issues every year and
• 25:14
  Speaker 1: then they reopen those issues. So I you know, big
• 25:17
  Speaker 1: part of the discussion is how do they make that
• 25:19
  Speaker 1: program more liquid, how do they get investors more interested,
• 25:22
  Speaker 1: how do they make it a program that can be
• 25:24
  Speaker 1: a kind of sustainable funding source and at the same
• 25:27
  Speaker 1: time be useful from an information purpose for policymakers like
• 25:31
  Speaker 1: the Federal Reserve as to as to where the market
• 25:34
  Speaker 1: things inflation is going to be. So those are those
• 25:37
  Speaker 1: are all the potential things that they that the Treasury
• 25:39
  Speaker 1: Department might try to address. And maybe that's a matter
• 25:42
  Speaker 1: of maybe getting rid of one of the issues, maybe
• 25:44
  Speaker 1: getting rid of, for example, the thirty year and only
• 25:47
  Speaker 1: having five and ten year and then having more frequent
• 25:49
  Speaker 1: auctions of them so you get a little bit more
• 25:51
  Speaker 1: liquidity and better price discovery. Thank you very much. I
• 25:54
  Speaker 1: read Jersey as our interest rate strategies for Bloomberg Intelligence.
• 26:00
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 26:03
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 26:07
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 26:10
  Speaker 1: on Twitter at pim Fox, I'm on Twitter at Lisa
• 26:14
  Speaker 1: Abramo wits one. Before the podcast, you can always catch
• 26:17
  Speaker 1: us worldwide on Bloomberg Radio.