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Too Much Money Chasing Too Few Deals: Oaktree's Marks · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim
• 0:08
  Speaker 1: Fox along with my co host Lisa A. Bramowitz. Each
• 0:11
  Speaker 1: day we bring you the most important, noteworthy, and useful
• 0:14
  Speaker 1: interviews for you and your money, whether you're at the
• 0:17
  Speaker 1: grocery store or the trading floor. Find the Bloomberg p
• 0:20
  Speaker 1: m L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com.
• 0:30
  Speaker 1: I am so pleased to bring in our next guest,
• 0:33
  Speaker 1: Howard Barks. He has written a new memo. He of course,
• 0:36
  Speaker 1: is co founder of oak Tree Capital and UH is
• 0:40
  Speaker 1: the biggest distressed debt fund in the world. And he
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  Speaker 1: joins us here in our eleven three oh studios And Uh, Howard,
• 0:48
  Speaker 1: thank you so much for being here. You just wrote
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  Speaker 1: a new memo, the seven worst words in the world.
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  Speaker 1: What are they for an investor? Too much money, chasing
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  Speaker 1: too few deals? And we're there right now. Well, I
• 1:02
  Speaker 1: think that where you know, life in the investment world
• 1:05
  Speaker 1: is not black or white, as although many people try
• 1:08
  Speaker 1: to say that, Uh. The environment is not the worst
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  Speaker 1: for investing anyone has ever seen. It's also far from
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  Speaker 1: the best. UH. And if you draw a dividing line
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  Speaker 1: down the middle, I would say we're in the vicinity
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  Speaker 1: of too much money chasing too few deals. Howard Marks,
• 1:25
  Speaker 1: you are the author of mastering the market cycle, getting
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  Speaker 1: the odds on your side, and that caused me also
• 1:32
  Speaker 1: to reread your I guess we can come. We call
• 1:35
  Speaker 1: it a famous memo about the race? Can we call
• 1:38
  Speaker 1: it the race to the bottom that basically called the
• 1:43
  Speaker 1: collapse and stocks and financial assets. You say, now that
• 1:49
  Speaker 1: we're closer to what two thousand six, does that kind
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  Speaker 1: of ring a bell? Is that what echoes in your
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  Speaker 1: mind when you look at current conditions? I think it's
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  Speaker 1: fair to say, Uh, you know, conditions are not as
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  Speaker 1: bad even as two thousand six. The banks are not
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  Speaker 1: as heavily levered as they were. Uh. There is no
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  Speaker 1: analog in the investment world today to the subprime mortgages
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  Speaker 1: in their um magnitude infallaciousness. We don't have so many
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  Speaker 1: levered entities out there waiting to melt down. Uh. But
• 2:20
  Speaker 1: what we do have is a lot of money chasing
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  Speaker 1: not too many deals. That causes the prices to be
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  Speaker 1: a bit up, which produces lower prospective returns and greater risk. Howard,
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  Speaker 1: when you say that there's not a direct analog, I
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  Speaker 1: think about some of the ways that this time is
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  Speaker 1: different than in two thousand five two six, and one
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  Speaker 1: of them is the flood of cash and to direct
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  Speaker 1: lending funds and let direct lending firms and away from
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  Speaker 1: the big banks. Uh. You had a quote referencing this,
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  Speaker 1: what the wise man does in the beginning, the fool
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  Speaker 1: does in the end. How do you see this ending? Well?
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  Speaker 1: If if too much money is the seven worst words
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  Speaker 1: in the world, what wise man doesn't the beginning the
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  Speaker 1: fool does in the ends is the most important single
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  Speaker 1: investment adage. Every trend which gets recognized in the early
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  Speaker 1: days by the intelligent few and profited from. When those
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  Speaker 1: profits become visible, everybody else wants to jump on the
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  Speaker 1: bandwagon too, even though prices may now be the higher
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  Speaker 1: than they should be. And when everybody jumps in at
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  Speaker 1: the end, Uh, that's a little on the late side.
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  Speaker 1: So I guess that my question is where are we
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  Speaker 1: with that and what's going to be the consequence? Well,
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  Speaker 1: direct lending is is one of the areas that has
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  Speaker 1: been very popular. Popular popularity is the enemy of the
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  Speaker 1: investor who wants to make a lot of money. Obviously,
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  Speaker 1: if you buy things or do things that are extremely popular.
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  Speaker 1: You should you're you're, you shouldn't expect to be getting
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  Speaker 1: a bargain. A lot of money has flooded into direct lending.
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  Speaker 1: I say in the memo that in the last five
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  Speaker 1: years there have been about three d and twenty new
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  Speaker 1: direct lending funds, of which eight five were first time funds,
• 4:02
  Speaker 1: as compared to the previous five years, in which there
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  Speaker 1: were about eighty direct lending funds, of which seventeen were
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  Speaker 1: first time funds. So obviously a lot more funds, a
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  Speaker 1: lot more money, a lot more rookies, UH doing their
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  Speaker 1: first direct lending funds. Those are not the elements that
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  Speaker 1: make for great results. A lot of debt outstanding right now.
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  Speaker 1: What's your call on distress debt? Well, at the present time, UH,
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  Speaker 1: you know, the the the distressed debt business is UH
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  Speaker 1: pretty snoozy. Uh. In this kind of environment technical definition,
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  Speaker 1: In this kind of environment with UH, with a very
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  Speaker 1: strong economy and a very accommodating capital market, you're unlikely
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  Speaker 1: to get much distress and the companies that get into
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  Speaker 1: trouble are are likely to deserve it. Now, we believe
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  Speaker 1: and hope that the large amount of lending and perhaps
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  Speaker 1: less care just lending which is taking place today may
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  Speaker 1: result when the economy weakens in a cascade of the
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  Speaker 1: stress debt. And and we hope to be busy right now,
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  Speaker 1: we're pretty much working on old deals much more than new.
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  Speaker 1: When you say you hope to be busy, does that
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  Speaker 1: mean that you're putting aside a lot of cash to
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  Speaker 1: swoop in should there be more distress. We organized a
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  Speaker 1: standby fund for distress debt investing UH in eight and
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  Speaker 1: a half billion. That's our second largest fund in history,
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  Speaker 1: I think, probably the second largest fund in the history
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  Speaker 1: of the sector. And we have done very little with
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  Speaker 1: that so far. It's it's largely just sitting on the
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  Speaker 1: shelf in reserve. But you know, you have to pre
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  Speaker 1: raise your money. In our business, nobody goes in at
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  Speaker 1: the bottom. Well, but but two investors pushed back. Then
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  Speaker 1: do they say, all right, we were hoping to swoop in.
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  Speaker 1: It hasn't happened. To forget it. Our investors, I will
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  Speaker 1: our very patients. Uh. They we don't make claims for
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  Speaker 1: being able to time this stuff, and so uh. And
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  Speaker 1: I think the investors realized that it's desirable to have
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  Speaker 1: a commitment for the stress debt a commitment to oak
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  Speaker 1: Tree for that moment, but we don't claim to know
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  Speaker 1: when it will come. You know, they haven't put up
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  Speaker 1: the money yet. It's just commitments. We haven't charged any fees.
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  Speaker 1: So I think our investors will be happy to be patient.
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  Speaker 1: Do you see investors currently playing the game a hot potato?
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  Speaker 1: I think, well, you know, in in uh, in private equity, Uh,
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  Speaker 1: we still see uh, the the trend towards what the
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  Speaker 1: British call passed the parcel, and you call hot potato.
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  Speaker 1: You know, you make an investment, it does well, it appreciates. Uh.
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  Speaker 1: Maybe the fund that made the investment is coming to
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  Speaker 1: the end of its life that maybe the managers would
• 7:03
  Speaker 1: like to realize they're carried interest in the profits, so
• 7:06
  Speaker 1: they sell it onward to some other fund which is
• 7:09
  Speaker 1: early in its investment life and wants to start putting
• 7:12
  Speaker 1: money to work. I think that's the technical definition of
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  Speaker 1: hot potato. Throughout your memo, you were saying that in
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  Speaker 1: this environment. You're not saying that there's a bond bubble
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  Speaker 1: or that we're headed toward an imminent and catastrophic crash
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  Speaker 1: by any means, but just saying that in this period
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  Speaker 1: of elevated demand and incredible liquidity, people have to lower
• 7:33
  Speaker 1: their returns expectations and be cautious. And I'm just wondering
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  Speaker 1: from your perspective. We've talked about this before, returns going forward?
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  Speaker 1: Has that Has your view on that changed at all? Um? Exactly, Lisa, UM.
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  Speaker 1: I mean, you know, debt today offers modest returns. Interest
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  Speaker 1: rates are still close to the lowest in history. The
• 7:59
  Speaker 1: yields breads above those base rates are not that high.
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  Speaker 1: They've come down as demand has has picked up. UM.
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  Speaker 1: So you know, returns, while sounding generous compared to other markets,
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  Speaker 1: are still low in the context of history. UM. And
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  Speaker 1: so I don't think people should be uh that excited
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  Speaker 1: about the prospective returns. And as you say, I think
• 8:25
  Speaker 1: the most important thing is to exercise caution. So what
• 8:28
  Speaker 1: returns are feasible to expect? It depends on the asset class. Hi,
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  Speaker 1: your bonds pay about six uh, not a king's ransom,
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  Speaker 1: but but better than treasuries. Uh. Direct lending might be
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  Speaker 1: able to produce returns in the high single digits if
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  Speaker 1: it's not levered um and and that sounds even better.
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  Speaker 1: Of course, you give up your liquidity, you get that
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  Speaker 1: you uh perhaps lend to uh less well tested companies
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  Speaker 1: and you enjoy less diversification, so you pay a price
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  Speaker 1: for the excess returns. But you know, um, the old
• 9:05
  Speaker 1: Jim Morrison song been down so long it looks like
• 9:08
  Speaker 1: up to me. I think that's how people feel today.
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  Speaker 1: About eight or nine percent the US thirty year treasury
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  Speaker 1: has reached its highest level and yield. Since you speak
• 9:22
  Speaker 1: about three things when you look at investing, recent history,
• 9:24
  Speaker 1: human emotion, and asset pricing. We talked a little bit
• 9:28
  Speaker 1: about recent history. Tell us about human emotion and asset pricing.
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  Speaker 1: You know him. One of the best things about the
• 9:35
  Speaker 1: market today in general is that we do not see
• 9:38
  Speaker 1: a prevalence of euphoria. The people in the media, we
• 9:43
  Speaker 1: don't hear them saying, oh, this is your last best
• 9:45
  Speaker 1: chance to get in on the market before it goes
• 9:47
  Speaker 1: to the moon. The book Doubt thirty six thousand has
• 9:50
  Speaker 1: not been reissued. That's all good. We want to see levelheadedness.
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  Speaker 1: What the challenges is that even people, even though people
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  Speaker 1: aren't thinking bullish, they're acting bullish, are dropping their caution
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  Speaker 1: to move out the risk curve to take on riskier
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  Speaker 1: assets in the hope that they can provide decent returns
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  Speaker 1: in a low return world, and it is their behavior
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  Speaker 1: that affects the condition of the market, and that's why
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  Speaker 1: we're calling for caution. I'm wondering, since you're firm does
• 10:19
  Speaker 1: so much on the ground research of companies, you have
• 10:23
  Speaker 1: an incredible view into the U. S economy, and I'm wondering,
• 10:27
  Speaker 1: do you think that people are overly confident in its
• 10:30
  Speaker 1: strength right now? I think when you when you say
• 10:33
  Speaker 1: it's strength right now is great in the economy is
• 10:37
  Speaker 1: very strong. Uh. The question is is it's sustainable? Is
• 10:44
  Speaker 1: the performance of a sign of a future trend? Or
• 10:52
  Speaker 1: is it a highly stimulated result of the tax bill,
• 10:56
  Speaker 1: in which case favorable comparisons will become their difficult Uh.
• 11:02
  Speaker 1: You know I always say that doctors rarely give shots
• 11:05
  Speaker 1: of adrenaline to healthy patients. Uh. Will the tax bill
• 11:11
  Speaker 1: produce over stimulation of the economy, necessitating the Fed increasing
• 11:18
  Speaker 1: rates further in order to prevent inflation? And will that
• 11:22
  Speaker 1: have a negative effect on economic growth? I have a
• 11:28
  Speaker 1: very strongly held view, and that is we'll see as
• 11:32
  Speaker 1: as the author of Mastering the Market Cycle, does the
• 11:37
  Speaker 1: popularity and interest in bitcoin and marijuana related stocks ring
• 11:43
  Speaker 1: a bell. You know it does, PIM and I wrote
• 11:47
  Speaker 1: a memo in July of seventeen mentioned bitcoin, got a
• 11:52
  Speaker 1: lot of attention for that. I don't want to invade
• 11:55
  Speaker 1: against bitcoin or against pot stocks, but the and I
• 12:00
  Speaker 1: want to point out is that the ability to have
• 12:05
  Speaker 1: an asset like Bitcoin on other coins and have Bitcoin
• 12:09
  Speaker 1: go up nineteen x last year should put people on
• 12:13
  Speaker 1: notice that this is a climate in which speculative behavior
• 12:16
  Speaker 1: is taking place. It is that that these kinds of
• 12:20
  Speaker 1: phenomena like you mentioned do not occur in cautious, skeptical, disciplined,
• 12:26
  Speaker 1: risk averse markets. And you know, the best, the biggest,
• 12:31
  Speaker 1: the easiest money in the investment business is to buy
• 12:34
  Speaker 1: when people are skeptical, discipline, risk averse, and even terrified.
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  Speaker 1: Nobody would say that's today, well done. Thank you very
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  Speaker 1: much for being with us. A pleasure. Howard Marks He
• 12:46
  Speaker 1: is the co chairman of oak Tree Capital. He is
• 12:49
  Speaker 1: the author of the new book Mastering the Market Cycle,
• 12:53
  Speaker 1: Getting the Odds on Your Side. The topic now is trade,
• 13:08
  Speaker 1: and our guest is Robert Lawrence. He is the Albert
• 13:10
  Speaker 1: Williams Professor of Trade and Investment at the John F.
• 13:13
  Speaker 1: Kennedy School of government at Harvard University. He is also
• 13:17
  Speaker 1: a senior Fellow at the Peterson Institute for International Economics,
• 13:22
  Speaker 1: and he previously served as a member of the Council
• 13:25
  Speaker 1: of Economic Advisors under President Bill Clinton. Robert Lawrence, thank
• 13:30
  Speaker 1: you very much for being with us. Will this new
• 13:33
  Speaker 1: trade agreement, as far as you know it, will it
• 13:36
  Speaker 1: increase employment in the automobile industry? I think it could,
• 13:43
  Speaker 1: although it's not perfectly clear because there are some positive
• 13:49
  Speaker 1: effects and some potentially negative effects. So so I would
• 13:53
  Speaker 1: say I would expect some moderate effect on the auto
• 13:58
  Speaker 1: industry's employment in the US. Do you think, Professor Lawrence,
• 14:02
  Speaker 1: that on the whole this is a a sort of
• 14:05
  Speaker 1: bent more toward free trade or more toward protectionism. I
• 14:10
  Speaker 1: think it's it's it's bent more towards protection. But we
• 14:17
  Speaker 1: we kind of has escaped a bullet because it's not
• 14:21
  Speaker 1: a certainty. NaSTA has now been renewed, and there were
• 14:25
  Speaker 1: many people who were worried about that. Um it has
• 14:28
  Speaker 1: been improved in certain respects, in the sense of things
• 14:31
  Speaker 1: like the digital economy are now included, labor and environment
• 14:35
  Speaker 1: are treated within the agreement. But I would say there's
• 14:40
  Speaker 1: a lot of constraints more constraints being placed on the
• 14:43
  Speaker 1: auto industry. They've raised the amount of value added required
• 14:47
  Speaker 1: to qualify for NaSTA. So there are a number of
• 14:51
  Speaker 1: measures which are less free trade, if you will, what
• 14:56
  Speaker 1: it's a but, but it's not. I don't think it's
• 14:59
  Speaker 1: a momentous change. And the effect on US farmers, for example,
• 15:03
  Speaker 1: with the Canadian dairy market, yes, well, there are slight improvements,
• 15:09
  Speaker 1: but if you look at the numbers involved, their their minuscule,
• 15:14
  Speaker 1: so so um, again it's kind of um, it's a change,
• 15:19
  Speaker 1: but the amount of additional dairy that that we're going
• 15:22
  Speaker 1: to be able to sell in Canada is going to
• 15:25
  Speaker 1: be increased, but the quota is on the you know,
• 15:28
  Speaker 1: less than ten percent more. Professor Lawrence, I want to
• 15:32
  Speaker 1: get your your thoughts on what this new agreement does
• 15:35
  Speaker 1: for the US. Is a path forward with China. Some
• 15:38
  Speaker 1: people are saying it actually sets a precedent and give
• 15:41
  Speaker 1: some sort of view into President Trump's trade policy. Do
• 15:45
  Speaker 1: you agree with that? Well, I think it has elements
• 15:50
  Speaker 1: that are aimed at China. You know, there's a there's
• 15:54
  Speaker 1: quite a remarkable provision which says that if if the
• 15:59
  Speaker 1: Canadians try to all the Mexicans try to negotiate a
• 16:03
  Speaker 1: free trade agreement with with China. Now the United States
• 16:08
  Speaker 1: has the right to withdraw from NaSTA. In other words,
• 16:12
  Speaker 1: we eat they're they're using this agreement has trying to
• 16:16
  Speaker 1: put leverage on China and to constrain its opportunities. UM.
• 16:21
  Speaker 1: It's also in Canada not very popular because it's seen
• 16:26
  Speaker 1: by some as an intrusion on Canadian sovereignty and their
• 16:29
  Speaker 1: ability to conduct their trade policies. UM. By and large,
• 16:34
  Speaker 1: it is sort of closing the US market and the
• 16:38
  Speaker 1: North American market somewhat to Chinese who might want might
• 16:43
  Speaker 1: have wanted to have sell more cars in the United States,
• 16:46
  Speaker 1: something that they aren't doing much now but potentially in
• 16:50
  Speaker 1: the future. But on the other hand, you know, the
• 16:54
  Speaker 1: tariffs on UH steel and aluminum remain in place, and um,
• 17:02
  Speaker 1: that's going to make it less attractive for American auto
• 17:05
  Speaker 1: manufacturers to produce cars for the Chinese market. And then
• 17:09
  Speaker 1: we also have the tariffs against our cause the Chinese
• 17:13
  Speaker 1: are lowering their tariffs in general in automobiles, but not
• 17:16
  Speaker 1: against US. So I would say on that front, and
• 17:21
  Speaker 1: it hit had unless we get rid of those tariffs
• 17:23
  Speaker 1: with with China and get out of that war. Um,
• 17:28
  Speaker 1: we're actually and that's where I think some of the
• 17:30
  Speaker 1: negative effects of the NAFTA will come. We're not encouraging
• 17:35
  Speaker 1: the auto firms to use the US as a base
• 17:39
  Speaker 1: for production for exports. You're referring to that section too.
• 17:43
  Speaker 1: Three to the tariff protections. Correct, Yes, we have tariffs
• 17:48
  Speaker 1: on steel and illuminium in the name of national security.
• 17:52
  Speaker 1: There's also the threat that in the future we could
• 17:56
  Speaker 1: um put additional tariffs on automobiles the name of national security. Now,
• 18:02
  Speaker 1: what the what the Mexicans and Canadians have gotten out
• 18:06
  Speaker 1: of this agreement is they're going to be side letters
• 18:09
  Speaker 1: in which at least their current volumes aren't going to
• 18:12
  Speaker 1: be subject to those Paris, Professor Lawrence, I'd love your
• 18:17
  Speaker 1: thoughts just going forward about what this negotiation process has
• 18:21
  Speaker 1: done to the political good will between the US and
• 18:24
  Speaker 1: Mexico and Canada. UM. I think it's the it's a
• 18:30
  Speaker 1: good question. I think are in general, are feelings of
• 18:35
  Speaker 1: closeness to to UM to the Canadians, their their feelings
• 18:39
  Speaker 1: of closeness to US, I think are have been damaged
• 18:43
  Speaker 1: as a result of this. I think you know, they've
• 18:46
  Speaker 1: got the sense that it's it is America trying to
• 18:50
  Speaker 1: put America first. But I think they're also heaving a
• 18:54
  Speaker 1: sigh of relief that things aren't as bad as they
• 18:57
  Speaker 1: could have been. The the trade pact that is set
• 19:03
  Speaker 1: to be voted on by Congress, do you believe it's
• 19:05
  Speaker 1: a template for U s trade negotiations with China? Not really, um.
• 19:14
  Speaker 1: I think the kind of questions, the really tough questions
• 19:19
  Speaker 1: that we're going to face with China, aren't really dealt
• 19:23
  Speaker 1: with in this trade agreement. One dimension where I would
• 19:28
  Speaker 1: I would I would say it's it's kind of a
• 19:30
  Speaker 1: template is that currency of the were included in this agreement,
• 19:37
  Speaker 1: and I think if we ever had an agreement with China,
• 19:39
  Speaker 1: we'd want to cover currency and currency manipulation. So in
• 19:44
  Speaker 1: that sense, we've done something. But the big problems with
• 19:47
  Speaker 1: China that relate to the protection of intellectual property and
• 19:52
  Speaker 1: the false transfer of technologies to China, and how do
• 19:58
  Speaker 1: we deal with state owned enterprise as in China, those
• 20:02
  Speaker 1: aren't really dealt with in this agreement because they're not
• 20:05
  Speaker 1: problems that we have with the with the Canadians or
• 20:09
  Speaker 1: the Mexican Professor Lawrence, Just to sort of wrap up
• 20:14
  Speaker 1: one thing that's been on my mind is whether President
• 20:17
  Speaker 1: Trump wants a trade agreement with China. And there was
• 20:21
  Speaker 1: a news report out yesterday about rising tensions in in
• 20:25
  Speaker 1: the South Seas between Chinese warships and US warships. How
• 20:30
  Speaker 1: do you see this whole thing evolving and and sort
• 20:33
  Speaker 1: of what's the compass. I'm very worried about that. Um.
• 20:37
  Speaker 1: I mean, I think he would like a trade agreement
• 20:41
  Speaker 1: with China in which they totally surrender, and he's playing
• 20:45
  Speaker 1: for that one and absent that. By that, I mean
• 20:49
  Speaker 1: they agree to give up a lot of their industrial policies,
• 20:52
  Speaker 1: which are the the core element of their development strategy.
• 20:56
  Speaker 1: And I don't see that as very likely. And I
• 20:59
  Speaker 1: think that's all aim at ly what he would like
• 21:01
  Speaker 1: to see happen, or certainly people who are advising him
• 21:03
  Speaker 1: would like to see happen. And so I believe that
• 21:08
  Speaker 1: these tariffs are going to remain in place for a
• 21:11
  Speaker 1: long time, unfortunately, and I think it's going to be
• 21:16
  Speaker 1: damaging too to our trade, uh to to our to
• 21:21
  Speaker 1: our economy and and and to the Chinese economy. Professor
• 21:26
  Speaker 1: lawrenced just quickly, what have we learned as part of
• 21:30
  Speaker 1: the negotiating style of the U. S. Trade representative Visa v.
• 21:34
  Speaker 1: Mexico and Canada. And what can we take away from
• 21:37
  Speaker 1: this example. Well, I think both in this case and
• 21:42
  Speaker 1: in the case of the Korea agreement, um, they they
• 21:48
  Speaker 1: they use it. They weighed the big stick. But when
• 21:53
  Speaker 1: the time comes, actually, uh, you know, President Trump had
• 21:59
  Speaker 1: called this the NaSTA, the worst agreement, you know, he'd
• 22:03
  Speaker 1: ever seen. But in fact what he ultimately agreed to
• 22:07
  Speaker 1: in the case of both the Korea and this new
• 22:11
  Speaker 1: agreement with Canada Mexico is a is a modification. Professor
• 22:18
  Speaker 1: Robert Lawrence, thank you so much for being with us.
• 22:20
  Speaker 1: We're gonna have to leave it. They're really illuminating an
• 22:22
  Speaker 1: important conversation. The Albert L. Williams, Professor of a Trade
• 22:26
  Speaker 1: Investment in John F. Kennedy School of Government at Harvard University,
• 22:29
  Speaker 1: also a senior Fellow at the Peterson Institute for International Economics,
• 22:33
  Speaker 1: as well as a former member of the Council of
• 22:36
  Speaker 1: Economic Advisors for President Clinton. Just this week we heard
• 22:51
  Speaker 1: from the President of the European Commission, Jean Claude Junker, saying,
• 22:56
  Speaker 1: we have to do everything to avoid a new Greece
• 23:00
  Speaker 1: this time in Italy crisis. Here to tell us about
• 23:04
  Speaker 1: it is Ferdinando Giuliano. Here's our Bloomberg opinion editor based
• 23:09
  Speaker 1: in Rome, and he joins us. Now, Ferdinando, thank you
• 23:12
  Speaker 1: very much for being with us. Maybe just spell out
• 23:14
  Speaker 1: for people who have not been following the back and
• 23:16
  Speaker 1: forth in Italian politics, who are the players and how
• 23:21
  Speaker 1: did they get into so much trouble. So the players
• 23:25
  Speaker 1: are the two populist parties, the Five Star Movements and
• 23:29
  Speaker 1: the League, which after the March the fourth election, decided
• 23:34
  Speaker 1: to team up and form these uh coalition of strange bedfellows,
• 23:40
  Speaker 1: because remember the two parties run against each other at
• 23:43
  Speaker 1: the election, but then decided to form this anti establishment
• 23:46
  Speaker 1: government and their economic program, which was published in mid May,
• 23:51
  Speaker 1: included spending commitments which topped a hundred billion euros according
• 23:56
  Speaker 1: to independent estimates. So that started freeing out the bond
• 24:00
  Speaker 1: market and you started seeing Italian bond deals going up
• 24:06
  Speaker 1: in UH May June, and then it's really been a
• 24:11
  Speaker 1: roller coaster with the finance minister, technocrat Giovann Tria, trying
• 24:16
  Speaker 1: to reassure the markets that the deficit and the debt
• 24:19
  Speaker 1: will be under kept under control. Now, remember Italy's public
• 24:22
  Speaker 1: debt is one of the largest in the world, over
• 24:25
  Speaker 1: one hundred and thirty percent of cross domestic products. So
• 24:28
  Speaker 1: investors are watching very closely. So on the one hand,
• 24:31
  Speaker 1: we have the finance minister. On the other hand, we
• 24:34
  Speaker 1: have the leaders of the two parties really want to
• 24:36
  Speaker 1: make good on their promises because they want to deliver
• 24:39
  Speaker 1: change and bring growth. And at the moment we are
• 24:42
  Speaker 1: at the crunch point because the deficit targets for the
• 24:47
  Speaker 1: next year in the forthcoming year need to be published.
• 24:49
  Speaker 1: Well they really had to be published last week, but
• 24:52
  Speaker 1: we'll be published within hours or days, and investors are
• 24:56
  Speaker 1: watching very closely to understand how toward extend these parties
• 25:01
  Speaker 1: will really continue with their spending pledges and we'll put
• 25:07
  Speaker 1: them into practice. You know, it seemed like there are
• 25:10
  Speaker 1: this good news overnight out of Italy, right we had
• 25:13
  Speaker 1: a sort of announcement that there was a plan to
• 25:16
  Speaker 1: reduce the deficit. The problem was it also came with
• 25:19
  Speaker 1: increasing stimulus, and at first the markets thought, oh, this
• 25:23
  Speaker 1: is good news, and then based on where bondyields are,
• 25:26
  Speaker 1: they came down a little bit. But I mean, they're
• 25:28
  Speaker 1: not buying it. Does this make sense to you? Their
• 25:30
  Speaker 1: latest plan. Well, the plan at the moment is, as
• 25:34
  Speaker 1: you said, you know, very hard to believe. Today we
• 25:37
  Speaker 1: had the Finance Minister saying he's targeting at two point
• 25:40
  Speaker 1: four percent um depthicit for next year. However, it also
• 25:46
  Speaker 1: made clear that the deficit, the structural depthicity without any
• 25:50
  Speaker 1: additional measure, would be two percent of GDP, and he
• 25:53
  Speaker 1: wants to do raise investment by another not point percent
• 25:57
  Speaker 1: of GDP, So that takes us already to two point
• 25:59
  Speaker 1: two percent of GDP. Now we have just a little margin,
• 26:03
  Speaker 1: which is around three point five billion to really make
• 26:07
  Speaker 1: good on all these promises, lowering the pension age, some
• 26:10
  Speaker 1: sort of income support scheme for the poor, lower taxes
• 26:13
  Speaker 1: which these parties are throwing around. So it's at the
• 26:17
  Speaker 1: moment it's very hard to square how you can keep
• 26:20
  Speaker 1: the deficit under control make good on your promises at
• 26:24
  Speaker 1: the time when the Italian and European economy really seemed
• 26:27
  Speaker 1: to be slowing. Ferdinando the Commissioner for Economic Affairs, Pierre Moscovici,
• 26:35
  Speaker 1: has released part of a text of a speech that
• 26:39
  Speaker 1: he gave at the o E c D in Paris, saying, quote,
• 26:43
  Speaker 1: like the Hungarians, Italians also opted for a decidedly euroskeptic
• 26:48
  Speaker 1: and xenophobic government that on migration and budgetary issues, is
• 26:53
  Speaker 1: trying to get rid of European obligations. I mean, do
• 26:58
  Speaker 1: you agree with that? Well, I wrote I wrote a
• 27:01
  Speaker 1: column just yesterday which basically said that the European Commission
• 27:04
  Speaker 1: should really avoid making these such such remarks, using such
• 27:09
  Speaker 1: such you know, this kind of tone. And the reason
• 27:12
  Speaker 1: is because actually the two parties, the League in the
• 27:14
  Speaker 1: Five Star movement that thriving on this rhetoric from Brussels,
• 27:18
  Speaker 1: because it's very easy for them to just, you know,
• 27:21
  Speaker 1: portray these bureaucrats, European bureaucrats as the really enemies of
• 27:26
  Speaker 1: the Italian people. The people are trying to stop them
• 27:30
  Speaker 1: from making good on all their lavish promises. So I think,
• 27:35
  Speaker 1: you know, a much better strategy for Europe would be
• 27:37
  Speaker 1: to obviously apply the rules. I mean, there are some
• 27:40
  Speaker 1: rules which say high that country should really try to
• 27:43
  Speaker 1: bring this stept down during an upturn. And at the
• 27:45
  Speaker 1: moment we're not in a recession. The economy is growing,
• 27:48
  Speaker 1: so that's the time to do it. But at the
• 27:50
  Speaker 1: same time, really leave it to investors, because investors are
• 27:54
  Speaker 1: already nervous they're watching this very closely, and there will
• 27:58
  Speaker 1: be a lot of pressure on Italian government to you know,
• 28:02
  Speaker 1: reigning this crazy spending pledges. So frankly, I think these
• 28:08
  Speaker 1: comments are not particularly helpful. They only make the populists
• 28:12
  Speaker 1: look stronger. Far better to keep, you know, stick to
• 28:16
  Speaker 1: the rules, apply the rules, but let's let the markets
• 28:19
  Speaker 1: really do the job. Yeah, Fernando Julianna, thank you so
• 28:22
  Speaker 1: much for being with us. Fernando Giuliano is a Bloomberg
• 28:25
  Speaker 1: Opinion editor in Rome watching this drama unfold. Of course,
• 28:31
  Speaker 1: there have been an increasing number of comparisons between Italy
• 28:34
  Speaker 1: and Greece, given the fact that their bond yields are
• 28:37
  Speaker 1: now treating closer together than you're seeing with Germany, and uh,
• 28:42
  Speaker 1: I don't know, interesting times, interesting times. The New York
• 28:55
  Speaker 1: Times reported a bombshell article about President Donald Trump's finances,
• 29:00
  Speaker 1: basically saying he got a lot of his money from
• 29:03
  Speaker 1: his dad, despite his claims that he was a self
• 29:06
  Speaker 1: made million billionaire. Excuse me joining us now. Tim O'Brien,
• 29:10
  Speaker 1: executive diver editor of Bloomberg Opinion, also um the author
• 29:14
  Speaker 1: of the book Trump Nation, The Art of Being the Donalds.
• 29:17
  Speaker 1: Also he has been sued by Donald Trump and one. So, uh,
• 29:21
  Speaker 1: that's going to throw that out here, Tim, Why did
• 29:24
  Speaker 1: you make of this New York Times piece? But what
• 29:25
  Speaker 1: do we learn that was new? Um? Well, I think
• 29:28
  Speaker 1: the main things in it that were newly so were
• 29:30
  Speaker 1: the various structures his parents and his siblings invented to
• 29:35
  Speaker 1: transfer as much of the parents money to the kids
• 29:39
  Speaker 1: without incurring inheritance or gift taxes, which was a lot.
• 29:42
  Speaker 1: About a billion dollars went to the children. Under tax
• 29:46
  Speaker 1: rules at the time when that happened, it should have
• 29:48
  Speaker 1: been tax about a fifty rate, but because of various
• 29:52
  Speaker 1: structures that the kids put in, uh, it only got
• 29:54
  Speaker 1: taxed at about five. So instead of paying over five
• 29:59
  Speaker 1: million dollars in tax is they've paid about a little
• 30:01
  Speaker 1: bit over fifty. So is any of this illegal though
• 30:04
  Speaker 1: a big portion of it's perfectly legal, um, including the
• 30:08
  Speaker 1: you know, the sort of conduits that they used to
• 30:10
  Speaker 1: transfer the money. The piece of it that might be
• 30:13
  Speaker 1: and is at least untoward and possibly illegal, is that
• 30:17
  Speaker 1: they used bogus valuations on some of the assets that
• 30:20
  Speaker 1: were being transferred, particularly buildings. They had an appraiser who
• 30:24
  Speaker 1: appeared to have low ball the valuations on lots and
• 30:28
  Speaker 1: lots of these buildings. However, those valuations occurred I think
• 30:32
  Speaker 1: well over a decade ago, and Uh the appraiser said, Look,
• 30:35
  Speaker 1: I don't have the paperwork anymore and statutes of limitations
• 30:38
  Speaker 1: have run. So I don't think that there's legal exposure
• 30:42
  Speaker 1: here for the president. There may end up being a
• 30:43
  Speaker 1: civil penalty. There's no I would be really I would
• 30:48
  Speaker 1: bet you know, my own small wallet on the fact
• 30:50
  Speaker 1: that there wouldn't be a criminal penalty. Um. I think
• 30:53
  Speaker 1: the larger lesson from it, though, is it It does
• 30:56
  Speaker 1: speak to how dependent Donald Trump has always been on
• 31:00
  Speaker 1: his father, uh, to get launched as a businessperson, to
• 31:04
  Speaker 1: fend off bankruptcy as a business person, and to just
• 31:08
  Speaker 1: get repeated help getting past his myriad mistakes as a businessman. Tim.
• 31:14
  Speaker 1: In addition to your book on Trump, I know that
• 31:16
  Speaker 1: you've also written about a book called the Lincoln Conspiracy,
• 31:20
  Speaker 1: right I have? Yeah, is there any The reason I
• 31:23
  Speaker 1: bring that up is because that takes a wider view
• 31:26
  Speaker 1: of the kind of tenor of the time between the
• 31:29
  Speaker 1: end of the Civil War and the First World War?
• 31:31
  Speaker 1: Can you describe based on what we know and also
• 31:35
  Speaker 1: the revelations today from the New York Times, which, as
• 31:37
  Speaker 1: you just described, may or may not be brand new.
• 31:41
  Speaker 1: What do you believe to be the tenor of the
• 31:44
  Speaker 1: inner circle of President Donald Trump? Well, then I think
• 31:48
  Speaker 1: he's running a very chaotic administration. I think it it
• 31:51
  Speaker 1: reflects the Trump organization, which was very chaotically run. It
• 31:56
  Speaker 1: was essentially a cult of personality at the Trump organization,
• 32:00
  Speaker 1: built around marketing him and his name. It wasn't a
• 32:03
  Speaker 1: Fortune five hundred company. It was a mom and pop
• 32:06
  Speaker 1: boutique operation in Trump Tower that really served his needs.
• 32:11
  Speaker 1: And he's essentially transferred that into the White House. Um,
• 32:15
  Speaker 1: the White House is short on process, it's short on
• 32:18
  Speaker 1: policy aspirations. It is long on public appearances and and
• 32:23
  Speaker 1: emotional relationships with the Trump base. That works in a campaign,
• 32:27
  Speaker 1: it doesn't work for running a federal government employs two
• 32:30
  Speaker 1: million people. One thing that I'm struck by. President Trump
• 32:34
  Speaker 1: did respond to the New York Times article, slamming it
• 32:36
  Speaker 1: for being boring in old news and saying that now
• 32:40
  Speaker 1: of all stories in the New York Times are negative
• 32:42
  Speaker 1: on him, and just because they're just sort of sour
• 32:44
  Speaker 1: on getting the election call wrong. And I guess that
• 32:46
  Speaker 1: I'm wondering how much any of this matters when it
• 32:49
  Speaker 1: comes to how different populations in America view President Trump
• 32:54
  Speaker 1: and whether they support him or not. Well, you know,
• 32:57
  Speaker 1: it's it's easy to sort of define his base as
• 32:59
  Speaker 1: post industrial workers, male workers, white workers, and in fact,
• 33:06
  Speaker 1: affluent Republicans were also a core support group for the president.
• 33:10
  Speaker 1: And he's delivered things that that cohort wanted. He delivered uh,
• 33:15
  Speaker 1: a massive tax cut, he has delivered deregulation. Um, he
• 33:20
  Speaker 1: has populated the district courts. Um, those are things that's
• 33:24
  Speaker 1: meaningful to that group of people. Um. The blue collar
• 33:27
  Speaker 1: workers who support them wat job supported him, want jobs.
• 33:31
  Speaker 1: I am not convinced yet, um that they don't think
• 33:34
  Speaker 1: he's going to fulfill that promise. But the clock is
• 33:37
  Speaker 1: ticking on that. You know. You can look at places
• 33:38
  Speaker 1: like Indiana where Trump and Pence made a big show
• 33:42
  Speaker 1: of saving all those jobs that carrier and then months
• 33:45
  Speaker 1: later those jobs disappeared. Uh. You know, there's fisher fishermen
• 33:49
  Speaker 1: in the coasts of both Louisiana and and Connecticut who
• 33:53
  Speaker 1: have who are feel that they've been betrayed. You see
• 33:56
  Speaker 1: these interviews in the press where they thought the president
• 33:58
  Speaker 1: was going to deliver job growth them and they haven't
• 34:00
  Speaker 1: seen it. So I think job growth, but that's gonna
• 34:03
  Speaker 1: be a longer term, multi year phenomenon. Right now, I
• 34:06
  Speaker 1: think it's base really likes him, and then the Republicans
• 34:08
  Speaker 1: that are wealthy businessmen, they don't care about this other
• 34:11
  Speaker 1: stuff as much if the policies are what they like.
• 34:14
  Speaker 1: Is that sort of those well, I mean, I think,
• 34:15
  Speaker 1: I think I think it would appear that that those
• 34:19
  Speaker 1: are pocketbook voters and they see the government. Both both
• 34:23
  Speaker 1: of those constituencies see the government for different reasons as
• 34:26
  Speaker 1: obstructionists or in the way they don't see a benefit
• 34:28
  Speaker 1: from it. Trump speaks to both of those populations when
• 34:32
  Speaker 1: he says governments the problem, um and uh. For affluent voters,
• 34:38
  Speaker 1: they don't need government services as much. For blue collar voters,
• 34:41
  Speaker 1: they need those services, but they don't know what they're missing. All.
• 34:44
  Speaker 1: I'm gonna throw you a little bit of a curveball here.
• 34:46
  Speaker 1: But because of the nature of the investigation by the
• 34:49
  Speaker 1: New York Times, do you think that the president is
• 34:51
  Speaker 1: sympathetic to another round attax cuts? Wow? I mean, I
• 34:57
  Speaker 1: think I think the president is sympathetic to anything that
• 35:00
  Speaker 1: makes him look like he's winning, and he defines that
• 35:03
  Speaker 1: very broadly. Um further, are two things that motivate everything
• 35:08
  Speaker 1: he does. A survival and being self aggrandizing. That's all
• 35:14
  Speaker 1: you need to know, all right, Thanks very much. Tim
• 35:17
  Speaker 1: O'Brien is executive editor for Bloomberg Opinion. He is, of course,
• 35:22
  Speaker 1: the author of Trump Nation, The Art of Being the Donald.
• 35:26
  Speaker 1: It's also the author of The Lincoln Conspiracy. Thanks for
• 35:33
  Speaker 1: listening to the Bloomberg P and L podcast. You can
• 35:35
  Speaker 1: subscribe and listen to interviews at Apple Podcasts, SoundCloud, or
• 35:39
  Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm on
• 35:43
  Speaker 1: Twitter at pim Fox. I'm on Twitter at Lisa Abramowits
• 35:47
  Speaker 1: one before the podcast. You can always catch us worldwide
• 35:50
  Speaker 1: on Bloomberg Radio.