Latest / Bloomberg Intelligence / China Clampdown Could Reverse Global Real Estate Prices, Orlik Says

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China Clampdown Could Reverse Global Real Estate Prices, Orlik Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well
• 0:31
  Speaker 1: news crossing today that on Bang Insurance Group is getting
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  Speaker 1: pressured to stop buying so many assets overseas and possibly
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  Speaker 1: sell the iconic Waldorf Astoria hotel in New York, which
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  Speaker 1: it bought for almost two billion dollars. In with us
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  Speaker 1: to talk about this is Tom or Like, chief Asia
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  Speaker 1: economist for Bloomberg Intelligence, normally based in Beijing, but he
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  Speaker 1: is in New York today in our eleven three oh studios. Tom,
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  Speaker 1: thank you so much for joining us. I want to
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  Speaker 1: start with what's behind your request by China to a
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  Speaker 1: Bang and others to reduce overseas investments and to sort of,
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  Speaker 1: you know, like what exactly triggered this. I think the
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  Speaker 1: lens through we have through which we have to see
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  Speaker 1: this is a broader attempt by China's policymakers to crack
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  Speaker 1: down on financial risk and to crack down on capitalite
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  Speaker 1: flows and and bank ticks both of those boxes. On
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  Speaker 1: financial risk, they're issuing short term, high interest rate investment
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  Speaker 1: products to finance a liquid long term assets. That's a
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  Speaker 1: massive asset liability mismatch. On capital outflows, well, they're making
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  Speaker 1: a bunch of purchases overseas, so it's trying to crack
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  Speaker 1: down on these two areas and banging other firms are
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  Speaker 1: coming very clearly into the regulators crosshairs. Tom, Can you
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  Speaker 1: put this into the context of government policy in China
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  Speaker 1: and their Silk Road initiative, And because they seem to
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  Speaker 1: be putting a lot of money in overseas development, they
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  Speaker 1: just wanted in a certain way and under a certain control.
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  Speaker 1: I think China's policymakers are firm believers in their own
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  Speaker 1: ability to walk and chew gum at the same time um,
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  Speaker 1: and that means that they think they can pursue an
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  Speaker 1: aggressive outbound investment strategy on the Belt and road building
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  Speaker 1: infrastructure in Southeast Asia into Central Asia at the same
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  Speaker 1: time as cracking down on what they see as the
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  Speaker 1: riskier aspects of capitalite flows, as it was the case
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  Speaker 1: with Ambang. So to me, this is this is really compelling.
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  Speaker 1: If Unbang does sell the Waldorf Storia, which have bought
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  Speaker 1: just three years ago, what other assets could it sell
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  Speaker 1: And could we see a mass sale among other assets
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  Speaker 1: by other companies that are engaging in similar practices. So
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  Speaker 1: I think we're still a little bit in the realm
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  Speaker 1: of speculation here. We have a well sourced story on
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  Speaker 1: the Bloomberg terminal. On this, we so far do not
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  Speaker 1: have confirmation from China's policymakers, and A Bang are certainly
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  Speaker 1: not affirming that they've been required to sell their overseas assets. Um.
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  Speaker 1: If it does come to that, um, then I think
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  Speaker 1: we're going to see some reversal in that excitement about
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  Speaker 1: real estate prices. Well, I mean, that's sort of what
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  Speaker 1: I'm getting at, even if it's let's say, even if
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  Speaker 1: they're not going to confirm it, or even if they
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  Speaker 1: don't sell the idea that Chinese companies may avoid some
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  Speaker 1: of the big purchases I'm thinking in particular property purchases
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  Speaker 1: in the in the New York area, for example, or
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  Speaker 1: in London. That changes the dynamic for those markets. Now, yeah,
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  Speaker 1: I think that's right. I think one of the underlying
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  Speaker 1: positives for global real estate markets in the last few
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  Speaker 1: years has been this idea that the big Chinese buyer
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  Speaker 1: in the case of the prestige project like Waldorf, or
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  Speaker 1: the just the middle income Chinese buyer in the case
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  Speaker 1: of run of the mill residential property is going to
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  Speaker 1: be there with a wad of cash willing to drive
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  Speaker 1: up prices. If that story starts to change, clearly there
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  Speaker 1: are some important implications. Tom. Before you came in, you
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  Speaker 1: mentioned that you know you've been in China for about
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  Speaker 1: a decade, perhaps even longer. What are some of the
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  Speaker 1: biggest misconceptions that you try to dispel from people who
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  Speaker 1: just read the headlines or news but actually don't live
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  Speaker 1: there and spend time there. I think what people underestimate
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  Speaker 1: is the capacity which China's policymakers have to pull policy
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  Speaker 1: levers to change the dynamic in the short term. UM
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  Speaker 1: So we underestimate the power of the Chinese government. I
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  Speaker 1: think people are right that China's government and China's economy
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  Speaker 1: faces some really serious problems in the long term, particularly
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  Speaker 1: on the over extension of the banking sess system and
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  Speaker 1: the overborrowing by the corporate sector. UM what people underestimate
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  Speaker 1: is the capacity of China's policymakers to move things around
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  Speaker 1: in a way which delays any kind of day of reckoning.
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  Speaker 1: Are we seeing any sales of assets overseas on the
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  Speaker 1: part of bigger Chinese companies yet? I haven't seen any
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  Speaker 1: of that so far. So so far, there's been absolutely
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  Speaker 1: no evidence that this is going on in any way.
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  Speaker 1: I think this is the beginning of the story, not
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  Speaker 1: the end, got it? And so what about wealthy individuals?
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  Speaker 1: Are they still moving money overseas or is that slowing
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  Speaker 1: down a bit? So if we look at the bigger
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  Speaker 1: picture on China's capital outflows, the government has really been extraordinarily,
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  Speaker 1: extraordinarily successful in stemming the outflow. If you go back
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  Speaker 1: to the end of two thousand and sixteen, capital light
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  Speaker 1: flows were picking up again. The big fear was that
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  Speaker 1: we were going to see a flood of outflows at
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  Speaker 1: the start of two thousand and seventeen and we'd be
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  Speaker 1: back to panic mode on China's economy. That hasn't happened.
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  Speaker 1: At the end of last year, we saw the beginnings
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  Speaker 1: of a crackdown on corporate and household outflows. These latest
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  Speaker 1: stories on and bang h Na Dally and Wander show
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  Speaker 1: an extension of that policy. And if we look at
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  Speaker 1: the numbers, China's capital light flows have come right down
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  Speaker 1: from fifty sixty billion dollars a month at the end
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  Speaker 1: of last year, too close to imbalance in the latest data.
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  Speaker 1: One of thank you very much for coming in and
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  Speaker 1: spending time with us. Tom Orlick is our chief Asia
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  Speaker 1: economist for Bloomberg Intelligence. We hear a lot about the
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  Speaker 1: souring US Russia relations, and really underpinning it is the
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  Speaker 1: ongoing investigation into President Trump. And here to give us
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  Speaker 1: a little bit more color from the Russian perspective and
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  Speaker 1: from a deeply knowledgeable and informed place, is Richard Khan,
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  Speaker 1: managing partner at Eurasia Advisors, based in New York City,
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  Speaker 1: also has offices in Moscow. And Richard, you have a
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  Speaker 1: deep background with Russia, with financial dealings of all sorts
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  Speaker 1: between Russia and the US, and I just want to
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  Speaker 1: start with you know, how serious do you think that
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  Speaker 1: this is being overblown, the Russia investigation into President Trump?
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  Speaker 1: And do you think that it's not fair to say
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  Speaker 1: that this is really at the heart of the ongoing
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  Speaker 1: conflict between the US and Russia. I do not think
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  Speaker 1: it's being overblown, Lisa. From the first time I spoke
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  Speaker 1: with you, roughly a year ago, I highlighted some red flags,
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  Speaker 1: mentioning people's names such as, you know, Paul Maniford and
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  Speaker 1: Carter Page, folks who I felt or indicative of efforts
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  Speaker 1: by the FSB to place people around Trump. And since,
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  Speaker 1: and I've of course been cautious about stating what I
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  Speaker 1: really think may happen in that context, but I think
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  Speaker 1: we now have a pretty good picture of what's going on,
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  Speaker 1: and those of us who spend time in Russia and
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  Speaker 1: are familiar with the FSB tactics really have I think
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  Speaker 1: very little doubt that there's a tremendous amount of fire here.
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  Speaker 1: And there are a variety of criminal UH statutes that
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  Speaker 1: may well have been violated that I'm sure Mueller is
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  Speaker 1: looking at right what UH. I would give several examples.
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  Speaker 1: One would be cyber intrusion, another, campaign finance laws, false
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  Speaker 1: statements to federal agents, foreign ancient registration, f c p A, RICO,
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  Speaker 1: money laundering, espionage, possible obstruction of justice. Of course, all
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  Speaker 1: of these things I can give examples of in terms
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  Speaker 1: of how I think they may play out, But one
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  Speaker 1: simple one would be well, first, let me just say
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  Speaker 1: during the time period when when we do not know
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  Speaker 1: all of the facts, if there is a fire, let's
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  Speaker 1: say regarding money laundering, the Russians are aware of that,
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  Speaker 1: just as they were aware of the meeting in Trump Tower,
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  Speaker 1: but did not disclose that during those time periods when
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  Speaker 1: they know it but we do not. That's what's called compremat.
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  Speaker 1: That puts the Russians in a position of having information
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  Speaker 1: that's embarrassing to the President and his team and allows
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  Speaker 1: them great leverage. But in the money laundering context, as
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  Speaker 1: an example, I'm sure that Mueller is looking at a
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  Speaker 1: very classic technique used in the high levels of Russian government,
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  Speaker 1: which is the movement of capital to real estate markets
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  Speaker 1: to clean money by basically by paying high prices for
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  Speaker 1: real estate and eventually having the ability to sell those
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  Speaker 1: assets and have the money at that point be utilized.
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  Speaker 1: In Schedule three countries meeting countries which are on the screen, Well,
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  Speaker 1: this all ties to two very recent developments. Because it's
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  Speaker 1: clear that Congress doesn't fully trust President Trump in his
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  Speaker 1: dealings with Russia. That could be an interpretation of popular
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  Speaker 1: one from the sanctions that were by passing a bipartisan
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  Speaker 1: fashion through Congress UH that resulted in Russia's retaliation by
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  Speaker 1: ejecting the more than seven hundred diplomats that are in Russia.
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  Speaker 1: And then of course there's this escalating concern about Russia's
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  Speaker 1: interactions with North Korea, with Venezuela. I mean, this is
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  Speaker 1: getting very complicated with Trump. I mean, how much leverage
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  Speaker 1: does he have within the US even to deal with Russia,
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  Speaker 1: even if Russia does have compromont on him. Well, the
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  Speaker 1: way I think of it, and I look going first
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  Speaker 1: say we eurased advisors. We want to see good relations
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  Speaker 1: with Russia. That's what we're really about is trying to
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  Speaker 1: build bridges, trying to see business move ahead, resolve problems.
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  Speaker 1: But that has to start in a situation where the
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  Speaker 1: United States is being represented by people who are trustworthy
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  Speaker 1: and both in terms of not having complet model them,
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  Speaker 1: not having been paid as some of the people around
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  Speaker 1: Trump have been, and in addition being in a position
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  Speaker 1: to have the confidence of the population behind you in
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  Speaker 1: order to make deals. I actually view Trump right now
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  Speaker 1: as the major impediment to better relations with Russia. And
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  Speaker 1: I say it that way because I don't think it's
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  Speaker 1: possible having Trump in power given all that we already
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  Speaker 1: know about him, and I believe there will be a
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  Speaker 1: great deal more that comes out. I don't think he's
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  Speaker 1: going to ever going to be in a position where
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  Speaker 1: people in the United States, whether they're in Congress or
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  Speaker 1: just a population generally, are going to have a confidence
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  Speaker 1: that he's actually acting exclusively in the best interests of
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  Speaker 1: the United States, without any concern for information that people
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  Speaker 1: may have on him or for his own business dealings.
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  Speaker 1: And as you were just saying, Lisa, the tentacles of
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  Speaker 1: this go far beyond Russia. This this comes into play
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  Speaker 1: when you're dealing with relations with China, with Turkey, with Greece.
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  Speaker 1: It comes into play when it comes to the undermining
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  Speaker 1: of our civil society in the United States, whether in
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  Speaker 1: other words, attacking anyone who is going to be part
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  Speaker 1: of the accusations against him, anyone who is essentially playing
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  Speaker 1: a prosecutorial role, whether that's the court system, whether it's
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  Speaker 1: the media, whether it's an individuals such as Mueller. I
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  Speaker 1: think he has made the decision from a fairly early
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  Speaker 1: stage because he knew what was out there, that he
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  Speaker 1: had to undermine these sources of attack on him, and
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  Speaker 1: I think he's done that in a very broad manner
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  Speaker 1: and it's extremely harmful. So it's a matter that I
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  Speaker 1: think that affects all of us as he tries to
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  Speaker 1: deal with these allegations, although a lot of people would
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  Speaker 1: say that they have been overblown, that there has been
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  Speaker 1: no proof that you know, he is generally moving forward
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  Speaker 1: with the consensus of a pretty big corps of people
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  Speaker 1: who think that he's still doing a good job despite
• 12:03
  Speaker 1: you know, some of the less popular polls, and they
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  Speaker 1: have come out, and you know, he's basically put some
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  Speaker 1: pretty respected people in right below him, and they certainly
• 12:13
  Speaker 1: like McMaster, who is absolutely respected broadly, so you could
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  Speaker 1: say that, you know, they could act and negotiate to
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  Speaker 1: a decent level. Well, Look, I have respect for many
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  Speaker 1: people whom he's hired. I know Rex to Learsten somewhat
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  Speaker 1: from having served on a board with him years ago.
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  Speaker 1: And I think many people and I would assume he's
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  Speaker 1: in this category trying to be helpful in the situation,
• 12:36
  Speaker 1: recognize that there are serious problems with Trump and many
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  Speaker 1: and his team and want to be responsible and our
• 12:43
  Speaker 1: patriots trying to do the right thing. I'm not sure
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  Speaker 1: that's going to be successful for them. And I also
• 12:48
  Speaker 1: don't think that at the end of the day that
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  Speaker 1: that is going to be enough to over in any
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  Speaker 1: way overcome the uh the undercurrents that we are now
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  Speaker 1: seeing coming out in terms of actual links between Russia
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  Speaker 1: and the Trump team. And as I said, I think
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  Speaker 1: there's gonna be a great deal more of that. What
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  Speaker 1: we look forward to your commentary and your thoughts. Richard
• 13:10
  Speaker 1: Kahn is the managing partner at Eurasia Advisors, speaking about
• 13:14
  Speaker 1: US Russia relations. All right, here to tell us what
• 13:30
  Speaker 1: to do with your money is Phil Orlando. He is
• 13:32
  Speaker 1: the chief Equity market Strategist, group head of Macro Balanced
• 13:36
  Speaker 1: and Growth and Income Teams at Federated Investors, and he
• 13:40
  Speaker 1: joins us here in our eleven trio studio. Phil, thanks
• 13:42
  Speaker 1: very much for being o. Hey, Pim, thanks for very
• 13:44
  Speaker 1: much for hearing me. So let's let's try to just
• 13:47
  Speaker 1: understand exactly where we are in the market right now.
• 13:50
  Speaker 1: And you know, we've heard these calls that equities are overvalued,
• 13:53
  Speaker 1: bonds don't return a lot. What are you suggesting to
• 13:57
  Speaker 1: your customers right now, Well, we don't think that stocks
• 13:59
  Speaker 1: are revalued per se. We're sitting here at about nineteen
• 14:03
  Speaker 1: times this year's estimated earnings of a hundred and thirty dollars.
• 14:07
  Speaker 1: But I gotta tell you that the earnings are just
• 14:09
  Speaker 1: coming in beautifully. You know. The first quarter is a
• 14:11
  Speaker 1: fifteen percent year every year, best quarter in five years.
• 14:14
  Speaker 1: Second quarter we're about sixty done. We're up about ten
• 14:18
  Speaker 1: eleven percent, another solid quarter. Journal this morning made a
• 14:22
  Speaker 1: comment that this is the best six month period we've
• 14:25
  Speaker 1: seen in corporate earnings since um and but how much
• 14:29
  Speaker 1: does that due to the weaker dollar? Well, currency is
• 14:32
  Speaker 1: absolutely headwind. But but you know, why do we Why
• 14:36
  Speaker 1: are we gonna penalize companies because the dollars weeken? They're
• 14:40
  Speaker 1: the large cap companies are selling more stuff overseas. That's
• 14:42
  Speaker 1: the environment in which they're dealing with. And if the
• 14:45
  Speaker 1: earnings were terrible now because of the strong dollar, uh
• 14:49
  Speaker 1: and and I would say, well, we've got to compensate
• 14:51
  Speaker 1: for the strength of the US dollar being a headwin
• 14:55
  Speaker 1: as opposed to tailwin, you'd say, and just just treat
• 14:57
  Speaker 1: the earnings as they are. That's true. We wouldn't say that.
• 15:01
  Speaker 1: I have to say, when you came in here and
• 15:03
  Speaker 1: we were gonna we were talking ahead of the segment
• 15:06
  Speaker 1: you were talking about, you're expecting a three to five
• 15:08
  Speaker 1: percent pullback. How do you think about that and how
• 15:11
  Speaker 1: do you sort of see that being triggered given the
• 15:13
  Speaker 1: fact that earnings are coming in fantastically and that there
• 15:17
  Speaker 1: isn't really anything that seems to shake confidence of investors.
• 15:20
  Speaker 1: So you're in great shape right now with the earnings
• 15:22
  Speaker 1: valuation at nineteen times is not that excessive. But earning
• 15:26
  Speaker 1: season to end in a couple of weeks and then
• 15:28
  Speaker 1: you know, seasonally, we've got this August September period, which,
• 15:32
  Speaker 1: you know, the duldrums of the summer tend to lead
• 15:35
  Speaker 1: to corrections. You've had a twenty move in the market since, uh,
• 15:39
  Speaker 1: since the election. Uh, Washington can't seem to get out
• 15:43
  Speaker 1: of its own way, for reasons that I still don't understand.
• 15:47
  Speaker 1: They keep they keep trying to pound this you know,
• 15:50
  Speaker 1: round peg of of healthcare into a square hole here,
• 15:54
  Speaker 1: as opposed to pivoting over to something that actually matters,
• 15:58
  Speaker 1: which is to focus on corporate tax reform and infrastructure
• 16:02
  Speaker 1: and repatriation, the things that will move the needle. So
• 16:05
  Speaker 1: at some point, maybe the market just says, you know what,
• 16:08
  Speaker 1: we're just frustrated as hell with the fact that this
• 16:11
  Speaker 1: administration can't can't shoot straight and and maybe that is
• 16:15
  Speaker 1: what you know, triggers a little bit of an air pocket. Well,
• 16:18
  Speaker 1: they might be frustrated, but if you're invested in the
• 16:21
  Speaker 1: SMP five hundreds, you're up more than ten percent so
• 16:23
  Speaker 1: far this year correct on the basis of earnings that
• 16:26
  Speaker 1: there's no Trump. You know. But let's say, as an investor,
• 16:29
  Speaker 1: you don't do you really care why it goes up.
• 16:32
  Speaker 1: If you're long you just are happy that you're you know,
• 16:35
  Speaker 1: your trade played out or your investments. Well, all right,
• 16:37
  Speaker 1: so at Federated investors were long term investors. And the
• 16:40
  Speaker 1: way we see this cycle playing out is we think
• 16:43
  Speaker 1: the SMP, you know, at two thousand or so last election,
• 16:48
  Speaker 1: we thought we had a nice clean run to three
• 16:51
  Speaker 1: thous and looking out into the spring of so as
• 16:54
  Speaker 1: as as we see that fifty percent move, we have
• 16:57
  Speaker 1: no problems with what's playing out. But we're not the
• 17:00
  Speaker 1: average investor. The average investor is looking at day to day,
• 17:03
  Speaker 1: week to week stuff. The hedgees are not looking out
• 17:05
  Speaker 1: to it for a year. Let me just challenging them,
• 17:07
  Speaker 1: because when you say average investor, let's just I understand
• 17:10
  Speaker 1: what you're saying. You know, it's like at the margin,
• 17:12
  Speaker 1: they may set the price on any given day. But
• 17:15
  Speaker 1: as you just described, if you're a long term investor,
• 17:17
  Speaker 1: if you're looking to make an investment now for three
• 17:19
  Speaker 1: to five years down the road, couldn't you be considered
• 17:22
  Speaker 1: to be like an actual investor as opposed to a speculator.
• 17:26
  Speaker 1: And if we were to get a three, five or
• 17:27
  Speaker 1: seven percent declined, what would you be buying? Oh, we
• 17:31
  Speaker 1: would absolutely be buyers. And the areas that we have
• 17:35
  Speaker 1: shifted our focus to post election were those areas that
• 17:38
  Speaker 1: are economically sensitive that we think will will benefit from
• 17:42
  Speaker 1: the improved economy. So technology, financial services, energy, materials, industrials,
• 17:47
  Speaker 1: the areas that you know will do better than the
• 17:50
  Speaker 1: big stable dividend pairs. So I want to go back
• 17:53
  Speaker 1: fil to what you were saying about the three to
• 17:55
  Speaker 1: five percent correction, that we're entering the dull drums period
• 17:58
  Speaker 1: of the year, and that typically that's a good time
• 18:00
  Speaker 1: for a sell off. Of course, um, that is not
• 18:03
  Speaker 1: enough of a catalyst that people are bored to to
• 18:06
  Speaker 1: trigger a sell off, because otherwise they would have sold
• 18:08
  Speaker 1: off a long time ago. But you know, I think
• 18:12
  Speaker 1: a Rist cost Rich of Black Rock was on Bloomberg
• 18:14
  Speaker 1: Television earlier today and he was talking about the build
• 18:16
  Speaker 1: up of leverage at hedge funds and other investors in
• 18:20
  Speaker 1: particular to buy stocks. And I have to wonder what
• 18:24
  Speaker 1: that means for short term interest rates. If they rise,
• 18:27
  Speaker 1: that leverage becomes much more expensive. Perhaps you get margin
• 18:30
  Speaker 1: calls or having to post a more collateral and all
• 18:34
  Speaker 1: of a sudden that could trigger a sell off. Do
• 18:38
  Speaker 1: you see that as a potential catalyst. If not, what
• 18:40
  Speaker 1: are some of the other potential catalysts. So Russ is
• 18:42
  Speaker 1: a smart guy and and looking at the leverage of
• 18:45
  Speaker 1: head funds, hedge funds is certainly an issue as we
• 18:49
  Speaker 1: look at the potential for rising interest rates. Uh. We
• 18:52
  Speaker 1: we know on the calendar that that we've got the
• 18:55
  Speaker 1: FED Dr Yellen giving a key speech at at Jackson
• 18:59
  Speaker 1: Hole in UH. I guess in about a month or less,
• 19:02
  Speaker 1: little less than a month's time, where we think she's
• 19:04
  Speaker 1: gonna lay out, you know, UH, a firmer plan in
• 19:08
  Speaker 1: terms of the Feds unwind of uh, you know, the
• 19:11
  Speaker 1: early stage of shrinking that four and a half trillion
• 19:13
  Speaker 1: dollar balance sheet. We think the Fed kicks off with that, uh,
• 19:16
  Speaker 1: definitively at their fo MC meeting in mid September. So
• 19:20
  Speaker 1: so perhaps somewhere in there the market has the reality
• 19:24
  Speaker 1: of the shrinking of the balance sheet, which is another
• 19:26
  Speaker 1: way of saying that the Fed will continue to to
• 19:29
  Speaker 1: withdraw accommodation from the market. Maybe maybe that is a
• 19:32
  Speaker 1: trigger that that that gets investors starting to take some
• 19:36
  Speaker 1: chips off the table. So it's really hard to sit
• 19:39
  Speaker 1: here and say definitively that this is the issue that's
• 19:42
  Speaker 1: going to trigger it. Uh, there may be three or
• 19:44
  Speaker 1: four things that the markets nervous about. And given the
• 19:46
  Speaker 1: fact that that you're you're entering sort of a typically
• 19:50
  Speaker 1: perilous time with the stock market having done phenomenally well.
• 19:54
  Speaker 1: Uh and and maybe we're just gonna, you know, nitpick
• 19:56
  Speaker 1: our way to a small correction. Fel gonna be nit
• 20:00
  Speaker 1: pick our way to that small correction. We're gonna be
• 20:02
  Speaker 1: doing it with a lot fewer stocks. Do you have
• 20:04
  Speaker 1: any thoughts on this idea that inn we had about
• 20:08
  Speaker 1: seventy five hundred publicly traded companies that wasn't like the
• 20:12
  Speaker 1: Wilshire five thousand. Right now we have about thirty five
• 20:15
  Speaker 1: hundred that's at the kind of fifty percent. That's just
• 20:19
  Speaker 1: fewer stocks to invest this maybe even growing amount of money. Uh.
• 20:23
  Speaker 1: That's an issue. I would think that with a stronger economy, uh,
• 20:28
  Speaker 1: with more business friendly fiscal policies, uh, we would start
• 20:33
  Speaker 1: to see a wave of I p O s that
• 20:34
  Speaker 1: would bring more, you know, fresh companies into the market.
• 20:38
  Speaker 1: Another concern to your point, Pim, and we were discussing
• 20:41
  Speaker 1: this at our morning meeting this morning, is that in
• 20:44
  Speaker 1: the past, you know, you'll remember this, you're an old
• 20:46
  Speaker 1: guy like me. Uh, companies when the stock price gets
• 20:50
  Speaker 1: to a certain level, would split the stock two four
• 20:53
  Speaker 1: three four. Don't they don't do that right now? Not are?
• 20:55
  Speaker 1: Are are? One of our Dan Paris, the head of
• 20:59
  Speaker 1: our strategic Vale You franchise, was bemoaning the fact that that, uh,
• 21:03
  Speaker 1: you know that that McDonald's is trading it. I don't know,
• 21:06
  Speaker 1: it's north of a hundred bucks. Was a hundred fifty
• 21:08
  Speaker 1: bucks right now? In the old days, you know, Uh,
• 21:11
  Speaker 1: companies would say, okay, we want to keep that stock
• 21:13
  Speaker 1: somewhere between thirty and fifty dollars a share, and you
• 21:16
  Speaker 1: would periodically get these two for one three for one splits.
• 21:18
  Speaker 1: Now everybody's working up towards a thousand dollars, you know,
• 21:22
  Speaker 1: Warren Buffett saying, we don't need to split the stock.
• 21:24
  Speaker 1: Let's just keep you know, keep Berkshire Hathaway up at
• 21:28
  Speaker 1: you know, these stratospheric levels. So that that also creates
• 21:31
  Speaker 1: an issue because the retail investor, per se, doesn't really
• 21:35
  Speaker 1: have the ability to buy a Hunter and hundred fifty
• 21:36
  Speaker 1: dollar stock. They like to buy stocks that are of share,
• 21:40
  Speaker 1: so they go to index funds where they can buy
• 21:42
  Speaker 1: them all. Phil Orlando, thank you so much for joining us.
• 21:45
  Speaker 1: It's always a pleasure to speaking. Thank you so much.
• 21:47
  Speaker 1: Enjoy the rest of your summer. Thank you too, Phill Orlando.
• 21:49
  Speaker 1: Chieffectuty Equity Market Strategistic Federated in Investors, joining us here
• 21:54
  Speaker 1: in our Bloomberg eleven three oh studios. Well he's real,
• 22:09
  Speaker 1: he's here with us today. Paul Sweeney US director of
• 22:12
  Speaker 1: Research and senior Media Internet Analysts for Bloomberg Intelligence. He
• 22:15
  Speaker 1: can be followed on Twitter at pt Sweeney r I
• 22:19
  Speaker 1: P T. Sweeney tell us about this combination Scripts, Networks
• 22:24
  Speaker 1: and Discovery. Why are they getting together? You know, I
• 22:27
  Speaker 1: think they're getting together simply to get scale in a
• 22:29
  Speaker 1: consolidating media business that is being disrupted by the likes
• 22:33
  Speaker 1: of the Netflix and Hulus and you know, all the
• 22:36
  Speaker 1: other types of Internet enabled commerce and entertainment. So we
• 22:41
  Speaker 1: saw in the last you know, a couple of years,
• 22:42
  Speaker 1: a lot of consolidation on the distribution side of the business.
• 22:45
  Speaker 1: We saw a T and T by Direct Tv, UH,
• 22:48
  Speaker 1: Charter Communications, by Time Warner Cable, and now I think
• 22:51
  Speaker 1: we're seeing kind of the flip side, some consolidation on
• 22:53
  Speaker 1: the content side of the media equation. UH. And this
• 22:57
  Speaker 1: is a deal Discovery and Scripts that investors have been
• 23:00
  Speaker 1: speculating on for a long time. It really makes the
• 23:02
  Speaker 1: most UH strategic sense. You've got two companies that are
• 23:05
  Speaker 1: very good, high quality cable network companies, but you know,
• 23:09
  Speaker 1: in this relative to the UH Foxes of the world
• 23:12
  Speaker 1: and the Disneys of the world, are probably a little
• 23:14
  Speaker 1: bit subscale. And by merging they can get a little
• 23:17
  Speaker 1: bit of scale to compete against some of these big distributors.
• 23:19
  Speaker 1: And they're hoping that people will continue to want to
• 23:21
  Speaker 1: watch people renovate their bedrooms for perpetuity. I want to
• 23:25
  Speaker 1: get a sense from you, Paul. Discovery shares down more
• 23:28
  Speaker 1: than six percent right after the open on this news.
• 23:32
  Speaker 1: Are they overpaying. UM. You know, I don't think they're overpaying,
• 23:35
  Speaker 1: but it's um. What happened this morning also is um
• 23:38
  Speaker 1: uh Scripts reported earnings that came in blow expectations, that
• 23:41
  Speaker 1: they pre announced their earnings in controjunction with the deal,
• 23:44
  Speaker 1: and they also took down their their guidance for the
• 23:47
  Speaker 1: remainder of the year. So it just highlighted once again
• 23:49
  Speaker 1: that the cable network business, UM, you know, isn't quite
• 23:52
  Speaker 1: as good a business as it used to be, and
• 23:54
  Speaker 1: in fact, the cord cutting issues are are impacting all
• 23:58
  Speaker 1: cable networks, including the ones that Scripts and Discovery UH.
• 24:02
  Speaker 1: So I think, you know, in the context of the
• 24:04
  Speaker 1: price tag paid in in light of the reduced estimates
• 24:07
  Speaker 1: for Scripts, I think some investors are taking it out
• 24:09
  Speaker 1: on the Discovery. But again, it just kind of highlights
• 24:11
  Speaker 1: one once once again the challenges that these companies, no
• 24:13
  Speaker 1: matter how big they're going to get, UH, will continue
• 24:16
  Speaker 1: to face in terms of cord cutting and the ability
• 24:19
  Speaker 1: that and the impact that has us on its advertising
• 24:21
  Speaker 1: revenue and on on on its affiliate feed revenue. Well,
• 24:24
  Speaker 1: does that mean that they really haven't taken the opportunity
• 24:27
  Speaker 1: to change the business model at all? From just relying
• 24:29
  Speaker 1: on advertising, specifically a lot of advertising from automobile companies. Yeah,
• 24:34
  Speaker 1: the the cable network business historically has been the best
• 24:37
  Speaker 1: part of the television advertising UH story over the last
• 24:40
  Speaker 1: ten to twenty years, as people spend more time with
• 24:43
  Speaker 1: the cable networks versus the broadcast networks. But that is
• 24:46
  Speaker 1: essentially played out now. The story is can these cable
• 24:49
  Speaker 1: networks and the broadcast networks, but particularly the cable networks,
• 24:53
  Speaker 1: how do they get their content to the consumers If
• 24:55
  Speaker 1: the consumers are cutting the cord or maybe never even
• 24:57
  Speaker 1: signing up for paid TV at all? How did they
• 25:00
  Speaker 1: get their content in front of consumers and get paid
• 25:03
  Speaker 1: for it through advertising or affiliate fees. So we you know,
• 25:06
  Speaker 1: they need to go direct to consumer, much like HBO
• 25:09
  Speaker 1: has gone direct to the consumer with HBO now um
• 25:12
  Speaker 1: and I think they need to be a part of
• 25:14
  Speaker 1: some of the skinny bundles that some of these consumers
• 25:16
  Speaker 1: are signing up for. They need to have a direct
• 25:18
  Speaker 1: to consumer solutions. So I think one of the expectations
• 25:21
  Speaker 1: is that Discovery and Scripts will pull their content and
• 25:25
  Speaker 1: create a direct to consumer kind of brand to go
• 25:28
  Speaker 1: right to the consumer, much like Netflix goes right to
• 25:29
  Speaker 1: the consumer with its content. Well, the market might not
• 25:32
  Speaker 1: be that enthusiastic about the price and especially the earnings
• 25:36
  Speaker 1: of Discovery, but stock traders are very happy with the
• 25:39
  Speaker 1: news that UH soft Bank might purchase Charter shares at
• 25:44
  Speaker 1: the highest level ever, up more than four percent so
• 25:48
  Speaker 1: far in trading. UH, can you just give us a
• 25:51
  Speaker 1: sense of why soft Bank would want to buy Charter?
• 25:55
  Speaker 1: The recent soft Bank would want to buy Charter is
• 25:57
  Speaker 1: because soft Bank also owns Sprint in the United States,
• 26:00
  Speaker 1: and Sprint is a company that is not performing well,
• 26:03
  Speaker 1: that is really challenged from a strategic perspective. It is
• 26:06
  Speaker 1: the fourth of the four wireless carriers in the United States,
• 26:10
  Speaker 1: so it's in a weak strategic positions, and it's in
• 26:12
  Speaker 1: a relatively weak financial position, and it Massa. Siro Son
• 26:17
  Speaker 1: believes that by combining with Charter, a much stronger company,
• 26:20
  Speaker 1: a company with a diversified business of video and high
• 26:24
  Speaker 1: speed data and landline phone, that this would be a
• 26:26
  Speaker 1: good way to shore up Sprint. But you know it's strange, Okay,
• 26:30
  Speaker 1: So SoftBank tried to get Charter to buy Sprint outright,
• 26:34
  Speaker 1: they said no. So now soft Bank is trying to
• 26:36
  Speaker 1: just buy Charter. Sprint shares not up, they are down. Well,
• 26:41
  Speaker 1: it's surprising to me, it is a little bit, and
• 26:43
  Speaker 1: I think I'm I'm actually surprised a little bit that
• 26:45
  Speaker 1: that Charter is up as much as it is, because
• 26:47
  Speaker 1: I think the there's a high level of skepticism in
• 26:49
  Speaker 1: the marketplace that Massa son Um can in fact pull
• 26:53
  Speaker 1: off by transaction and acquisition of Charter Um. You know,
• 26:56
  Speaker 1: if you factor in some type of premium for Charter
• 26:59
  Speaker 1: an ACQUA system, Charter would approach two hundred billion dollars
• 27:02
  Speaker 1: when you include the sixty billion dollars in debt that
• 27:05
  Speaker 1: Charter has. So this is a huge transaction, UH, and
• 27:08
  Speaker 1: it would be very difficult from also to pull off
• 27:10
  Speaker 1: from a financial UH perspective, even if Charter wanted to sell.
• 27:14
  Speaker 1: And let's remember when we talk about Charter once again,
• 27:16
  Speaker 1: we're talking about John Malone. He has a significant shareholder
• 27:20
  Speaker 1: of Charter Communications, and he would have to agree to
• 27:22
  Speaker 1: any deal. And I do not believe that he is
• 27:25
  Speaker 1: looking for an outright sale of Charter. Is he willing
• 27:27
  Speaker 1: to do some type of UH strategic transaction with Sprint
• 27:31
  Speaker 1: or with Massa son Very possible. John Malone is the
• 27:34
  Speaker 1: you know, a prolific deal maker. So maybe there's some
• 27:36
  Speaker 1: stret strategic outcome here, but I don't think an outright
• 27:40
  Speaker 1: acquisition of Charter is in the cards right now. Well,
• 27:43
  Speaker 1: I mean that's a that that's something I guess they
• 27:46
  Speaker 1: haven't figured out yet because they're trying to make this
• 27:48
  Speaker 1: deal happen. I mean, I wonder if the technology is
• 27:51
  Speaker 1: up to date. I know, yeah, Sprint, you know, it's
• 27:54
  Speaker 1: you know, I just talked to John Butler are telecom
• 27:56
  Speaker 1: antals here, and he made the comment to me that Sprint,
• 27:58
  Speaker 1: because of its uh you know, a week financial position,
• 28:01
  Speaker 1: has not been investing in its network. Paul Sweeney, As always,
• 28:05
  Speaker 1: we love hearing from you. Paul Sweeney, thank you for
• 28:07
  Speaker 1: joining us. He is US director of Research and senior
• 28:10
  Speaker 1: Media and Internet Analyst for Bloomberg Intelligence. Thanks for listening
• 28:17
  Speaker 1: to the Bloomberg P and L podcast. You can subscribe
• 28:20
  Speaker 1: and listen to interviews at Apple Podcasts, SoundCloud, or whatever
• 28:23
  Speaker 1: podcast platform you prefer. I'm Pim Fox. I'm on Twitter
• 28:27
  Speaker 1: at pim Fox. I'm on Twitter at Lisa Abramo. It's
• 28:31
  Speaker 1: one before the podcast. You can always catch us worldwide
• 28:34
  Speaker 1: on Bloomberg Radio.