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Abandon 'One Korea' Policy, Lefkowitz 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 Abramowitz. Each day we
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Speaker 1: bring you the most important, noteworthy, and useful interviews for
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Speaker 1: you and your money, whether you're at the grocery store
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Speaker 1: or the trading floor. Find the Bloomberg p m L
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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Right now, though,
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Speaker 1: let's turn our attention to North Korea and the issues
0:35
Speaker 1: facing the Korean Peninsula. J Leftwitz is a former U
0:38
Speaker 1: S Special Envoy for Human Rights in North Korea and
0:41
Speaker 1: currently a leading partner at Kirkland and Ellis. J. Leftwitz,
0:45
Speaker 1: thank you very much for being with us. Good morning,
0:47
Speaker 1: How are you good. Maybe you could just begin by
0:50
Speaker 1: stating what many people do not know myself. Included, perhaps,
0:55
Speaker 1: is the current position of the United States government when
0:58
Speaker 1: it comes to a uni fied Korean Peninsula. Well, it
1:02
Speaker 1: has been basically the policy of the United States going
1:06
Speaker 1: all the way back to the Korean War, uh that
1:09
Speaker 1: we believe that there really should be one government on
1:13
Speaker 1: the peninsula of Korea. It should be a government led
1:16
Speaker 1: by what is really the the Republic of Korea, the
1:19
Speaker 1: democratic government that is currently based in Seoul, and the
1:25
Speaker 1: Korean War when it actually ended, didn't formally end there.
1:29
Speaker 1: There there's never really been a cessation of hostilities, and
1:32
Speaker 1: of course that's because the the Chinese have always insisted
1:37
Speaker 1: that everything above the thirty parallel be outside of the
1:42
Speaker 1: scope of influence of of what is South Korea, and
1:45
Speaker 1: so we've kind of been at a stalemate. But our
1:47
Speaker 1: official policy has always been that we support unification of
1:52
Speaker 1: the peninsula, and that's actually been the formal policy of
1:55
Speaker 1: of of South Korea as well. You know, Jay, I
1:59
Speaker 1: was listening reading through the recent oup ed piece that
2:02
Speaker 1: you published in the New York Times, were you were
2:05
Speaker 1: saying that as long as the US, this is my
2:07
Speaker 1: interpretation anyway, as long as the US continues with this
2:10
Speaker 1: policy and remains hard fixated on it, uh, it's going
2:15
Speaker 1: to be very difficult to get some kind of uh,
2:18
Speaker 1: meaningful concession from China that could actually make a difference
2:22
Speaker 1: in this whole situation and end it without a catastrophic
2:25
Speaker 1: type of event on the Korean Peninsula. I think that's
2:29
Speaker 1: the very accurate reading of of of my take here.
2:32
Speaker 1: I mean, look, there there are two there are two
2:34
Speaker 1: parties that were focused on here. We're focused principally on
2:37
Speaker 1: North Korea. And actually, to his credit, President Trump just
2:41
Speaker 1: signed into law in August second the uh bill called
2:45
Speaker 1: Countering America's Adversary through Sanctions, and that imposes new sanctions
2:49
Speaker 1: on Russia, North Korea, and Iran. And I think there's
2:53
Speaker 1: certainly a lot that we can do in terms of
2:55
Speaker 1: dealing with North Korea from a sanctioned perspective. But the
3:00
Speaker 1: fact is we've been dealing with this North Korean issue
3:02
Speaker 1: for decades. The Sixth Party took started in in two
3:07
Speaker 1: thousand and three, were now about fourteen years later, and
3:11
Speaker 1: they are marching inexorably towards not only having the nuclear
3:15
Speaker 1: weapons that they already have, but developing a delivery system
3:19
Speaker 1: that will have the ability to have ballistic missiles that
3:23
Speaker 1: are nuclear tipped hit the coast of the United States.
3:26
Speaker 1: And so what President Trump has said, which is corrected,
3:30
Speaker 1: we have to get China to engage here. But it's
3:33
Speaker 1: simple negotiation tactics that you need both carrots and sticks,
3:38
Speaker 1: and I think the most important carrot here is to
3:41
Speaker 1: let China know that we actually are not seeking to
3:45
Speaker 1: exert our influence or South Korea's influence over the northern
3:50
Speaker 1: part of that peninsula. It's not actually something that anybody
3:54
Speaker 1: believes is realistic at this stage. And yet as long
3:57
Speaker 1: as it remains our official stated policy, I think China
4:01
Speaker 1: believes that it is more to fear from a unified
4:06
Speaker 1: pen and flow with US influence in South Korea right
4:10
Speaker 1: on its weakest border then it has from this current
4:13
Speaker 1: unstable nuclear regime in North Korea. And if we could
4:17
Speaker 1: just allay those concerns that I think China would be
4:21
Speaker 1: incentivized to help solve the problem of North Korea. Jay,
4:25
Speaker 1: I'm sure that you have discussions with some people currently
4:28
Speaker 1: in government or I imagine that you have a sense
4:31
Speaker 1: of the dynamic there. Do you have a sense that
4:34
Speaker 1: anyone is seriously considering what you're talking about? And if so,
4:40
Speaker 1: what would they hope that China would give a sort
4:43
Speaker 1: of a reciprocation and that could possibly ameliorate the whole situation.
4:47
Speaker 1: So look, I have had quite a number of follow
4:52
Speaker 1: ups just in the last week from folks who are
4:54
Speaker 1: involved in in policy issues in the government. Uh, I
4:58
Speaker 1: don't want to reveal they are directly, and I also
5:01
Speaker 1: don't want to in any way suggest that the Trump
5:04
Speaker 1: administration is accepting my suggestions. But I think the Trump
5:09
Speaker 1: administration certainly recognizes that the path to a North Korea
5:13
Speaker 1: solution lies through China, and the challenges how to really
5:18
Speaker 1: get the Chinese to the table. And when you say,
5:20
Speaker 1: what would we be looking for, you know, it seems
5:23
Speaker 1: to me that the message to China is, look, if
5:26
Speaker 1: we allay your concerns about too much US influence up
5:31
Speaker 1: north of the Parallel, in return, we want you to
5:36
Speaker 1: deal with this regime. Now, China has enormous economic clout.
5:41
Speaker 1: They could literally shut all of the remaining lights in
5:44
Speaker 1: Pianyang out in forty eight hours if they wanted to,
5:47
Speaker 1: and they could presumably also uh change the regime um
5:53
Speaker 1: if they wanted to. And I think what we have
5:55
Speaker 1: to tell the Chinese is We're going to give you
5:57
Speaker 1: some time to do this, but if not, then here
6:01
Speaker 1: are the sticks. The sticks are we are going to
6:04
Speaker 1: have to protect U s citizens. We are going to
6:06
Speaker 1: have to think about putting short range missiles in the region,
6:10
Speaker 1: whether in Japan or South Korea. We're going to have
6:13
Speaker 1: to start building a missile defense system that is there
6:17
Speaker 1: to protect the United States of interest, and it has
6:20
Speaker 1: to be in the region to deal with North Korea,
6:23
Speaker 1: and of course China certainly doesn't want the United States
6:26
Speaker 1: to do that. So I think we need a set
6:28
Speaker 1: of carrots and sticks to have a productive negotiation. J Lefkowitz.
6:34
Speaker 1: Do we know what it is that North Korea wants?
6:37
Speaker 1: Has anyone asked them? I don't know that anybody knows
6:42
Speaker 1: what they want. You know, the problem with North Korea
6:45
Speaker 1: is it is really a cult of personality. It's probably
6:49
Speaker 1: the last true remaining stalinist authoritarian regime. They have concentration camps,
6:56
Speaker 1: they torture their own citizens, they routinely starve their own citizens.
7:01
Speaker 1: I mean, this is a cult of personality. It's not
7:05
Speaker 1: really a nation state. And the problem is when you're
7:08
Speaker 1: not dealing with true nation states that are functioning nation states, Uh,
7:12
Speaker 1: there isn't the same sense of responsibility to a citizen
7:15
Speaker 1: rate accountability. Um. And so I don't know that anybody
7:20
Speaker 1: knows what what what the Kim family really wants here, Jay,
7:25
Speaker 1: real quick, what do you think the chances are at
7:27
Speaker 1: this point of a violent resolution to the situation. I
7:31
Speaker 1: don't think we're likely to have a violent resolution in
7:36
Speaker 1: the short term. I think China certainly has has has
7:40
Speaker 1: made it clear to North Korea that at least short term,
7:43
Speaker 1: a true violent reaction would not be acceptable, and of
7:47
Speaker 1: course the United States would have to react with violence.
7:50
Speaker 1: If there were one South Korea, it would be in jeopardy.
7:54
Speaker 1: But I do think over the next year the United
7:56
Speaker 1: States of shores are going to be genuinely threatened, and
8:00
Speaker 1: so we can't leave it for a year from now
8:02
Speaker 1: to try to solve this problem. Jay Leftwitz, thank you
8:05
Speaker 1: so much for joining us. Truly a pleasure speaking with you.
8:08
Speaker 1: Jay Leftwitz was a former U S Special Envoy for
8:12
Speaker 1: Human Rights in North Korea under President Bush from two
8:16
Speaker 1: five to two thousand and nine. He is currently a
8:19
Speaker 1: leading partner at Kirkland and Ellis in New York, and
8:23
Speaker 1: we will continue to bring you coverage in this issue
8:25
Speaker 1: because it is one of the main concerns that a
8:27
Speaker 1: lot of policymakers have, at least at Brown with Pimp Fox.
8:30
Speaker 1: This is Bloomberg right now. We want to get more
8:45
Speaker 1: on this from Chris Strom, Justice Department reporter for Bloomberg,
8:48
Speaker 1: and Chris, you're listening. What was your biggest takeaway from this? Well,
8:53
Speaker 1: the biggest takeaway is that they aren't actually announcing anything
8:58
Speaker 1: new so much as they're saying that they're putting more
9:03
Speaker 1: emphasis on activities to identify leaguers and men prosecute them. Uh.
9:10
Speaker 1: They Session said that they've now had more referrals that
9:14
Speaker 1: they're going to investigate, and he said that the number
9:17
Speaker 1: of active investigations is higher now than it was at
9:22
Speaker 1: the end of the end of last year. Uh. The
9:24
Speaker 1: abomb administration was known for for being for having an
9:27
Speaker 1: aggressive posture towards towards leaguers. And uh, it seems that
9:32
Speaker 1: Sessions wants to try to even outdo the Obama administration.
9:37
Speaker 1: But you know, we'll still have to see how it
9:40
Speaker 1: plays out in the coming months. I mean, obviously Sessions
9:43
Speaker 1: has been under a lot of pressure to talk about
9:44
Speaker 1: leagues and that's what he's doing. Chris, just a question
9:48
Speaker 1: to you, because some Republican senators, I'm thinking, for example,
9:51
Speaker 1: of the Judiciary Chairman Chuck grass Lee back in July,
9:55
Speaker 1: he urged the leaker who had the information about the
9:58
Speaker 1: talks between Attorney Gen. Jeff Sessions in a Russian diplomat.
10:01
Speaker 1: He urged the leaker to actually leak the entire conversation.
10:05
Speaker 1: Is there any confusion amongst the Republican senators about what
10:10
Speaker 1: leaks are allowed and what aren't. Well, I mean, certainly
10:13
Speaker 1: there's hypocrisy in in in this world, and so uh
10:17
Speaker 1: you know, uh, one person's leaker is another person's patriot.
10:22
Speaker 1: You know. So it just depends on your your your
10:25
Speaker 1: politics and in your point of view. I mean even
10:28
Speaker 1: going back to um, you know, uh Trump when he
10:31
Speaker 1: was campaigning talking about uh, you know Russian, you know Russian, Uh,
10:36
Speaker 1: you know, hackers should should find Hillary Clinton's emails and
10:39
Speaker 1: leak them. I mean, you know, um, the idea that
10:42
Speaker 1: uh you know, some people support some leagues while they
10:47
Speaker 1: oppose other leagues. Um, you know, is you know frequently happens. Chris,
10:52
Speaker 1: you know, I'm struck by this coming just as we
10:55
Speaker 1: find out about the assembling of a grand jury for
11:00
Speaker 1: or Bob Mueller's team. He is the special prosecutor that
11:04
Speaker 1: was appointed to look into any connection with Russia and
11:08
Speaker 1: possible collusion with respect to the U. S. Election. And
11:11
Speaker 1: I'm wondering, you know, this raises the specter of even
11:14
Speaker 1: more leaks. And do you expect that the conversation will
11:18
Speaker 1: shift to what is classified? How how to determine these things?
11:22
Speaker 1: And do you expect the leaks to actually stop or
11:24
Speaker 1: just simply accelerate from here. Well, it's hard to know
11:28
Speaker 1: exactly how this is going to play out. Um Uh, certainly, Uh,
11:32
Speaker 1: there have been leaks that have been damaging to the
11:35
Speaker 1: to the Trump administration. Um that you know, appear to
11:39
Speaker 1: come from people who are who are who who feel
11:42
Speaker 1: that what Trump is doing is wrong and that they
11:44
Speaker 1: need to stand up. And the and the way that
11:46
Speaker 1: they are choosing to stand up is being uh, you know,
11:49
Speaker 1: whistleblowers by by leaking information. Um. Uh you know, with
11:54
Speaker 1: with Moller. You know, I think that the Trump administration
11:58
Speaker 1: seems to be trying to build a case to discredit
12:01
Speaker 1: what uh you know, what Maller is is finding, um
12:04
Speaker 1: by saying he has conflicts of interest and so um
12:08
Speaker 1: you know, to the degree that you've got you know,
12:11
Speaker 1: these competing these competing forces, I think that you're going
12:14
Speaker 1: to continue to see people, um, you know, leaking information
12:17
Speaker 1: to the media uh for what they see you know,
12:20
Speaker 1: is in there in their best interest and so. UM.
12:25
Speaker 1: But I wouldn't be surprised if if you do see uh,
12:29
Speaker 1: the administration come forward with some you know, new active cases. Um.
12:34
Speaker 1: But these cases take a while, they're they're hard to uh,
12:38
Speaker 1: they're they're they're hard to prosecute. That's why you don't
12:41
Speaker 1: have many examples of actually successful prosecutions. And so you know,
12:46
Speaker 1: any case that that the uh you know Sessions is
12:49
Speaker 1: working on is going to take a while to come
12:51
Speaker 1: to fruition. Is is there a way to I don't
12:55
Speaker 1: even know if it's relevant, but I mean, is there
12:57
Speaker 1: a way to to find what is a leaker? What
12:59
Speaker 1: is a whistle blow or and what is a confidential source? Well,
13:03
Speaker 1: there are there in the law. There there is definitions
13:08
Speaker 1: that um that you know apply when you're actually doing
13:12
Speaker 1: a leak investigation. And so um, if you're if you're
13:17
Speaker 1: somebody who's working inside government and you're not if you
13:21
Speaker 1: if you're working for the civilian side of government, the
13:24
Speaker 1: non national security side of government. There are specific steps
13:28
Speaker 1: that you can go through in order to be a
13:30
Speaker 1: whistle in order to be designated as a whistleblower and
13:33
Speaker 1: have a job protection. UM. Now, people have said that
13:37
Speaker 1: those uh steps are very difficult to follow and that
13:40
Speaker 1: you know, they're cumbersome, and that oftentimes when people come
13:43
Speaker 1: forward and they follow those steps, they get retaliated against
13:46
Speaker 1: in in their own agency. And so there's a disincentive
13:49
Speaker 1: to actually do that. So, um, but when you get
13:53
Speaker 1: into a leak investigation, you need to you know, look
13:55
Speaker 1: at the look at the facts that that are that
13:57
Speaker 1: are relevant to that investigation in order to find out
14:01
Speaker 1: you know what specifically, uh, you know what, what specific
14:04
Speaker 1: laws somebody violated and whether criminal charges can be can
14:07
Speaker 1: be brought against them. Chris, you know, I was really
14:09
Speaker 1: struck by the comments about media subpoenas. Did that ring
14:14
Speaker 1: something for you as being I don't know, something new? Yeah,
14:19
Speaker 1: that that caught me. Um. The idea that you know,
14:22
Speaker 1: he said that they are going to be reviewing the
14:24
Speaker 1: idea of subpoenaing news outlets is uh, it's something that
14:28
Speaker 1: I think, you know, we need to watch for. Um.
14:31
Speaker 1: You know, I wouldn't be surprised to see the Trump
14:34
Speaker 1: administration to try to, um, you know, go after some
14:38
Speaker 1: news outlets for uh publishing uh, you know, classified or
14:43
Speaker 1: or sensitive information. I want to thank you very much
14:46
Speaker 1: for joining us. Chris Strom is our Justice Department reporter
14:50
Speaker 1: for Bloomberg, giving us his thoughts and reaction to the
14:54
Speaker 1: comments from Attorney General Jeff A. Sessions today coming from
14:58
Speaker 1: the Justice Department. Thanks for every much well, today's non
15:13
Speaker 1: farm paywork report was better than estimated by a variety
15:16
Speaker 1: of economists. Joining us now is the former Deputy Secretary
15:19
Speaker 1: of Labor under President Obama, Chris Lou. He is currently
15:23
Speaker 1: a Senior Fellow at the University of Virginia Miller Center,
15:27
Speaker 1: and he can be followed on Twitter at Chris Lou
15:30
Speaker 1: forty four. Chris Lou forty four, tell us if you
15:34
Speaker 1: now have a new perspective after leaving the administration. Obviously,
15:38
Speaker 1: I'm wondering if you could explain to us what you
15:41
Speaker 1: have learned now that you are out of government about
15:44
Speaker 1: the politicization of these reports, because you know you did
15:49
Speaker 1: it when you were in when you were in the administration,
15:51
Speaker 1: that you know we take that, and of course the
15:54
Speaker 1: current administrat every administration does it. But is there a
15:56
Speaker 1: way to step back and say, all right, let's not
15:58
Speaker 1: play politics with the numbers. Let's not describe blame or
16:01
Speaker 1: or credit, just describe what's going on. I think that's
16:04
Speaker 1: a fantastic point number that we touted back in Republicans
16:09
Speaker 1: love saying or uh, I love poo pooing them, and
16:12
Speaker 1: and and the flip right now as you see it,
16:14
Speaker 1: going the other way, where numbers that President Trump is touting,
16:18
Speaker 1: Democrats often sort of say, uh, this is really glass
16:21
Speaker 1: half empty. I think what's fair to say about these
16:24
Speaker 1: numbers is that it's a solid growth two nine anything.
16:28
Speaker 1: Anytime you have a two before the number, that's a
16:31
Speaker 1: good sign. The constant here, and this runs across both administrations,
16:37
Speaker 1: is wage growth at two and a half percent. And
16:39
Speaker 1: while obviously any positive wage growth is a good thing,
16:42
Speaker 1: it's really not enough to make a meaningful difference in
16:45
Speaker 1: most people's lives. And this is one of the reasons
16:47
Speaker 1: why in the Obama administration we push for increases in
16:51
Speaker 1: the minimum wage, raising the overtime threshold, up skilling, which
16:55
Speaker 1: are good, sensible, I would argue, nonpartisan policies. So I
16:58
Speaker 1: think that's the constant rate. I'm are go ahead, well, no, Chris,
17:01
Speaker 1: because I was going to say that actually, in the
17:04
Speaker 1: lower salary jobs there actually has been more growth with
17:08
Speaker 1: respect to salaries as well as jobs being filled. It
17:12
Speaker 1: seems to be uh, you know, clearly there could be
17:14
Speaker 1: more growth there as well, but you know, there has
17:17
Speaker 1: been also very little growth at the high end, in fact,
17:20
Speaker 1: less growth at the higher ends, which is uh, it
17:23
Speaker 1: which suggests that there's something larger at play here. Well,
17:26
Speaker 1: it is something larger play. It reflects kind of the
17:29
Speaker 1: shifting of the economy right now, when you've got kind
17:32
Speaker 1: of um an outflux of manufacturing jobs in the United States,
17:37
Speaker 1: a lot of the folks that would have those jobs
17:39
Speaker 1: in rural areas have now moved to retail jobs, and
17:42
Speaker 1: so those salaries have been basically flat during this period
17:44
Speaker 1: of time. And again, looking a little bit more at
17:47
Speaker 1: these numbers. While again over all these were positive numbers,
17:50
Speaker 1: I look at construction manufacturing, which had gains, but they
17:53
Speaker 1: weren't big gains. I looked at retail, which was essentially
17:56
Speaker 1: flat and has lost about eighty thousand jobs over the
17:59
Speaker 1: last six and that's kind of a longer term trend
18:02
Speaker 1: that is going to continue with automation. And so again
18:04
Speaker 1: this is a positive job report, but as with anything,
18:07
Speaker 1: there are some issues in here. Chris, is there any
18:11
Speaker 1: data that you've been able to look at that describes
18:13
Speaker 1: the relationship between actually getting a job, holding a job,
18:17
Speaker 1: and the benefits such as healthcare, health insurance that would
18:20
Speaker 1: come with the job. Many people taking a position for
18:24
Speaker 1: those reasons as opposed to let's say, making money or
18:27
Speaker 1: or doing the particular work. Well, you're right, it's not
18:31
Speaker 1: just the that's a minimum wage. It's whether people have
18:35
Speaker 1: health care, how robust that healthcare is. Obviously, um the
18:39
Speaker 1: affordable character has played an important role in helping to
18:43
Speaker 1: lift up people. But more broadly, it's what are the
18:45
Speaker 1: retirement benefits. As larger companies have moved away from the
18:49
Speaker 1: traditional pension plans, the longer term security of employees is
18:53
Speaker 1: really at risk. And as you move more to a
18:56
Speaker 1: gig economy where people don't work for one employer, uh
19:00
Speaker 1: for the course of their lifetime or even at one time,
19:03
Speaker 1: it creates greater economic instability. And that's just not something
19:06
Speaker 1: we've really figured out a way to address quite yet
19:09
Speaker 1: in this country. You know, Chris, we had our own
19:11
Speaker 1: Carl Ricadona, chief US economist from Bloomberg Intelligence on earlier
19:15
Speaker 1: and he was saying that he does expect that wage
19:18
Speaker 1: growth will start to accelerate more later in the year
19:21
Speaker 1: if we still keep getting these two plus prints. Do
19:25
Speaker 1: you agree? Well, I hope so. And that's something that frankly,
19:29
Speaker 1: we thought would happen um years ago and during this recovery. Mean,
19:33
Speaker 1: when we got down in the five percent unemployment, and
19:37
Speaker 1: people kept saying, well, we're close to full full employment,
19:40
Speaker 1: we should start to see wage growth. That just doesn't happen,
19:42
Speaker 1: and it starts to suggest there may be broader issues
19:45
Speaker 1: going on in the economy, whether it's with automation, whether
19:47
Speaker 1: is globalization that may be having a powerful downward impact
19:51
Speaker 1: on wages. It also speaks more broadly as to whether
19:55
Speaker 1: the fet is being premature in raising interest rates and
19:58
Speaker 1: whether they ought to let this recovery go on a
20:00
Speaker 1: little bit longer. Of course, one of the big topics
20:03
Speaker 1: is immigration and the jobs that immigrate immigrants to the
20:07
Speaker 1: United States get when they arrive. Can you give us
20:11
Speaker 1: your thoughts about the trends that currently exist, what kinds
20:14
Speaker 1: of jobs they get, and whether these new policies will benefit,
20:19
Speaker 1: as the President has said, the American workers. Well, I
20:22
Speaker 1: think the bill that the President out of the other
20:24
Speaker 1: day is the wrong approach. And that's not just me
20:27
Speaker 1: saying that. That's the US Chamber of Commerce, that's the
20:29
Speaker 1: I T industry, it's Senators McCain and Graham. Uh. You know,
20:33
Speaker 1: we are in a period right now in the United
20:35
Speaker 1: States where population growth really is at its lowest since
20:38
Speaker 1: the Great depression. And that's not only because of low
20:41
Speaker 1: birth rates, it's because of more people retiring. And so
20:45
Speaker 1: we need more labor in this country. And yes, we
20:47
Speaker 1: need more high skilled labor. We need to replenish and
20:50
Speaker 1: revitalize the igh T industry in this country, but we
20:54
Speaker 1: need low skilled labored as well. And uh. Senator Lindsay
20:57
Speaker 1: Graham said it, well, in a state like South Carolina,
20:59
Speaker 1: you not only have high tech healthcare jobs, but you
21:03
Speaker 1: also have a retail, your food service, you have agriculture
21:06
Speaker 1: that all needs more people. And so artificially cutting in
21:10
Speaker 1: half legal immigration is not the right answer to creating
21:13
Speaker 1: economic growth. Chris lou thank you so much for joining us.
21:16
Speaker 1: Chris Leu is a senior fellow at the University of
21:18
Speaker 1: Virginia Miller Center. He was the Deputy Secretary of Labor
21:22
Speaker 1: under former President Barack Obama, and he comes to us
21:26
Speaker 1: from Virginia. Well, it is another day and another billionaire
21:42
Speaker 1: hedge fund manager is coming out to trash the E
21:46
Speaker 1: T F industry. Paul Singer, who's the billionaire founder of
21:50
Speaker 1: Elliott Management Corps, warned that quote passive investing is in
21:54
Speaker 1: danger of devouring capitalism, which may have been a clever
21:58
Speaker 1: idea and its infancy has grown into a blob which
22:01
Speaker 1: is destructive to the growth creating and consensus building prospects
22:06
Speaker 1: a free market capitalism. We'll here to defend the blob
22:09
Speaker 1: that is the E t F industry. Is our own
22:12
Speaker 1: Eric baltun As he is our senior et F analyst
22:15
Speaker 1: for Bloomberg Intelligence and Eric Um. First, I just want
22:20
Speaker 1: to I want to ask you, you know, I have
22:22
Speaker 1: a feeling that you do not think that E t
22:24
Speaker 1: F s are devouring capitalism. Is there anything about Paul
22:28
Speaker 1: Singer's argument that rang true with you? Yes, So there's
22:33
Speaker 1: there's a one hand in the other. So on one hand,
22:35
Speaker 1: Vanguard and black Rock, which are ultimately passive, that's they
22:38
Speaker 1: own almost all the passive assets, are the top in
22:41
Speaker 1: the top three holders of the sp companies. So they
22:46
Speaker 1: are becoming a bigger and bigger deal. And if we
22:48
Speaker 1: extrapolate the assets ten twenty years down the road, you
22:51
Speaker 1: could see a world where Vanguard alone owns thirty of
22:53
Speaker 1: the stock market. At that point, I think we would
22:56
Speaker 1: the government might step in at that point. But right now,
22:59
Speaker 1: let me give you some other context, which is to
23:01
Speaker 1: say that even though they're the top three in the
23:03
Speaker 1: top three holders of almost all the companies, they collectively
23:06
Speaker 1: only own about thirteen point five of the stock market.
23:09
Speaker 1: Because here's why people forget this. Mutual funds which e
23:12
Speaker 1: t f s are included in, are a minority owner
23:15
Speaker 1: of the stock market. The rest is households, institutions, pensions,
23:18
Speaker 1: all people who are active essentially. So you are definitely
23:22
Speaker 1: looking at a rise of passive within mutual funds, where
23:26
Speaker 1: you're having more and more people put their money passively
23:29
Speaker 1: um and I think that speaks to a bigger issue,
23:31
Speaker 1: which is that active has lost the hearts and minds
23:34
Speaker 1: of investors. And I think that's part of what you're seeing.
23:37
Speaker 1: You're seeing they feel threatened, they're they're losing. I'm sure
23:40
Speaker 1: he's getting calls from people saying, why don't I just
23:42
Speaker 1: put my money in the n sp y or or
23:44
Speaker 1: a separately managed account that's passive And it's tough to
23:47
Speaker 1: defend uh in this market going with free exposure, essentially,
23:51
Speaker 1: it's just hard to combat that. And I think active
23:54
Speaker 1: in the eighties and nineties got potentially a little too
23:58
Speaker 1: greedy and did not pass on some of the economy's
24:01
Speaker 1: of scale in the form of lower fees. Meanwhile, Vanguard
24:04
Speaker 1: is then you have the world turning and now everybody
24:06
Speaker 1: wants everything cheap, and you could argue it's overshooting a
24:09
Speaker 1: little bit, but it's active creation. Well, okay, so let's
24:12
Speaker 1: talk about Paul saying, all right, his main hedge fund
24:15
Speaker 1: oversaw thirty three billion dollars. He's not exactly hurting. He
24:17
Speaker 1: is a billionaire. Uh that fund gained three and a
24:20
Speaker 1: half percent in the first half of the year. Fine
24:23
Speaker 1: me underperformed the stock market for sure. But I I
24:28
Speaker 1: want to just talk to the one point that you
24:30
Speaker 1: made about Vanguard and black Rock owning such a substantial
24:33
Speaker 1: proportion of the biggest companies. Have they shown an inclination
24:37
Speaker 1: to be active with their ownership of these shares? I mean,
24:42
Speaker 1: could they potentially affect great changes at companies without necessarily Yes,
24:49
Speaker 1: you know, the investors setting off on that and active
24:51
Speaker 1: maybe owning this whole their value for capitalism a little
24:55
Speaker 1: too much. I mean, arguably Elon Musk and Steve Jobs
24:58
Speaker 1: aren't waiting for active managers to do what they have
25:00
Speaker 1: to do. Um making profits is for their real motivation. Second,
25:04
Speaker 1: active is definitely focused on short termism. They are definitely
25:07
Speaker 1: guilty of making everything about the quarterly earnings now passive.
25:11
Speaker 1: They have corporate governance groups. Now they're not is in
25:14
Speaker 1: the face of the c e o s, but they
25:16
Speaker 1: are definitely prickly and they vote with activists, sometimes against
25:20
Speaker 1: them sometimes but really what their game is is to
25:23
Speaker 1: create the environment to have good uh independent board corporate
25:26
Speaker 1: government's e s G policies so that long term value
25:30
Speaker 1: can exist. But they're not gonna basically needle them on
25:33
Speaker 1: one product or another. That's not their thing. But they're
25:35
Speaker 1: not passive. They have teams that do this and both
25:38
Speaker 1: Larry Fink and Bill mcnabbel, now it's Tim Buckley have
25:42
Speaker 1: come out and said exactly what they hope to do.
25:44
Speaker 1: And that's where you got this dual class listing issue
25:46
Speaker 1: with the SMP. I think it was pushed by Vanguard
25:49
Speaker 1: and Blackrock. Eric, is anybody ever gonna be let go
25:52
Speaker 1: from their job if they recommend to their client that
25:55
Speaker 1: they buy an e T F let's say, of the
25:57
Speaker 1: SMP five and it goes down, Well, if it goes
26:01
Speaker 1: down because the market goes down, or right, that's the spid.
26:04
Speaker 1: You buy the spider, right, you buy an index fund
26:07
Speaker 1: and you make it plain to the investor here, this
26:10
Speaker 1: is what it's connected to. Yeah, so you're bringing something
26:13
Speaker 1: that's even bigger, which is UM this fiduciary UH standard
26:17
Speaker 1: and now it's a rule. So what we're finding is
26:20
Speaker 1: the reason you see this flood. The passive flows have
26:23
Speaker 1: doubled this year. They're doubling their intensity. And the fiduciary
26:26
Speaker 1: rules is not Trump trade. It's the fiduciary rule, correct,
26:29
Speaker 1: Because all of the money is going to the absolute
26:32
Speaker 1: cheapest products from Schwab, black Rock and Vanguard. They're taking
26:34
Speaker 1: like ninety of the assets. And the reason is because
26:37
Speaker 1: if you don't go to the absolutely cheapest fund, a
26:39
Speaker 1: lot of advisors are worried their clients are gonna come
26:41
Speaker 1: back and say, hey, there was a cheaper fund on
26:43
Speaker 1: the market. You put me in this one, even though
26:44
Speaker 1: it was three basis points more, I'm gonna sue you.
26:47
Speaker 1: And so they're this fear of the fiduciary rule is
26:49
Speaker 1: sending money to basically as low as you can go,
26:52
Speaker 1: and that's why that has exacerbated the fee war. UM.
26:56
Speaker 1: Now you can see the few were in print of
26:58
Speaker 1: Vanguard free zones like cybersecurity ETFs are now in a
27:00
Speaker 1: fee war there's two of them and they're like going
27:02
Speaker 1: down to six each now, and the fiduciary rule has
27:05
Speaker 1: everybody um that you're exactly right, so no one, Yeah,
27:08
Speaker 1: it depends. I will say that if somebody recommend sp
27:10
Speaker 1: Y over i VV, you know, that's six basis points more,
27:14
Speaker 1: it's possible they get in trouble. And that's why spies
27:17
Speaker 1: losing money this year partially is because now there's cheaper
27:20
Speaker 1: san P five products. That's how one basis point is
27:24
Speaker 1: enough to double your flows. It's like the law of
27:27
Speaker 1: unintended consequences. Well done, Thanks very much for being with us.
27:30
Speaker 1: Eric balchun Is always a pleasure, Senior et F analyst
27:33
Speaker 1: for Bloomberg Intelligence. You can follow him on Twitter at
27:37
Speaker 1: Eric Balchunis. Go ahead, Well, the one thing that does
27:40
Speaker 1: scare me, I will just add a sort of an
27:42
Speaker 1: epithet and they get three seconds. If if the market
27:46
Speaker 1: tanks and everybody pulls their money out, who's going to
27:49
Speaker 1: be on the other side if active managers are washed
27:51
Speaker 1: out of the market. Well, that's why we've got Erik Balchunis.
27:53
Speaker 1: He's going to be telling us. Thanks for listening to
27:58
Speaker 1: the Bloomberg P and L podcast. You can subscribe and
28:01
Speaker 1: listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast
28:05
Speaker 1: platform you prefer. I'm pim Fox. I'm on Twitter at
28:09
Speaker 1: pim Fox. I'm on Twitter at Lisa Abramo wits one.
28:12
Speaker 1: Before the podcast, you can always catch us worldwide on
28:15
Speaker 1: Bloomberg Radio