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Former Acting CIA Director Devine Is 'Very Concerned' About Korea · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim
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  Speaker 1: Fox along with my co host Lisa Bramowitz. Each day
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• 0:32
  Speaker 1: Over the weekend, we heard from a number of top
• 0:35
  Speaker 1: US officials trying to dispel some of the tension around
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  Speaker 1: North Korea, saying we are not near a nuclear conflict
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  Speaker 1: with Korea. There's still with North Korea where there's still
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  Speaker 1: a lot of lovers that we can pull. Uh. You
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  Speaker 1: had the US is top general reassuring South Korean UH
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  Speaker 1: President that we are going to try to reach some
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  Speaker 1: kind of peaceful agreement To get us a better sense
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  Speaker 1: of where we are in all of this. I want
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  Speaker 1: to bring in Jack Divine, founding partner and president of
• 1:03
  Speaker 1: the ark And Group. He also was a former Acting
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  Speaker 1: director of the CIA and founding partner of this security group.
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  Speaker 1: So Jack, I'd love to get your sense how close
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  Speaker 1: are we to a nuclear conflict with North Korea. I
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  Speaker 1: don't want to be alarming, But it's been a long
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  Speaker 1: long time since I thought we were in a situation
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  Speaker 1: where it's conceivable that we could have a military confrontation
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  Speaker 1: that could end up in and some sort of nuclear incident. Um.
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  Speaker 1: I think back to the Cuban missile crisis. Were not there,
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  Speaker 1: but you know, in Cuba they didn't have missiles on
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  Speaker 1: the I mean they did, that's not that's an accurate
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  Speaker 1: we didn't learn about them until a few years later.
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  Speaker 1: So I think this is a very serious and threatening situation.
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  Speaker 1: I'm hopeful that we'll be able to walk the dog back,
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  Speaker 1: but I think it's um. I wouldn't minimize this at all.
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  Speaker 1: I could do that in all candor. So how do
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  Speaker 1: we walk the dog back? Well, I think, first of all, uh,
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  Speaker 1: any rational person would not want to get into any
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  Speaker 1: sort of military engagement which could then lead to a
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  Speaker 1: nuclear incident. I mean, there's no way. I mean, we
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  Speaker 1: have the finest military in the world, finest intelligence people.
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  Speaker 1: But I've been the business long enough that even with
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  Speaker 1: all your preparation and the best equipment, things go wrong.
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  Speaker 1: I mean, even if the very successful been ladding one
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  Speaker 1: of the helicopters you know, crashed. I mean we had
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  Speaker 1: an operation to try and get our hostages out of
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  Speaker 1: Iran and three of them crashed into the desert. So
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  Speaker 1: there's no way you can have a military operation where
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  Speaker 1: general can say, I give you a security here that
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  Speaker 1: we're going to take out all their their missiles. So
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  Speaker 1: I don't see how the military confrontation can end up
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  Speaker 1: with anything but a catastrophe. So I think one way
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  Speaker 1: or the other, we have to go back to the table.
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  Speaker 1: And as you know, I I've been putting forth the
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  Speaker 1: idea they try and go back to the Six party talks.
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  Speaker 1: But one way or the other, if we're not going
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  Speaker 1: to have a confrontation, we have to get back to
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  Speaker 1: the table. And while things may be taking place in
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  Speaker 1: back rooms, and I'm sure they are, I haven't seen
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  Speaker 1: it other than uh the South Korea proposing direct talks
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  Speaker 1: with North Korea. So I think we have to get
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  Speaker 1: back to the table. I think we need to be
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  Speaker 1: strong demonstrating with our b twos in our military positioning,
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  Speaker 1: and I think Trump is right to speak tough to them.
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  Speaker 1: But I think all that aside, there's no way this
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  Speaker 1: ends without negotiations. So let's talk about who we're negotiating with.
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  Speaker 1: I mean, China has been pinpointed as the main sort
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  Speaker 1: of negotiator in this whole business just because they could
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  Speaker 1: potentially cut off all global economic ties with North Korea.
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  Speaker 1: They seem to be unwilling to do that. And then
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  Speaker 1: there's a question which I want to pose to you
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  Speaker 1: of how effective would that act really be? I mean,
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  Speaker 1: quit China conceivably, uh stop Kim Jong's efforts to build
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  Speaker 1: a nuclear arsenal. Remember, our our interests are not directly
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  Speaker 1: lined up with the Chinese. I mean, there's clearly some overlap.
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  Speaker 1: Neither of us want to see a nuclear confrontation, certainly
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  Speaker 1: don't want to see one in their area, but they
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  Speaker 1: don't want to see United career either. They don't want
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  Speaker 1: to destabilized career. You have to guarantee after whatever confrontation
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  Speaker 1: you have that you know what's going to happen the
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  Speaker 1: next day. So the Chinese are not and sync with
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  Speaker 1: our interest On the other hand, they have a lot
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  Speaker 1: of equities with us, and we with them. Historically, I
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  Speaker 1: think they've under underinvested in trying to be helpful here.
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  Speaker 1: I think too many people over the past several years,
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  Speaker 1: and many of the articles that are written today talk
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  Speaker 1: about how key China is, but they don't talk about
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  Speaker 1: how you get the Chinese to do something that they're
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  Speaker 1: not convinced as in their interests. So there has to
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  Speaker 1: be a great deal pressure put on the Chinese. And
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  Speaker 1: it's one of the reasons again I think it would
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  Speaker 1: be important to get a group of people at the table.
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  Speaker 1: Is easier, it's easier to make concessions when you're in
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  Speaker 1: a group than one on one in my view. And
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  Speaker 1: you have to have the world sort of with you.
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  Speaker 1: If you have the six major countries and for those
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  Speaker 1: that don't follow to be Russia, South Korea, United States,
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  Speaker 1: and North Korea South Korea, so you have, you know,
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  Speaker 1: the world sort of trying to resolve this problem. And uh,
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  Speaker 1: it's it's harder for everyone just to fold their hands.
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  Speaker 1: I do think now that the North Koreans have tested
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  Speaker 1: and they've gone a long way, they may be because
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  Speaker 1: of the economic pressures on them, might be more willing
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  Speaker 1: to They're not going to bend in the program. Anyone
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  Speaker 1: that's hoping for that good luck. Um. I think what
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  Speaker 1: we could hope for is that we freeze it about
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  Speaker 1: where it is. And you know, you can't take the
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  Speaker 1: word for it. You have to have a verifying system
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  Speaker 1: and you have to have an independent intelligence look at
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  Speaker 1: to make sure that the sticking with it. They made
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  Speaker 1: some progress in the last time, in fact, some substantial
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  Speaker 1: progress of the Six party talks, but the North Koreans violin,
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  Speaker 1: and that's why I fell apart. They may be in
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  Speaker 1: a different position there because they now have a much
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  Speaker 1: more um powerful nuclear capability now than they did when
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  Speaker 1: they walked away from the table. There may be some
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  Speaker 1: room here for smart negotiations, but I think we need
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  Speaker 1: everybody in the game. Well, talking about that, Jack, I
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  Speaker 1: want to get a sense of Russia, because I don't
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  Speaker 1: have a clear sense of where they come down on this.
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  Speaker 1: Would they be willing and eager to negotiate with the
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  Speaker 1: other five major parties. I think there's a couple of
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  Speaker 1: aspects of it, little bit like the Chinese. It's not
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  Speaker 1: a nearer interest to see a um, you know, an
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  Speaker 1: improvement of relations between North Korea, South Korean and the
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  Speaker 1: United States, because if it improves enough, I can actually
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  Speaker 1: find if there was ever unification to be unification in
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  Speaker 1: favor of the South. So and the fact that they're
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  Speaker 1: able that the North Koreans quosed so much commotion it
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  Speaker 1: keeps US distracted, tied up or military forces. So it's
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  Speaker 1: not immediately in their interest. However, they are part of
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  Speaker 1: the human race and nobody can afford to think casually
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  Speaker 1: about having a nuclear um, a nuclear event anywhere. So
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  Speaker 1: and they want to be a player. I mean, they
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  Speaker 1: are a they wouldn't like to hear this, but they're
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  Speaker 1: not a major economy force in the world. They're not
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  Speaker 1: even they're not on the ground the force that they
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  Speaker 1: were years ago. So um, but they want to be
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  Speaker 1: taken with with more respect at the table, so through
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  Speaker 1: at the table. If everyone else goes to the the table
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  Speaker 1: and they don't, I think they'll shrink a little bit
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  Speaker 1: so that you may get them to the table. Yeah, Jack,
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  Speaker 1: real quick, how much confidence do you have in the
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  Speaker 1: current team, the current US team that's negotiating this. Well,
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  Speaker 1: I think we haven't as well. Again, let me come back.
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  Speaker 1: I'm not sure what's going on. I mean, I think
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  Speaker 1: we have very competent diplomats and intelligence people. I just
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  Speaker 1: haven't seen much discussion about the negotiation aspect of it.
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  Speaker 1: I haven't seen anybody putting forth, let's meet here, let's
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  Speaker 1: do this now. Maybe it's going on in the back rooms.
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  Speaker 1: I'm hoping that it is um, but UM. The emphas
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  Speaker 1: seems to be more how do you bring the military
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  Speaker 1: presence and how do you threaten each side and then
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  Speaker 1: leaning on people. I don't see a format being constructed
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  Speaker 1: for for discussion, and I said, I'm willing to admit
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  Speaker 1: there may be something going on, but as sure as
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  Speaker 1: ILL isn't grabbing headlines. Chack Devine, thank you so much
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  Speaker 1: for joining us. Jack Devine is former acting director of
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  Speaker 1: the c i A and founding partner and president of
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  Speaker 1: the security firm the arcan It Group. Talking about why
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  Speaker 1: we need to start negotiating with other major powers right now.
• 9:04
  Speaker 1: I want to talk about angry birds and just how
• 9:06
  Speaker 1: valuable they are. I want to bring in Leonel Laurent.
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  Speaker 1: He's a calumnist for a Bloomberg gad flag covering finance
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  Speaker 1: and markets. And Leonel, Uh, do you think that angry
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  Speaker 1: birds are worth two billion dollars? I saw this today
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  Speaker 1: and the Angry Birds franchise owner Rovio Entertainment UH planning
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  Speaker 1: in I p O probably next month two billion dollars.
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  Speaker 1: They rely entirely on angry birds. What's up with this
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  Speaker 1: two billion dollars, which would be about ten times revenue,
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  Speaker 1: which would be substantially above where one of its rivals,
• 9:41
  Speaker 1: Zinger trades. Um we shall see. I would just note
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  Speaker 1: that two billion was what the company reportedly rebuffed about
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  Speaker 1: five years ago when it was offered that for for
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  Speaker 1: an acquisition, So it wouldn't exactly be a be a
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  Speaker 1: huge victory, but it would still be a pretty toppy
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  Speaker 1: multiple for a company that's you know, they've they've proven
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  Speaker 1: people wrong. I think they've really milked a lot more
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  Speaker 1: money out of Angry Birds than anybody thought possible. Well
• 10:08
  Speaker 1: this is but have they milked money out of anything else?
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  Speaker 1: Or is it all angry and all birds? It's it's
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  Speaker 1: I mean they've they've tried, and they have some of
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  Speaker 1: the games, but but nothing to match it. And I
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  Speaker 1: think that you could and they will probably make the
• 10:22
  Speaker 1: case that this I p O if it happens, would
• 10:25
  Speaker 1: help them fund other things. Right. I mean, they've they've
• 10:29
  Speaker 1: had some tough, tough couple of years. The markets change
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  Speaker 1: a lot. They've adapted to that. They had to cut
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  Speaker 1: a lot of staff, so they had to sort of
• 10:37
  Speaker 1: stand on their own two feet. Hold on a second,
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  Speaker 1: The markets changed a lot for Angry Birds or for
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  Speaker 1: entertainment or you know, where are they trying to branch out?
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  Speaker 1: So so I think mobile games, that's that's what's really
• 10:47
  Speaker 1: changed these This is almost a decade old, right, so
• 10:50
  Speaker 1: you have to put yourself back to what it was
• 10:52
  Speaker 1: like when it first burst onto the scene. You sold
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  Speaker 1: your app for a price and that was it. Quickly
• 10:58
  Speaker 1: with with other big hit it's like Handy crushed. The
• 11:01
  Speaker 1: whole market moved towards micro transactions, free to play, the
• 11:05
  Speaker 1: kind of situation where your kid grabs your credit card
• 11:08
  Speaker 1: and essentially spends your your hard land salary on on
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  Speaker 1: on a little game. These these became billion dollar companies
• 11:15
  Speaker 1: in dollar games, billion dollar companies, and Rothio never got
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  Speaker 1: to that stage. And it's it's definitely adapted and it survived,
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  Speaker 1: but I just wonder what it can show that's new
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  Speaker 1: in terms of the future outlook. So do you play
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  Speaker 1: Angry Birds? I used to? You know, I did. It
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  Speaker 1: came out. My whole vision of view is changed, really
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  Speaker 1: thousand and nine, two tho nine. I mean, you know,
• 11:39
  Speaker 1: you can't read Proust all day long, right, You've got
• 11:42
  Speaker 1: to unwind, I guess. So, I mean, do they have
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  Speaker 1: other games in the works or are they just basically
• 11:46
  Speaker 1: trying to make more Birds that are that are varying
• 11:49
  Speaker 1: stages of anger. They have other games. They put out
• 11:53
  Speaker 1: a new game I think called Battle Bay earlier this year,
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  Speaker 1: and they have a new studio in London whose whole
• 11:57
  Speaker 1: mission is to make new title that are not Angry Birds.
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  Speaker 1: But they're not expected to produce a new game till
• 12:04
  Speaker 1: which is the year, as I'm sure you know that
• 12:06
  Speaker 1: the new Angry Birds movie comes out Angry Birds too.
• 12:09
  Speaker 1: We are still on this weird limbo where we are
• 12:13
  Speaker 1: still waiting for this kind of new Rovio two to hatch, right,
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  Speaker 1: and it hasn't happened two billion dollars and the timing
• 12:20
  Speaker 1: is sort of odd to me. So I'm wondering, you know,
• 12:23
  Speaker 1: would this I p O be derailed if we see
• 12:26
  Speaker 1: the weakness that we saw last week or the people
• 12:29
  Speaker 1: you're talking to, I mean, is it is there are
• 12:31
  Speaker 1: sense they're going to go ahead with this? They need
• 12:33
  Speaker 1: to do something. I don't know. I think that that
• 12:37
  Speaker 1: there there have been reports right of everything from ten
• 12:40
  Speaker 1: Cent potentially buying the company to the company floating a
• 12:44
  Speaker 1: small part of itself. You know, I think as usual
• 12:47
  Speaker 1: with this kind of industry. I mean, people aren't dumb.
• 12:50
  Speaker 1: They can look at the market and see that the
• 12:52
  Speaker 1: stock prices of mobile game companies have underperformed post i
• 12:56
  Speaker 1: p O. This is a volatile, tough hit of an industry.
• 13:01
  Speaker 1: On the other hand, as we've seen from tech i
• 13:03
  Speaker 1: p o s, that just seems to be demand even
• 13:05
  Speaker 1: for crazy evaluations right like like Snap um and even
• 13:09
  Speaker 1: with blue Aprons troubles. Who knows, there might just be
• 13:12
  Speaker 1: enough happit site for this. There just might be. Of course,
• 13:15
  Speaker 1: Snap is bouncing back after the earlier plunge, talking about
• 13:19
  Speaker 1: uh Snap and one hit wonders. It seems like this
• 13:22
  Speaker 1: one hit wonder is going to continue for longer, and
• 13:25
  Speaker 1: now it shares her up more than seven percent. My god.
• 13:27
  Speaker 1: They were down almost five percent earlier today after it
• 13:31
  Speaker 1: was revealed that Tamasak of Singapore had offloaded it's holdings
• 13:37
  Speaker 1: of this particular company. Leone Lauron, thank you so much
• 13:40
  Speaker 1: for joining us, truly, I guess you know. Look Angry Birds,
• 13:44
  Speaker 1: it is an appealing franchise. My kids loved Angry Birds,
• 13:48
  Speaker 1: but still two billion dollars. Leone Laurent Columnists covering finance
• 13:52
  Speaker 1: and markets for Bloomberg gad fly coming to us from London. Well,
• 14:08
  Speaker 1: it isn't a day in up markets if there isn't
• 14:11
  Speaker 1: a fear about a bubble in exchange traded funds. And
• 14:14
  Speaker 1: I want to bring in Eric Beltunez, who spent his
• 14:17
  Speaker 1: life basically at least for the past few years, defending
• 14:20
  Speaker 1: e t f s against the bubble fears. Eric Valtunez
• 14:23
  Speaker 1: is a senior e t F analyst for Bloomberg Intelligence
• 14:26
  Speaker 1: and he joins us. Now, Eric, yet again we get
• 14:30
  Speaker 1: another story about record e t F inflows fueling price
• 14:35
  Speaker 1: bubble fears. That headline was published in the Financial Times
• 14:39
  Speaker 1: and it stemmed from a statistic that investors have already
• 14:42
  Speaker 1: funneled three hundred and nine billion dollars into e t
• 14:45
  Speaker 1: f s in the first seven ones of already eclipsing
• 14:49
  Speaker 1: the full year record that was set last year. So, Eric,
• 14:54
  Speaker 1: does this acceleration of inflows suggest to you that perhaps
• 14:58
  Speaker 1: people are getting over their skis and putting too much
• 15:00
  Speaker 1: faith in these vehicles? Uh? Well, no, I mean, and
• 15:06
  Speaker 1: when you say definite ets, I don't necessarily like to
• 15:09
  Speaker 1: be the apologist, but there's definitely more people taking shots
• 15:13
  Speaker 1: and just throwing out these things without using much context.
• 15:17
  Speaker 1: I thought two better headlines for that FT article would
• 15:20
  Speaker 1: have been investors demanding stocks fuels fears of a of
• 15:25
  Speaker 1: a stock market bubble, or e t F record inflows
• 15:30
  Speaker 1: fuels fears of asset managers lost revenues. I think those
• 15:34
  Speaker 1: are two better headlines than what they did. They kind
• 15:36
  Speaker 1: of take, Okay, all this money is going into e
• 15:39
  Speaker 1: t s, But all this money is going into the
• 15:42
  Speaker 1: market anyway, like if ets didn't exist, it would buy
• 15:46
  Speaker 1: index funds, or it would buy active mutual funds, and
• 15:49
  Speaker 1: ultimately you would own the same stocks. So I think
• 15:52
  Speaker 1: that's what I get getting gets annoying with me is
• 15:55
  Speaker 1: that sometimes there's some laziness and some conflating of just
• 16:00
  Speaker 1: because money is going into e t s means that, oh,
• 16:02
  Speaker 1: there's a bubble. I think all you're seeing is that
• 16:05
  Speaker 1: money is basically transferring from closet indexing to actual indexing.
• 16:09
  Speaker 1: So but it's ultimately owning the same stocks. But the
• 16:12
  Speaker 1: investors deciding to buy equities and faith in Trump and
• 16:16
  Speaker 1: all in the FED in the past, that's ultimately what
• 16:19
  Speaker 1: is driving out valuations. Well, I guess that one fear
• 16:23
  Speaker 1: is that right now and you have so much money
• 16:26
  Speaker 1: going into the stock market through index funds, and you
• 16:29
  Speaker 1: talked about closet indexing, in other words, active managers who
• 16:33
  Speaker 1: essentially just followed the indexes, so are essentially we're indexers
• 16:37
  Speaker 1: but charging larger fees. And that's been a fear and
• 16:40
  Speaker 1: an accusation for a long time. But there's a concern
• 16:44
  Speaker 1: that with so much money going into funds that all
• 16:47
  Speaker 1: track the same indexes, that companies that are unworthy of
• 16:51
  Speaker 1: their money will get them regardless of what their financial
• 16:56
  Speaker 1: health is, but just by virtue of their being big
• 16:59
  Speaker 1: and in the index right now. And then we've got
• 17:02
  Speaker 1: to use context on the fact that if you go
• 17:04
  Speaker 1: back and you look at, uh, the amount of money
• 17:08
  Speaker 1: or the amount of ownership of the stock market made
• 17:11
  Speaker 1: up by mutual funds, it's about half a little less
• 17:13
  Speaker 1: than half. So there's still again plenty of people picking
• 17:16
  Speaker 1: stocks based on valuations. UM. I also think that, look,
• 17:20
  Speaker 1: active managers are now out saying that like e t
• 17:23
  Speaker 1: s and index funds are bad for capitalism. UM. And
• 17:26
  Speaker 1: you know, look, I mean there's some case who made
• 17:28
  Speaker 1: that an active manager can evaluate a stock better. UM.
• 17:31
  Speaker 1: And if that's the case, an investor should pick an
• 17:34
  Speaker 1: active manager. I think part of the problem with this
• 17:37
  Speaker 1: whole thing is that investors are just voting with their feet.
• 17:40
  Speaker 1: I mean, I think what really has caused a lot
• 17:42
  Speaker 1: of the movement is low cost one but to disappointment
• 17:46
  Speaker 1: in two thousand and eight. I think a lot of
• 17:48
  Speaker 1: people thought that their active fund would have saved them
• 17:51
  Speaker 1: some of that uh thirty five percent loss, but it didn't.
• 17:55
  Speaker 1: In fact, two thirds of active managers underperformed in two
• 17:58
  Speaker 1: thousand and eight, and I think that's partially the investor's fault.
• 18:02
  Speaker 1: Active managers know that investors can't tolerate a lot of
• 18:05
  Speaker 1: tracking error and they have to buy these stocks, so
• 18:07
  Speaker 1: ultimately their hands are tied. In the end, investors really
• 18:11
  Speaker 1: want the index anyway, um, and so they're driving all
• 18:14
  Speaker 1: of this. So you put out research recently looking at
• 18:19
  Speaker 1: where these flows have been going, and you showed how
• 18:21
  Speaker 1: they're going to Van Garden black Rock overwhelmingly. And does
• 18:24
  Speaker 1: this mean that you expect to see some of the
• 18:27
  Speaker 1: smaller et F providers close up shop or get absorbed
• 18:30
  Speaker 1: by the bigger by the bigger players, Yeah, you know,
• 18:33
  Speaker 1: I have this thing I use where, like you know,
• 18:36
  Speaker 1: the old news is active passes the new news is
• 18:40
  Speaker 1: um high cost to low cost. The future news is
• 18:44
  Speaker 1: three companies manage the assets UM. So yes, you're going
• 18:48
  Speaker 1: to see a massive consolidation. We just saw power Shares
• 18:52
  Speaker 1: is on the verge of buying Guggenheim, which took a good,
• 18:55
  Speaker 1: juicy smart data issue off the table for active shops
• 18:58
  Speaker 1: who need a passive game. By the way, but ultimately, yes,
• 19:00
  Speaker 1: you're gonna see a ton of consolidation. I think what's
• 19:03
  Speaker 1: going to happen is the next sell off. There's gonna
• 19:06
  Speaker 1: be a whole Uh. This is where a lot of
• 19:08
  Speaker 1: this is going to come to light and a lot
• 19:09
  Speaker 1: of managers are can be forced to team up in
• 19:11
  Speaker 1: order to compete with the vanguarden black rocks of the world.
• 19:14
  Speaker 1: And with those low fees you need scale. Eric BLUs,
• 19:18
  Speaker 1: thank you so much. And you know, honestly, when I
• 19:21
  Speaker 1: say an E T F defender, I find that a
• 19:23
  Speaker 1: lot of our conversations end up being Eric, you calling
• 19:26
  Speaker 1: me and saying, you know, actually, let's reframe this. Let's
• 19:29
  Speaker 1: look at what the where the money is actually going.
• 19:30
  Speaker 1: This is just a vehicle, uh, that people can sort
• 19:33
  Speaker 1: of invest in the underlying assets. So it's always enlightening
• 19:37
  Speaker 1: to speak with you and you're looking at the technical
• 19:40
  Speaker 1: is not just blindly defending Eric beltunas, senior et F
• 19:43
  Speaker 1: analyst for Bloomberg Intelligence. Uh. And again, those bubble fears
• 19:47
  Speaker 1: will be ongoing, I'm sure, especially if we do not
• 19:50
  Speaker 1: get another major downturn, you'll have people saying, well, they're untested.
• 20:06
  Speaker 1: With all of the news that's coming out of North
• 20:08
  Speaker 1: Korea and Virginia, there has been less talked about one
• 20:12
  Speaker 1: of the most important things that will happen probably this month,
• 20:16
  Speaker 1: which is the beginning of the renegotiation of the North
• 20:18
  Speaker 1: American Free Trade Agreement known as NAFTA. And here to
• 20:22
  Speaker 1: give us a sense of exactly what's at stake, and
• 20:25
  Speaker 1: it potentially is quite a bit, is Mike McDonough. He
• 20:28
  Speaker 1: is a global director of Economic Research and chief economist
• 20:31
  Speaker 1: for Bloomberg Intelligence, and he joins us in our eleven
• 20:33
  Speaker 1: three oh studios. Mike, just can you lay out what
• 20:37
  Speaker 1: the main issues will be because we've heard a lot
• 20:39
  Speaker 1: about agriculture, We've heard a lot about dairy. Yeah, you know, well,
• 20:43
  Speaker 1: it depends on who you ask. I think a little
• 20:45
  Speaker 1: bit right if you if you look at the trade representative,
• 20:48
  Speaker 1: they actually put out a kind of preliminary report a
• 20:51
  Speaker 1: month or two ago on what their expectations were, and
• 20:54
  Speaker 1: the key things were that they expected to maintain the
• 20:58
  Speaker 1: trade free terrorists for agricultural and industrial goods. Uh and
• 21:01
  Speaker 1: instead focusing on things like I T financial sector integration,
• 21:07
  Speaker 1: things like this, which which all makes sense, it would
• 21:09
  Speaker 1: be a good thing to add to the deal. But
• 21:11
  Speaker 1: when you listen to the Trump administration's rhetoric, it has
• 21:14
  Speaker 1: mostly been trade deficit, trade deficit, trade deficit, be it
• 21:17
  Speaker 1: with China, be it with Mexico, Germany, whoever. Uh. And
• 21:20
  Speaker 1: what's interesting when you actually look at Mexico and you say, well, where,
• 21:25
  Speaker 1: how why are we running this trade deficit with Mexico.
• 21:27
  Speaker 1: If you actually break it down by product and you
• 21:30
  Speaker 1: look at transportation equipment, the deficit in transportation equipment between
• 21:34
  Speaker 1: the US and Mexico is actually larger than the entire
• 21:37
  Speaker 1: US trade deficit, So meaning if you strip that component
• 21:41
  Speaker 1: out there, we would actually be running a trade surplus
• 21:43
  Speaker 1: of Mexican. So is this basically the flip side of
• 21:47
  Speaker 1: Ford and GM manufacturing their cars in Mexico or car parts?
• 21:52
  Speaker 1: It's two things. It's uh, exactly what you just said.
• 21:56
  Speaker 1: Car companies building their cars in Mexico and bringing them back.
• 21:58
  Speaker 1: And it's also all the parts being produced in Mexico
• 22:01
  Speaker 1: that are being used in cars that are assembled in
• 22:04
  Speaker 1: the US. When you when you break it out by state,
• 22:06
  Speaker 1: the two largest states with the deficits that are Michigan
• 22:09
  Speaker 1: and obviously cars in California, which is cars is number one,
• 22:12
  Speaker 1: but then computer parts is number two. But why why
• 22:15
  Speaker 1: I went into all this is if your President Trump
• 22:18
  Speaker 1: and your biggest concern is the trade deficit, and you're
• 22:20
  Speaker 1: renegotiating renegotiating NAFTA with that in mind, it's hard to
• 22:24
  Speaker 1: see how you're going to ignore this sector. But that's
• 22:26
  Speaker 1: kind of what was indicated by the to me at
• 22:29
  Speaker 1: least when I read the summary that the trade representatives
• 22:32
  Speaker 1: had put out. So I'm just trying to wrap my
• 22:35
  Speaker 1: head around this, because we were talking before the segment
• 22:38
  Speaker 1: that these negotiations have a pretty accelerated time frame, that
• 22:42
  Speaker 1: there is some expectation of a renegotiated deal by the
• 22:45
  Speaker 1: end of the year, which seems actually pretty ambitious given
• 22:48
  Speaker 1: the fact that there are so many moving parts and
• 22:50
  Speaker 1: there is so much political capital that President Trump has
• 22:54
  Speaker 1: tied up in this. Can you give us a sense
• 22:56
  Speaker 1: of what the competing factions will be, whether you know
• 23:01
  Speaker 1: how many people are going to be involved with this,
• 23:03
  Speaker 1: where these negotiations are going to be held, well, I
• 23:06
  Speaker 1: think I think there's a round being held in each country,
• 23:08
  Speaker 1: but I think they have this end of year deadline.
• 23:11
  Speaker 1: But I think even Lightheiser himself has said he's not
• 23:13
  Speaker 1: holding any commitments to necessarily meeting that deadline. So I think,
• 23:18
  Speaker 1: you know the baseline what most people think is this
• 23:20
  Speaker 1: is going to be some very minimal changes that actually
• 23:23
  Speaker 1: occurred in AFT. And if you look at how strongly
• 23:25
  Speaker 1: the Mexican pesos rallied, it's had been the strongest performing
• 23:29
  Speaker 1: currency year to day. It may still be, and this
• 23:32
  Speaker 1: is because a lot of the fears that people had
• 23:35
  Speaker 1: have alleviated a bit. Well. But this idea of the
• 23:39
  Speaker 1: auto sector and the auto parts sector, though, raises the
• 23:42
  Speaker 1: specter of some more damage to Mexico's economy because you
• 23:45
  Speaker 1: were saying that this accounts for what three they're total
• 23:49
  Speaker 1: GDP long term pending. How this if if if they
• 23:52
  Speaker 1: were to go after that sector, you could have the
• 23:55
  Speaker 1: Mexico's long term growth potential could come down a bit.
• 23:58
  Speaker 1: Given how the magnetus out of this to Mexico's GDP,
• 24:02
  Speaker 1: and it's been growing every year. It's becoming a more
• 24:04
  Speaker 1: important part of Mexico's economy. It just surprises me that
• 24:07
  Speaker 1: there isn't more of an outcry from GM and Ford
• 24:10
  Speaker 1: because you know, in in back office rooms are saying, look,
• 24:14
  Speaker 1: we want to provide cheaper cars, we provide labor to Mexico.
• 24:18
  Speaker 1: Mexico's economy grows, it helps us because then we could
• 24:20
  Speaker 1: sell our cars. If we make everything in the US,
• 24:24
  Speaker 1: it would cost us a lot more. So far, so far,
• 24:27
  Speaker 1: there's no reason to be necessarily right. All signs are
• 24:30
  Speaker 1: pointing to that that there's going to be relatively minor
• 24:32
  Speaker 1: changes to this agreement. I think the trade representatives had
• 24:35
  Speaker 1: gone in and said the process is going to be
• 24:37
  Speaker 1: do no harm. Uh. So you know, President Trump hasn't
• 24:40
  Speaker 1: been that outspoken about and after renegotiations recently, so I
• 24:44
  Speaker 1: don't He's been more centered around China. So I think
• 24:47
  Speaker 1: that that's why you haven't heard as much about this.
• 24:49
  Speaker 1: The baseline view is right now that this is going
• 24:51
  Speaker 1: to go over relatively minimal changes again and pains free,
• 24:55
  Speaker 1: pain free talking about China. Last night, I saw the
• 24:59
  Speaker 1: headlines have about China underperforming in July with respect expectations
• 25:06
  Speaker 1: about how much their economy grew and how much their
• 25:08
  Speaker 1: industrial output grew. People seem to not care at all today. Yeah,
• 25:14
  Speaker 1: and I think that's the right thing. Actually wrote about
• 25:17
  Speaker 1: this in my my macro musings today. And the fact
• 25:20
  Speaker 1: is China had a much better than expected first half
• 25:23
  Speaker 1: of the year, uh and ending that they had a
• 25:26
  Speaker 1: much much much better than expected June. So you saw
• 25:29
  Speaker 1: a little bit that you saw the data come back
• 25:30
  Speaker 1: a little bit in July. When you look at what
• 25:32
  Speaker 1: happened in June and what happened in July, what it
• 25:34
  Speaker 1: really is pointing to is a bit of a return
• 25:36
  Speaker 1: to normalcy or or a moderate slowdown in growth. So
• 25:40
  Speaker 1: you know, everyone expects China's GDP growth is going to
• 25:43
  Speaker 1: decelerate for the remainder of the year. The thing is
• 25:45
  Speaker 1: it hadn't actually done that yet, So now it's finally
• 25:47
  Speaker 1: showing signs that it will start to decelerate a bit.
• 25:50
  Speaker 1: Although you had the Statistic Statistics Bureau coming out and
• 25:53
  Speaker 1: saying they're hidden risks and their problems out there. So
• 25:58
  Speaker 1: so the Statistical Bureau basically said what we've been talking
• 26:01
  Speaker 1: about on the show for I don't know how many
• 26:03
  Speaker 1: years everybody everybody, everybody knows there's hidden risks, right, you
• 26:06
  Speaker 1: have you do have a You're you're gonna have a
• 26:08
  Speaker 1: moderate slowdown in economic growth in China. And another important
• 26:12
  Speaker 1: thing to keep in mind is you have twice a
• 26:14
  Speaker 1: decade leadership transition occurring later this year. They're going to
• 26:18
  Speaker 1: do whatever they need to do to maintain stability around that.
• 26:21
  Speaker 1: They're going to let growth decelerate a bit, because that's
• 26:23
  Speaker 1: what everyone expects. It's still even above the six and
• 26:25
  Speaker 1: a half percent target, but there if it looks like
• 26:28
  Speaker 1: it's going a bit slower than that, then you know,
• 26:29
  Speaker 1: you could see reverse reversal of some tightening that had
• 26:33
  Speaker 1: taken place earlier this year. Who doesn't know about the
• 26:35
  Speaker 1: hidden risks? Mike mcduonda, thank you so much for joining us.
• 26:38
  Speaker 1: A pleasure as always. Mike mcdonna is Global director of
• 26:41
  Speaker 1: Economic Research and Chief Economist for Bloomberg Intelligence based in
• 26:46
  Speaker 1: New York. Thanks for listening to the Bloomberg P and
• 26:50
  Speaker 1: L podcast. You can subscribe and listen to interviews at
• 26:53
  Speaker 1: Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm
• 26:57
  Speaker 1: Pim Fox. I'm on Twitter at Pam Fox. I'm on
• 27:01
  Speaker 1: Twitter at Lisa Abramo. It's one before the podcast. You
• 27:04
  Speaker 1: can always catch us worldwide on Bloomberg Radio