Latest / Bloomberg Intelligence / Slowing China Manufacturing May Benefit Global Economy (Podcast)

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Slowing China Manufacturing May Benefit Global Economy (Podcast) · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. 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 and L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. We
• 0:33
  Speaker 1: want to consult now with Patrick Chauvannack. He is a
• 0:36
  Speaker 1: managing director and chief strategist for Silvercrest Asset Management and
• 0:41
  Speaker 1: he can be followed on Twitter at pr Schauvannic. Thank
• 0:45
  Speaker 1: you very much for being here. Patrick, Happy New Year
• 0:47
  Speaker 1: to you. Maybe you could just draw the connection for
• 0:51
  Speaker 1: our listeners between what happens with US interest rates and
• 0:56
  Speaker 1: global debt situation, specifically, what is happening in China right now. Well,
• 1:04
  Speaker 1: you know, I wouldn't draw a direct connection with what's
• 1:06
  Speaker 1: going on in China. I do think that whenever you
• 1:09
  Speaker 1: have interest rates rise in the United States, with the
• 1:11
  Speaker 1: prospect of interest rates rising in the United States, you've
• 1:14
  Speaker 1: seen a pullback of dollar liquidity to the United States,
• 1:18
  Speaker 1: and that's undercut a lot of emerging markets. So emerging
• 1:21
  Speaker 1: markets globally or down now. Everything's down now. But but
• 1:26
  Speaker 1: whenever you've seen that, you've seen that undercut equity markets,
• 1:30
  Speaker 1: particularly in emerging markets. With China, you know, China has
• 1:33
  Speaker 1: got its own complex issues, and I don't think the
• 1:36
  Speaker 1: US interest rates necessarily driving it. Certainly, it's not necessarily
• 1:42
  Speaker 1: US interest rates. UH. There has been, though, a slowdown,
• 1:45
  Speaker 1: which is perhaps part of the reason why interest rates
• 1:47
  Speaker 1: globally haven't arisen much more. And we're seeing that, certainly
• 1:50
  Speaker 1: in the manufacturing data that we got overnight. What do
• 1:52
  Speaker 1: you think of that data? And frankly the incredible response
• 1:56
  Speaker 1: to it with a negative reaction and equity markets and
• 1:59
  Speaker 1: and and a bit for bonds. So it really reminds
• 2:01
  Speaker 1: me of the beginning of two thousand sixteen, when obviously
• 2:05
  Speaker 1: markets were much stronger to begin two thousand sixteen, but
• 2:09
  Speaker 1: the first day of two thousand sixteen we saw a
• 2:11
  Speaker 1: negative p m I number manufacturing number from China. It
• 2:14
  Speaker 1: kicked off a correction in global markets, in the US markets. UH.
• 2:22
  Speaker 1: On the assumption, the widespread assumption that a slowing China
• 2:25
  Speaker 1: necessarily is bad news for the global economy, I don't
• 2:28
  Speaker 1: agree with that assumption. That's being well here's the thing.
• 2:33
  Speaker 1: What matters to the rest of the world is not
• 2:36
  Speaker 1: uh Chinese supply, it's Chinese demands. And normally in an economy,
• 2:41
  Speaker 1: these two things go together. The more you supply, the
• 2:43
  Speaker 1: more you can demand. But for a long time there's
• 2:46
  Speaker 1: been this need for a correction where China consumes more
• 2:50
  Speaker 1: relative to what it's it's producing. So slowdown in Chinese
• 2:54
  Speaker 1: output does not necessarily translate into a slowdown in Chinese demand.
• 2:58
  Speaker 1: In fact, it could actually translate in to a China
• 3:01
  Speaker 1: begins to run trade deficits and other things. So a
• 3:04
  Speaker 1: slowdown in China's over investment boom, which has driven a
• 3:07
  Speaker 1: lot of its growth, does not necessarily translate into a
• 3:11
  Speaker 1: slowdown for the rest of the world economy. But hasn't
• 3:14
  Speaker 1: China extended credit in the form of loans to a
• 3:17
  Speaker 1: variety of countries around the world financed infrastructure projects in
• 3:22
  Speaker 1: Latin America as well as in Africa. Are the Chinese
• 3:26
  Speaker 1: likely to continue to lend money if indeed they have
• 3:29
  Speaker 1: these issues that are domestic oriented. So again, whether that's
• 3:33
  Speaker 1: a good thing or a bad thing for the global
• 3:35
  Speaker 1: economy is an open question. I mean, obviously everybody likes
• 3:38
  Speaker 1: free money, but building out capacity has tended to boost
• 3:44
  Speaker 1: um input prices and suppress output prices, and so this
• 3:50
  Speaker 1: is you know, this is part of the imbalance in
• 3:53
  Speaker 1: the global economy that that has I think undercut a
• 3:56
  Speaker 1: lot of the growth potential in the world economy throughout
• 4:00
  Speaker 1: off this recovery. I'm I'm struggling though with this idea
• 4:05
  Speaker 1: that if China lowers its manufacturing output, it's going to
• 4:09
  Speaker 1: offset that with increases in other areas that will be
• 4:13
  Speaker 1: sufficient to keep that economy going to create the kind
• 4:16
  Speaker 1: of extra demand from the rest of the world that
• 4:18
  Speaker 1: you're talking about. In other words, is to indicate that
• 4:21
  Speaker 1: the economy is just slowing so much that this is
• 4:24
  Speaker 1: not going to be a powerhouse for the global economy,
• 4:26
  Speaker 1: which is how people are taking it. So China has
• 4:29
  Speaker 1: produced more and it's consumed for years, which is actually
• 4:31
  Speaker 1: part of the problem. It can afford to consume more
• 4:34
  Speaker 1: than it produces. It can afford to actually prop up
• 4:37
  Speaker 1: consumption in the face of of the kind of slowdown
• 4:40
  Speaker 1: that would normally undercut consumption in most economies of the world,
• 4:44
  Speaker 1: and that and there'll be a lot of political pressure
• 4:45
  Speaker 1: for them to do that. And that's why we've actually
• 4:48
  Speaker 1: started to see actually, uh, China's trade surplus disappear UM.
• 4:53
  Speaker 1: So not with the United States, not the bilateral I
• 4:56
  Speaker 1: was about to say, I remember seeing a lot of
• 5:00
  Speaker 1: ultilateral trade deficit UM. You know, it depends on how
• 5:03
  Speaker 1: much you believe the numbers, But there are indications that
• 5:06
  Speaker 1: they actually may be moving into deficit, which is actually
• 5:10
  Speaker 1: a positive thing for the global economy because it means
• 5:12
  Speaker 1: that China's finally demanding and mensurate with what it produces.
• 5:18
  Speaker 1: Do you believe that investors are too gloomy, too pessimistic
• 5:21
  Speaker 1: about specifically when it comes to US stocks. So I
• 5:26
  Speaker 1: take the concerns very seriously. But I just spent the
• 5:30
  Speaker 1: latter I write a quarterly letter and and it's not
• 5:32
  Speaker 1: out yet, But I but I looked at nine leading
• 5:36
  Speaker 1: indicators for the global for for the U S economy,
• 5:39
  Speaker 1: things that usually flash a recession warning before it happens. UM.
• 5:44
  Speaker 1: Six of them were no, three of them were maybe
• 5:47
  Speaker 1: early signs. UM if the yield curve inverted, one of
• 5:51
  Speaker 1: them would move from the O D s. I'm talking
• 5:53
  Speaker 1: about the ten year versus two years UM. But I'm
• 5:57
  Speaker 1: not seeing convincing evidence that we are on the car
• 6:00
  Speaker 1: of a recession as the market seems to think. What
• 6:03
  Speaker 1: I am seeing is uh the fact that equity prices
• 6:09
  Speaker 1: are the twelve month trailing P ratio for the SMP
• 6:13
  Speaker 1: five is now down from twenty one five twenty one
• 6:17
  Speaker 1: point five times a year ago to sixteen times UM.
• 6:21
  Speaker 1: What I'm also seeing as a blowout in the equity
• 6:24
  Speaker 1: risk premium, which is the additional amount based on casual
• 6:28
  Speaker 1: is the additional amount that you earn potentially earn on
• 6:31
  Speaker 1: equities over the long haul UM versus investing in treasuries
• 6:37
  Speaker 1: that has blown out to five point seven percent normally
• 6:41
  Speaker 1: that the average for the past fifty years or so
• 6:44
  Speaker 1: is four. That Typically when you see a wide equity
• 6:49
  Speaker 1: risk premium UM, it generally means that over the next
• 6:55
  Speaker 1: five years equities will outperform. So if I looked at
• 7:00
  Speaker 1: over the last going back to when the equity risk
• 7:04
  Speaker 1: premium was above five, the average annual return for five
• 7:10
  Speaker 1: years afterwards was eleven point two. If it was below
• 7:15
  Speaker 1: three point four percent, the average return with three. What
• 7:19
  Speaker 1: the reason why is because what's happening is that the
• 7:22
  Speaker 1: market is scared of the next recession, but it's pricing
• 7:26
  Speaker 1: in that risk adversity and that won't tell you that
• 7:29
  Speaker 1: that number, did I just said, won't tell you where
• 7:32
  Speaker 1: stocks will be a year from now, But if you're
• 7:35
  Speaker 1: more interested in where stocks will be five years from now,
• 7:37
  Speaker 1: it's a very interesting number. Thank you very much for
• 7:41
  Speaker 1: being with us. A pleasure. Patrick Chovanicki is an expert
• 7:45
  Speaker 1: when it comes to all things that China and trade related.
• 7:47
  Speaker 1: He is the managing director and chief strategist for Silver
• 7:50
  Speaker 1: Crest Asset Management. Shares of Tesla lower by about seven
• 8:11
  Speaker 1: and a half percent now. The company is cutting prices
• 8:14
  Speaker 1: to partially make up for the federal tax credit that
• 8:17
  Speaker 1: has been cut in half in the United States for
• 8:20
  Speaker 1: those vehicles. Here to tell us about the decline and
• 8:23
  Speaker 1: the company's future prospects is Kevin Tynan, our senior autos
• 8:27
  Speaker 1: analyst for Bloomberg Intelligence. Kevin, great to have you with us.
• 8:32
  Speaker 1: Happy New Year. Is that decline in the price of
• 8:34
  Speaker 1: Tesla stock connected to the discount that Tesla is offering.
• 8:40
  Speaker 1: They're willing to knock two thou dollars off the price
• 8:43
  Speaker 1: of an automobile because those tax credits are going away. Yeah.
• 8:47
  Speaker 1: My feeling is that's more the issue than say, the
• 8:51
  Speaker 1: production and delivery slight mess for the quarter. Um. You know,
• 8:55
  Speaker 1: keep in mind, this is a company that that needs
• 8:58
  Speaker 1: to um make margin, right, and they need to do
• 9:03
  Speaker 1: that while getting down to that thirty five tho dollar vehicle,
• 9:07
  Speaker 1: which opens up their addressable market considerably. So by taking
• 9:13
  Speaker 1: two thousand dollars off the sticker price, you're sort of
• 9:15
  Speaker 1: moving away from that that concept that Tesla is gonna
• 9:19
  Speaker 1: do gross margins, sell a vehicle at thirty five thousand
• 9:24
  Speaker 1: dollars and have this sort of infinite demand profile in
• 9:28
  Speaker 1: the US. I'm just wondering at what point all of
• 9:31
  Speaker 1: the bears will get flushed out and it will leave
• 9:34
  Speaker 1: sort of the hard, hard skinned Tesla believers. And my
• 9:39
  Speaker 1: point being basically, at what point can we say this
• 9:42
  Speaker 1: is real trading and this is sort of not just
• 9:44
  Speaker 1: sort of the believers versus the haters, right? I think
• 9:47
  Speaker 1: we're a long ways away from that, um you know.
• 9:50
  Speaker 1: And and automobile manufacturing is an industry, there's no finish line, right.
• 9:56
  Speaker 1: General Motors is bankrupt years later, uh to two years
• 10:00
  Speaker 1: removed from nine million units globally. So you know that's
• 10:03
  Speaker 1: why looking at these quarterly numbers, you say, as an analyst,
• 10:08
  Speaker 1: you want Tesla to be boring, right, just produce cell grow,
• 10:13
  Speaker 1: make margins, make profits. UH introduced new vehicles. So if
• 10:18
  Speaker 1: you look at at Leasta, there's one factory at this
• 10:20
  Speaker 1: point right talking about breaking ground on a China factory.
• 10:23
  Speaker 1: There's a company in the auto space. You need scale
• 10:26
  Speaker 1: right there, A long way away from scale. But that's
• 10:29
  Speaker 1: that's sort of my point is that it's still a
• 10:31
  Speaker 1: belief story. It isn't sort of an on the ground
• 10:34
  Speaker 1: number story. It's not like we're debating whether or not
• 10:37
  Speaker 1: they're going to meet this target or that target. We're
• 10:39
  Speaker 1: debating its viability, right, and not only that, you know
• 10:42
  Speaker 1: when when you look at it compared to other automakers,
• 10:45
  Speaker 1: and I hear this constantly that Tesla has no competition,
• 10:48
  Speaker 1: And that's correct because we're still discussing whether it's viable
• 10:52
  Speaker 1: or not. So if you look at the global automotive
• 10:55
  Speaker 1: space of a hundred million units, how big is the
• 10:58
  Speaker 1: battery electric vehicle a portion of it? Is it two million? Well,
• 11:02
  Speaker 1: most automakers are going to fight over the other and
• 11:05
  Speaker 1: leave that too to Tesla and whoever else wants to
• 11:08
  Speaker 1: invest in it. I find it very interesting Toyota has
• 11:12
  Speaker 1: never said electrification is the way to go. You know,
• 11:15
  Speaker 1: this is not a a small company or a not
• 11:20
  Speaker 1: intelligent company that's done a lot of things in the space.
• 11:23
  Speaker 1: So now if that segment is twenty million units, fifty
• 11:28
  Speaker 1: million units, now everybody rushes in. But we're at the
• 11:31
  Speaker 1: point right now where other automakers are saying, do I
• 11:34
  Speaker 1: want to fight over those that one percent, that two percent,
• 11:38
  Speaker 1: maybe it's even five percent. Is it worth the investment
• 11:40
  Speaker 1: in that space? All right? Three quick questions. How's the
• 11:43
  Speaker 1: build quality of and the reviews of all of the
• 11:46
  Speaker 1: Tesla vehicles? Well? Pretty good? Yeah, pretty good. You don't
• 11:50
  Speaker 1: get any bad marks for for the cars. No, and
• 11:54
  Speaker 1: and obviously everybody who has them loves them. Um, they
• 11:57
  Speaker 1: don't advertise, well they they're advertising. They don't pay for advertising,
• 12:02
  Speaker 1: That's what I mean. Okay, so that's number two. Number three.
• 12:06
  Speaker 1: Aren't governments around the world mandating the move from fossil
• 12:10
  Speaker 1: fuel from the internal combustion engine to some form of
• 12:13
  Speaker 1: either hybrid or electric vehicle vehicles? Okay, So that's a trifecta, right,
• 12:19
  Speaker 1: except if plug in hybrid winds up being the most
• 12:22
  Speaker 1: practical option there to say, we're still going to have
• 12:26
  Speaker 1: an internal combustion component. Look, battery pure battery electric might
• 12:30
  Speaker 1: not work for everybody, right in terms of recharging time,
• 12:34
  Speaker 1: the availability of of the charging stations. So again, I
• 12:39
  Speaker 1: think we're still a long ways away from this being
• 12:42
  Speaker 1: the majority of the new vehicle market globally. And then
• 12:45
  Speaker 1: there's of course the question of which companies will dominate
• 12:48
  Speaker 1: that given the fact that the majors in the US,
• 12:50
  Speaker 1: including GM, have sort of really laid their stake in
• 12:54
  Speaker 1: this ground. Also, so a lot of questions. Kevin Tynan,
• 12:56
  Speaker 1: You're gonna be answering them for us years to come,
• 13:00
  Speaker 1: and we are grateful for that. Kevin Tynan, a senior
• 13:02
  Speaker 1: autos analyst for Bloomberg Intelligence. Let's go back to late
• 13:22
  Speaker 1: last month when President Trump was tweeting about positive rumblings
• 13:27
  Speaker 1: between China and the US that possibly there'll be some
• 13:31
  Speaker 1: easing of the trade tensions. What would some sort of
• 13:35
  Speaker 1: trade agreement between the US and China actually look like
• 13:38
  Speaker 1: if there were to be something like that within the
• 13:40
  Speaker 1: next few months. Joining us now and Stevenson Yang, co
• 13:44
  Speaker 1: founder and research director at Jake Capital Research, also a
• 13:47
  Speaker 1: Bloomberg opinion columnists, thank you so much for being here.
• 13:50
  Speaker 1: And so, what would some sort of truth or agreement
• 13:54
  Speaker 1: look like at this point, given the vast span of
• 13:58
  Speaker 1: of topics and UH areas that that that the two
• 14:01
  Speaker 1: nations just agree on. Yeah, that's a great question. I
• 14:04
  Speaker 1: think that what has to be focused on is the
• 14:06
  Speaker 1: tech stuff z t E. Huawei, um in I pr agreements,
• 14:12
  Speaker 1: export controls, and not the low tech exports and the
• 14:16
  Speaker 1: trade gap. And what Trump tends to be personally focused
• 14:19
  Speaker 1: on is the trade gap which is actually widening UM
• 14:23
  Speaker 1: and will continue around the same in the in the
• 14:26
  Speaker 1: current year because the Chinese will depreciate the currency because
• 14:29
  Speaker 1: they'll be forced to UM. So I don't think that
• 14:32
  Speaker 1: that's where there should be a focus. Do you think
• 14:34
  Speaker 1: that we're going to cross that sort of crucial line
• 14:38
  Speaker 1: of seven, Yeah, exactly seven, because you know, look at
• 14:42
  Speaker 1: the Chinese economy, they're just it's just tumbling. UM. People
• 14:46
  Speaker 1: are going to be You're you're going to see a
• 14:47
  Speaker 1: big pick up in in UH in capital flight, and
• 14:51
  Speaker 1: the China's only defense will be to depreciate the currency. Now,
• 14:55
  Speaker 1: you have over twenty five years of expertise in China.
• 15:00
  Speaker 1: You were headed heading the US Information Technology Office in
• 15:05
  Speaker 1: the mid nineteen nineties and also the China operations of
• 15:09
  Speaker 1: the U S. China Business Council. You also wrote about
• 15:12
  Speaker 1: China's emergence and the back and forth of expansion and
• 15:17
  Speaker 1: retreat that China historically has expressed. I wonder if you
• 15:22
  Speaker 1: could expand on that and explain why that's relevant understanding
• 15:26
  Speaker 1: of China. Well, because I think that when China embarked
• 15:32
  Speaker 1: on its current opening phase in nineteen seventy nine, mainly
• 15:36
  Speaker 1: in the nineteen nineties, when China really started to accelerate,
• 15:39
  Speaker 1: it's its economic opening to the West. A lot of
• 15:43
  Speaker 1: international corporations and countries believe that China was in the
• 15:48
  Speaker 1: process of liberalizing and that the liberalization was open ended,
• 15:52
  Speaker 1: and then China ultimately would become sort of a Jeffersonian
• 15:55
  Speaker 1: democracy and a capitalist country. That is not at all
• 15:59
  Speaker 1: the case. It's trying to goes through these uh, these
• 16:01
  Speaker 1: cycles of opening and closing again. It opens when the
• 16:05
  Speaker 1: country needs cash, and that's what happened through the ES
• 16:09
  Speaker 1: and the twenty two thousands to date um and now
• 16:12
  Speaker 1: the cost is getting higher than the benefit, and so
• 16:15
  Speaker 1: you'll see China closing. All right. I want to go
• 16:17
  Speaker 1: to something that Patrick Shavannick said earlier in this show.
• 16:21
  Speaker 1: Patrick Shavannick is chiefe strategist of Silver Crest Asset Management
• 16:25
  Speaker 1: and has focused a lot on China, and he said
• 16:28
  Speaker 1: that a slowdown in China would not necessarily be a
• 16:32
  Speaker 1: bad thing for the rest of the world, especially if
• 16:34
  Speaker 1: it's a slowdown in manufacturing, which is what we're seeing,
• 16:38
  Speaker 1: since perhaps that will mean that they will actually import
• 16:41
  Speaker 1: war and reduce some of the imbalance that has sort
• 16:44
  Speaker 1: of been inherent in its growth. Do you agree. You know,
• 16:48
  Speaker 1: Pat has been talking about that for a while and
• 16:51
  Speaker 1: how how running through the foreign reserves would be a
• 16:54
  Speaker 1: good thing for China. Theoretically that is a good thing,
• 16:58
  Speaker 1: it's just not really politically in the cards. So will
• 17:02
  Speaker 1: China start to import more because it manufactures lesus? No.
• 17:06
  Speaker 1: What China will do is go through a dramatic depreciation
• 17:10
  Speaker 1: of the currency and then find that its own manufacturing
• 17:13
  Speaker 1: is more is more competitive, and then manufacture more. But
• 17:17
  Speaker 1: if they do do this competitive devaluation, that will ignite
• 17:21
  Speaker 1: a complete storm from Washington, d C. Will it not,
• 17:25
  Speaker 1: and aggravate the trade tensions to such a degree that
• 17:28
  Speaker 1: there could be potentially more ramifications on that side. It may.
• 17:31
  Speaker 1: I don't think that they're going to do it in
• 17:33
  Speaker 1: response to the US. In fact, I think they've been
• 17:35
  Speaker 1: holding up the currency to the extent they can in
• 17:39
  Speaker 1: order to uh, to to continue the trade negotiations with
• 17:42
  Speaker 1: the US. The problem is that, um, you know, trying
• 17:46
  Speaker 1: to trying to claims a little over three trillion and
• 17:49
  Speaker 1: foreign reserves. The the reality is that they have liquid
• 17:53
  Speaker 1: reserves of about one point one one point two trillion UM,
• 17:57
  Speaker 1: and so they don't have that much room to operate.
• 17:59
  Speaker 1: So they dropped by a hundred billion. You'll see them
• 18:02
  Speaker 1: depreciate very fast. What can you tell us about the
• 18:05
  Speaker 1: importance of the personal relationship that the president says he
• 18:09
  Speaker 1: has with Ping president of China? Nonsense? Uh, really, nonsense. Um.
• 18:15
  Speaker 1: I I do think that she didn't paying a little
• 18:17
  Speaker 1: bit fell for it, but she didn't paying also greatly
• 18:20
  Speaker 1: supported the election of Donald Trump, and I think now
• 18:22
  Speaker 1: is regretting it a lot. Is there anything that President
• 18:26
  Speaker 1: Trump has actually gotten for the US out of these
• 18:29
  Speaker 1: negotiations with China? You know, that's a good question. I
• 18:33
  Speaker 1: do think that it was high time that the United
• 18:37
  Speaker 1: States start to start to exert pressure on China for
• 18:40
  Speaker 1: its intellectual property theft and for the export controls violations
• 18:44
  Speaker 1: and those things. You know, Obama imposed or threatened to
• 18:49
  Speaker 1: impose sanctions two years before Trump came into office, but
• 18:53
  Speaker 1: never actually actualized the sanctions. There's been too long a
• 18:57
  Speaker 1: period when the United States has been a afraid of
• 19:00
  Speaker 1: losing business and so has been afraid to put pressure
• 19:03
  Speaker 1: on China, and it turns out actually to be effective.
• 19:06
  Speaker 1: The problem is what's the goal? You need to define
• 19:09
  Speaker 1: the goal and then exert pressure. What do investors get
• 19:13
  Speaker 1: wrong when they think about China? Mostly the consumer? The
• 19:20
  Speaker 1: investors have this idea that China is a place where
• 19:23
  Speaker 1: the consumer is uh is growing and spending more. That
• 19:26
  Speaker 1: you have companies like Ali Baba and j D and
• 19:29
  Speaker 1: everybody's spending money online. The consumer is just a rebranding
• 19:33
  Speaker 1: of what they used to call the masses um and
• 19:35
  Speaker 1: that you know they're going to buy this year, what
• 19:37
  Speaker 1: you tell them to buy this year, and what you
• 19:39
  Speaker 1: fund them to buy, and then they're going to stop
• 19:41
  Speaker 1: buying it. So going forward, what do you think is
• 19:46
  Speaker 1: going to be the story heading into trade agreement still
• 19:50
  Speaker 1: on the table? Well, I think that that Donald Trump
• 19:54
  Speaker 1: is going to back down, as he always backs down,
• 19:56
  Speaker 1: and there will be no new ARRA even after the
• 20:01
  Speaker 1: grace period. I think the big story of twenty nine though,
• 20:04
  Speaker 1: is going to be the sort of crash of the
• 20:06
  Speaker 1: Chinese economy. If indeed that takes place, will there be
• 20:11
  Speaker 1: a political reaction to distract or dissuade domestic forces in
• 20:18
  Speaker 1: China from focusing on that decline. I would have thought so,
• 20:22
  Speaker 1: it's a very opaque system. I would have thought that
• 20:25
  Speaker 1: that would have started quite some time ago. And I've
• 20:28
  Speaker 1: been surprised at the accommodating UH position that she didn't
• 20:32
  Speaker 1: Pink has taken. You'd think that that running out of cards,
• 20:36
  Speaker 1: that that's that would be what they would do, and
• 20:38
  Speaker 1: circle Taiwan, Uh go to the Spratley as you know,
• 20:42
  Speaker 1: this sort of thing. Well, just to pick up quickly
• 20:44
  Speaker 1: on that on the Taiwan issue, because in a speech
• 20:48
  Speaker 1: just recently, J. Pink speaks about that this is a reunification,
• 20:54
  Speaker 1: that's an irresistible trend. Well, it is something that clearly
• 20:58
  Speaker 1: he has focused his He he wants to be his legacy.
• 21:01
  Speaker 1: The question is if you take Taiwan, what do you
• 21:04
  Speaker 1: do with it? Nobody wants to fight a ground war
• 21:07
  Speaker 1: in Taiwan for twenty years. But there's also a question
• 21:11
  Speaker 1: as to whether the US would defend, and whether the
• 21:14
  Speaker 1: US can defend if the Chinese navy were too, for
• 21:17
  Speaker 1: example in circle, thank you very much for being with us.
• 21:20
  Speaker 1: And Stevenson Yang is co founder and research director of
• 21:24
  Speaker 1: j Capital Research, also a Bloomberg opinion columnist. Gold is
• 21:45
  Speaker 1: rallying and is actually at the highest level since June
• 21:48
  Speaker 1: of last year. Kind of interesting at a time when
• 21:51
  Speaker 1: a lot of people had written gold office perhaps not
• 21:54
  Speaker 1: acting as a store of value in the way it
• 21:55
  Speaker 1: once did. Joining us now, Frank Holmes, chief executive officer
• 21:59
  Speaker 1: in chief investment officer of US Global Investors, joining us
• 22:02
  Speaker 1: from San Antonio. Frank, thank you so much for being
• 22:05
  Speaker 1: with us. So let's start with the rally that we've
• 22:07
  Speaker 1: seen in gold. Does this sort of edify gold long
• 22:11
  Speaker 1: held sort of rule as a capital preservation tool. Absolutely,
• 22:17
  Speaker 1: and we're going back. Since the year two thousand billion
• 22:20
  Speaker 1: has performed the SMP two to one, and we can
• 22:24
  Speaker 1: see now for the last year it slowly outperformed the
• 22:28
  Speaker 1: SMP five the last quarter of the year as a
• 22:30
  Speaker 1: market unraveled, bullion had a spectacular run along with the
• 22:34
  Speaker 1: gold stocks. Well, Frank Holmes, if you have to choose
• 22:38
  Speaker 1: between gold stocks are actual physical gold, which would you hold.
• 22:44
  Speaker 1: It's a great question, Pam, and I've always advocated that
• 22:47
  Speaker 1: tem percent golden rule and five percent be into into
• 22:50
  Speaker 1: gold coins or g l D and the other five
• 22:53
  Speaker 1: percent of gold stocks because in a running gold gold
• 22:57
  Speaker 1: stocks can give you two to three times uh more performance.
• 23:03
  Speaker 1: So I guess that what I'm trying to understand right
• 23:05
  Speaker 1: now is, you know, are we going to see the
• 23:08
  Speaker 1: gold rally continue? Is this bearish kind of outlook going
• 23:11
  Speaker 1: to continue, or is gold going to potentially lose out
• 23:15
  Speaker 1: throughout the rest of this year as people realize that
• 23:17
  Speaker 1: we are actually headed towards armageddon. US profitability a company
• 23:21
  Speaker 1: is a still pretty good, and you know, perhaps we
• 23:24
  Speaker 1: got a little over our skis No. I think it's
• 23:27
  Speaker 1: the fifty seven trillion dollars in over a hundred and
• 23:29
  Speaker 1: fifty tillion dollars at global debt. That's a big issue
• 23:33
  Speaker 1: for people of looking at in a global basis. And
• 23:37
  Speaker 1: I also think that when we're witnessing is peak gold.
• 23:40
  Speaker 1: We had peak oil in two thousand and five, and
• 23:42
  Speaker 1: so the factors came along and and we're disruptive to
• 23:46
  Speaker 1: the supply of oil, but there's been no technological breakthrough
• 23:50
  Speaker 1: of even close to that equivalent in the mining sector,
• 23:52
  Speaker 1: in particular blinding gold, developing and producing, et cetera. So
• 23:56
  Speaker 1: we have this ongoing global demand for gold, both the
• 23:59
  Speaker 1: loved it than the fear trade, and you have supplied
• 24:02
  Speaker 1: as peaked and we're getting less and less from the minds.
• 24:06
  Speaker 1: They are lower grade, they are higher costs of shutting
• 24:08
  Speaker 1: them down. Uh. And the only way countries like South
• 24:12
  Speaker 1: Africa can be profitables by their currency to valuing to
• 24:16
  Speaker 1: be able to get a margin. Well, I'm glad you
• 24:18
  Speaker 1: mentioned currency is devaluing. And I'm wondering if the US
• 24:21
  Speaker 1: dollar loses strength, doesn't that mean that the price of gold,
• 24:26
  Speaker 1: at least on a nominal basis, will increase And if
• 24:29
  Speaker 1: the dollar loses value, that will make gold even more attractive.
• 24:34
  Speaker 1: In the blink of an eye, am In a blink
• 24:37
  Speaker 1: of an eye, gold will was just snap on that
• 24:40
  Speaker 1: on that trade. And I think that's just looking by
• 24:44
  Speaker 1: from here to June that rates will peak and any
• 24:47
  Speaker 1: sign of that you will see gold all of a
• 24:50
  Speaker 1: sudden start to resuscitate itself. And also quee, you know,
• 24:54
  Speaker 1: the unwinding of the Qui in the US was a
• 24:57
  Speaker 1: big fun flows went into bond and equities. And since
• 25:01
  Speaker 1: the QUI has basically been pushed back and there's a
• 25:04
  Speaker 1: retraction here. We're seeing this thought market unwind and we're
• 25:07
  Speaker 1: seeing gold all of a sudden rally the peak and
• 25:10
  Speaker 1: gold was basically when quei is one started when gold
• 25:14
  Speaker 1: hit nineteen hundred UM. The last time we had a
• 25:16
  Speaker 1: financial crisis two thousand and eight, gold was seven UH
• 25:20
  Speaker 1: and then by two thousand and eleven it has skyrock
• 25:23
  Speaker 1: the nine hundred before it fell back to a bother thousand.
• 25:27
  Speaker 1: So I think that gold is in a very strong
• 25:29
  Speaker 1: and a relative basis. Globally, we still have issues the
• 25:33
  Speaker 1: eu Brexit UH, and we have this trade war, and
• 25:37
  Speaker 1: we can do to see more central banks buying gold.
• 25:41
  Speaker 1: Many of the Eastern European economies like Hungary and Poland
• 25:45
  Speaker 1: shown up for the first time buying uh tons of gold. Yeah. Well,
• 25:49
  Speaker 1: one thing I have to think about, Frank, because you
• 25:51
  Speaker 1: manage a fund that that focuses on precious medals, but
• 25:53
  Speaker 1: you also manage a fund that has to do with
• 25:56
  Speaker 1: the airline industry and manufacturing. And just real quick here,
• 25:59
  Speaker 1: do you expect the sort of opposite to be true
• 26:02
  Speaker 1: that manufacturing companies and airline companies are going to struggle
• 26:05
  Speaker 1: because ultimately the bid for gold comes from a pretty
• 26:08
  Speaker 1: bearish place in the economy. Well, you know, it's it's
• 26:12
  Speaker 1: something that's very contrarian. I would share with you that
• 26:15
  Speaker 1: from two thousand and one gold went from two hundred
• 26:18
  Speaker 1: and fifty dollars to seven hundred uh to two thousand
• 26:22
  Speaker 1: and eight, so we had a strong global economy and
• 26:25
  Speaker 1: gold did participate quite well in that rally. So I
• 26:28
  Speaker 1: don't think you just market off as being you know,
• 26:30
  Speaker 1: bear both that's the fear trade. What's really important is
• 26:33
  Speaker 1: that sixt gold demand is love, and love comes from Shindia,
• 26:37
  Speaker 1: which is of the world's population. It's actually known as
• 26:40
  Speaker 1: China and India, and it's highly correly to the rising
• 26:44
  Speaker 1: GDP per capita in those two countries. All of a
• 26:47
  Speaker 1: sudden you get greater increases in gold gift giving. Well done,
• 26:52
  Speaker 1: Thanks very much, Frank Holmes, wishing you happy New year.
• 26:56
  Speaker 1: Gold right now is higher by about a half percent
• 26:59
  Speaker 1: of about six seven dollars announced dollars for an ounce
• 27:04
  Speaker 1: of gold. Many thanks to Frank Holmes, chief executive and
• 27:07
  Speaker 1: chief investment officer for US Global Investors. Thanks for listening.
• 27:15
  Speaker 1: To the Bloomberg P and L podcast. You can subscribe
• 27:18
  Speaker 1: and listen to interviews at Apple Podcasts, SoundCloud, or whatever
• 27:22
  Speaker 1: podcast platform you prefer. I'm pim Fox. I'm on Twitter
• 27:26
  Speaker 1: at pim Fox. I'm on Twitter at Lisa Abramo wits one.
• 27:30
  Speaker 1: Before the podcast, you can always catch us worldwide on
• 27:32
  Speaker 1: Bloomberg Radio