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EU Rejection Poses Bigger Danger For May Than Brexit Rebellion · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg pim L Podcast. I'm pim Fox
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• 0:32
  Speaker 1: Theresa May speaking in Parliament a raucous sex session of Parliament,
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  Speaker 1: and one of the comments that you made is that
• 0:40
  Speaker 1: what we're proposing is challenging to the European Union and
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  Speaker 1: speaking in detail about several of the areas that the
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  Speaker 1: United Kingdom is negotiating as a Brexit position with the
• 0:55
  Speaker 1: European Union. Here to help us understand what's going on
• 0:58
  Speaker 1: right now is Clive Crook. He is editor for Bloomberg Opinion.
• 1:02
  Speaker 1: You can follow Clive on a Twitter at Clive Underscore Crook,
• 1:06
  Speaker 1: and he comes from our studios in Washington, d C. Clive,
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  Speaker 1: what do you make of Teresa May's statement regarding the
• 1:16
  Speaker 1: ongoing negotiations over Brexit and whether the United Kingdom will
• 1:21
  Speaker 1: really have the ability to craft its own trade agreements? Well,
• 1:26
  Speaker 1: I think the statement was actually pretty good, Um, but
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  Speaker 1: it doesn't actually alter the politics of the situation all
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  Speaker 1: that much. You know, she was pretty clear about what
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  Speaker 1: the deal she wants to put to the EU represents,
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  Speaker 1: and I think as a matter of fact, there's a
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  Speaker 1: lot to be said for the approach she's adopting. But
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  Speaker 1: the problem is, the political problem is that her own
• 1:48
  Speaker 1: party is split right down in the middle on this issue. Um.
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  Speaker 1: That's why you've seen the resignations from the cabinet. Um.
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  Speaker 1: And the question is whether she can keep the party
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  Speaker 1: together sufficiently well to actually advance uh, this proposal and
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  Speaker 1: make it, you know, make progress with Europe and getting
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  Speaker 1: to a good deal and acceptable deal. At the moment,
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  Speaker 1: you know, basically the government is is hanging on by
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  Speaker 1: its fingernails, and I don't think the statements she just
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  Speaker 1: made actually is going to make a huge difference to that. Yeah,
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  Speaker 1: it seemed, um, quite quite boisterous. Raucus was the word
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  Speaker 1: that Pim used. I was looking at the predicted prediction
• 2:25
  Speaker 1: markets and noticing that the chances that Theresa May will
• 2:29
  Speaker 1: be the Prime Minister of the UK your end went
• 2:31
  Speaker 1: down quite significantly in the wake of Boris Johnson's resignation
• 2:36
  Speaker 1: can you walk us through what would happen to remove
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  Speaker 1: Theresa May and whether you think that that's a likely possibility.
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  Speaker 1: I think it is more likely than before because you
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  Speaker 1: have now a plausible, a somewhat plausible rival for me
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  Speaker 1: in the running. I mean, that's the point. That's the
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  Speaker 1: point about Boris Johnson's resignation, that you can imagine Johnson
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  Speaker 1: running against May in a leadership contest. Well has to
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  Speaker 1: happen is that a sufficient number of Labor MPs f
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  Speaker 1: T eight to be precise, need to sign letters saying
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  Speaker 1: they have no confidence into Race and May's leadership, and
• 3:11
  Speaker 1: then there would be a vote in the Conservative partium
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  Speaker 1: on the Conservative MPs to dislodger, and a hundred and
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  Speaker 1: fifty nine out of three hundred and sixteen of those
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  Speaker 1: MPs would need to vote against her, and then there
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  Speaker 1: would be a competition to replace her. Now, I think
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  Speaker 1: there are enough votes for the beginning of that process.
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  Speaker 1: In other words, I think there are forty eight votes
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  Speaker 1: to say, you know, we have no confidence in Race
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  Speaker 1: May and we want a leadership election. But I don't
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  Speaker 1: think there are a hundred and fifty nine votes to
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  Speaker 1: replace her. So I think the likely scenario is if
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  Speaker 1: the rebels, if the Brexit people, the hard Brexit people,
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  Speaker 1: decide to try and bring May down, I think the
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  Speaker 1: chances are that they will fail. Clive Crook, then why
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  Speaker 1: do you believe that Boris Johnson, a former Foreign secretary
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  Speaker 1: in David Davis, the Brexit secretary, Why would they have
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  Speaker 1: resigned if they didn't line up support for their position beforehand.
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  Speaker 1: Doesn't this then strengthen the Prime Minister's hand? Well, as
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  Speaker 1: I say, you know, what's happened increases the danger for me,
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  Speaker 1: there's no question. But I think in the end she
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  Speaker 1: can prevail. I don't think there will be sufficient support
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  Speaker 1: in the Tory Party to replace a part because you know,
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  Speaker 1: Tory MPs understand that if that happens, you know they're
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  Speaker 1: moving along a path that leads to another general election.
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  Speaker 1: That's a general election that they could very well lose.
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  Speaker 1: So I don't think they're going to want to do that.
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  Speaker 1: But I mean it is a you know, a moment
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  Speaker 1: of maximum political Unsurgeonty. There's no question about that. Now,
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  Speaker 1: coming back to what David Davis was calculating, what Boris
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  Speaker 1: Johnson was calculating, I think you have to understand that
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  Speaker 1: these are two these are two somewhat different cases. I mean,
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  Speaker 1: Davis was in a position where he was having to
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  Speaker 1: be uh, you know, the pre innstbole negotiate with the
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  Speaker 1: EU as this deal moves forward, and he was in
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  Speaker 1: a position of having to defend a policy which he
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  Speaker 1: thinks doesn't make sense. And on top of that, I mean,
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  Speaker 1: I think May has sort of gone out of her
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  Speaker 1: way to disempower him in that job. And towards the end,
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  Speaker 1: I mean this Checkers meeting, there was this ridiculous business
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  Speaker 1: of you know, a briefing to the cabinet minister's attending
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  Speaker 1: that said, you know, if if any of them reside,
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  Speaker 1: they could make their own way back to London. You know,
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  Speaker 1: there'd be no ministerial car to take them back. And
• 5:32
  Speaker 1: Steve Baker, who another junior Brexit minister who resigned at
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  Speaker 1: the weekend, basically said he felt like resigning over the
• 5:40
  Speaker 1: sheer childishness of that threat. And I must say when
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  Speaker 1: I read that, my first instinct was to think, this
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  Speaker 1: can't be right. You know, they surely can't. They can't
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  Speaker 1: have done that briefing. It's it did seem childish, completely idiotic,
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  Speaker 1: But apparently it happened, and I think, you know, this
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  Speaker 1: is one of a series of uh moves that make
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  Speaker 1: made Davis Field. You know, what am I even doing
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  Speaker 1: in this job? I don't believe in the policy. I'm
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  Speaker 1: not being listened to. Uh you know, May has taken
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  Speaker 1: close control of the Brexit reins. I don't really have
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  Speaker 1: a job. So I mean, I think in this case
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  Speaker 1: there's no mystery at all about why I resigned. All right,
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  Speaker 1: So what's the road ahead here? Given how split the
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  Speaker 1: UK government is and given the fact that Teresa Mayson
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  Speaker 1: that the proposal that the European Union put out there
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  Speaker 1: leaves a serious risk could lead to no deal. Well,
• 6:34
  Speaker 1: we are at a moment of great uncertainty. There's no
• 6:36
  Speaker 1: you know, there's no no denying that. But my my
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  Speaker 1: guess is that May will prevail because there won't be
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  Speaker 1: sufficient support in the Tory Party to bring her down.
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  Speaker 1: And I think you will move to a position where
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  Speaker 1: she has a camera which is more squarely behind the policy.
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  Speaker 1: And then the then the question shifts to Okay, what
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  Speaker 1: is the EU going to make of this proposal that
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  Speaker 1: she's made. I mean, it's very important to remember that
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  Speaker 1: this proposal that she's made is unpopular with Brexit MPs
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  Speaker 1: because it's too friendly to Europe. Europe is going to
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  Speaker 1: take the view that this is no good for them
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  Speaker 1: because it isn't close enough to the model they would
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  Speaker 1: prefer right which is the Norway Single Market membership model.
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  Speaker 1: So I think that is that that is a bigger
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  Speaker 1: danger for May right now myself, rather than rebellion within
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  Speaker 1: the Tory Party, that when the EU gets around to
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  Speaker 1: responding to this new position she's taken, they will say sorry,
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  Speaker 1: we're not interested, and then I think May would be
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  Speaker 1: in more serious trouble. If the EU says, okay, we
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  Speaker 1: can talk about this, we can do business along these lines,
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  Speaker 1: then maybe Britain can move towards a soft Brexit of
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  Speaker 1: the kind that May is suggesting, but that the action
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  Speaker 1: pretty soon will shift to Europe and Europe's reaction to
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  Speaker 1: May's proposal. Clive Crook, thank you so much for being
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  Speaker 1: with us. Clive Crook is Bloomberg Opinion editor coming to
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  Speaker 1: us to talk about the ongoing turmoil in British politics,
• 8:08
  Speaker 1: as well as the Brexit path ahead. Ian Bremer, a
• 8:12
  Speaker 1: long time strategist who runs the Aurasia Group, just tweeted
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  Speaker 1: out shambolic is too understated to describe present British political process. Certainly,
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  Speaker 1: that talk that Theresa May gave to the legislature was
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  Speaker 1: raucous and fraught with a lot of jibing and mocking
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  Speaker 1: and all sorts of things. As the rhetoric heats up
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  Speaker 1: between the US and China and other nations over trade,
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  Speaker 1: there is a question of what are the potential consequences,
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  Speaker 1: and our markets overly sanguine or really perhaps heated up
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  Speaker 1: or overly dramatizing what's going on here? To answer that
• 9:06
  Speaker 1: is Robert Lawrence. He's Professor of International Trade and Investment
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  Speaker 1: at the John F. Kennedy School of Government at Harvard University.
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  Speaker 1: He's also a senior fellow at the Peterson Institute for
• 9:15
  Speaker 1: International Economics and former economic advisor to President Clinton. Robert,
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  Speaker 1: thank you so much for being with us. I just
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  Speaker 1: want to start with a line in a recent article
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  Speaker 1: that you wrote, it may be impossible to prevent the
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  Speaker 1: d globalization of the US economy. What did you mean
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  Speaker 1: by that, Well, the way we make things today is
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  Speaker 1: in global supply chain, and so products are no longer
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  Speaker 1: singly made in one country and then sold in the second,
• 9:45
  Speaker 1: but rather many components are shipped in and then they're assembled.
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  Speaker 1: And so when you put tariffs like we're now seeing imposed,
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  Speaker 1: you disturbed these global supply chains. And that's what's happening.
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  Speaker 1: And that's what I meant by saying, in the long run,
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  Speaker 1: firms are going to be unable to plan and to
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  Speaker 1: invest in order to service the global economy. So isn't
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  Speaker 1: this what President Trump wants, which is to bring more
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  Speaker 1: jobs back to the US and not outsource them to
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  Speaker 1: a lot of other countries. Well, in one sense, it
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  Speaker 1: is what he wants. But the problem is that what's
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  Speaker 1: going to happen as he imposes these tariffs is that
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  Speaker 1: a lot of American jobs are also going to be lost.
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  Speaker 1: We saw last last week, for instance, how Harley Davidson
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  Speaker 1: has decided that they, because of the retaliation that President
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  Speaker 1: Trump was invoked, they're going to have to move now
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  Speaker 1: to Europe to produce their motorbikes. I was just Robert Lawrence.
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  Speaker 1: I'd just like to get your thoughts on the movement
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  Speaker 1: of people, basically because they're seeking some kind of economic
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  Speaker 1: saw us from poverty and being disenfranchised, particularly in Latin America.
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  Speaker 1: And I'm wondering whether that is a factor when it
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  Speaker 1: comes to trade. In other words, would better trade policies
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  Speaker 1: lead to healthier economies outside the United States, thereby mitigating
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  Speaker 1: what the President has already described as a flood of
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  Speaker 1: economic immigrants into the United States. I think absolutely. You know,
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  Speaker 1: when President Selinas of Mexico was talking about the original Masta,
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  Speaker 1: he said, America, your choice is simple. You can take
• 11:39
  Speaker 1: our goods or you can take our people. And in fact,
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  Speaker 1: I think by um causing, by disrupting the supply chains
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  Speaker 1: like those that we have currently with Mexico, we're going
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  Speaker 1: to lead to economic instability in Mexico, and that could
• 11:57
  Speaker 1: put even more pressures on our borders. Professor, I want
• 12:01
  Speaker 1: to I want to talk specifically about the relationship between
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  Speaker 1: the US and China. I know you've done a lot
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  Speaker 1: of research on the history there, and I'm just wondering.
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  Speaker 1: You know, there is an argument that China's practices have
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  Speaker 1: been UH anti competitive against the US, have disadvantaged the
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  Speaker 1: US UH and that President Trump is right to go
• 12:24
  Speaker 1: after certain of these practices. Would you agree with that? Well,
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  Speaker 1: I would agree that there are numerous practices of the
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  Speaker 1: Chinese that we need to go after, but I would
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  Speaker 1: disagree very strongly that the right way to do it
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  Speaker 1: is by breaking our international trade commitments and imposing paraffs
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  Speaker 1: on them. I think we should be using the legal
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  Speaker 1: processes of something like the World Trade Organization to deal
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  Speaker 1: with some of the practices, and in other cases we
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  Speaker 1: have power because we should be preventing the Chinese from
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  Speaker 1: investing in our country if we can't invest in this.
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  Speaker 1: So my problem is that I think there are genuine
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  Speaker 1: issues with China, but we need to deal with them
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  Speaker 1: in a way that doesn't damage our own economy. I
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  Speaker 1: think a lot of people would agree with that, and
• 13:15
  Speaker 1: I think that the disagreement comes with exactly how to
• 13:17
  Speaker 1: how to do that, And I think a lot of
• 13:19
  Speaker 1: people are wondering. You know, President Trump has gone after
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  Speaker 1: certain things. We don't know what he's going to do eventually.
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  Speaker 1: How does China's transformation uh from a relatively poor country
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  Speaker 1: to the world's second biggest economy affect these discussions? Well, definitely. Um.
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  Speaker 1: I think firstly, we can't push him around in the
• 13:42
  Speaker 1: way that perhaps President Trump thinks he can. And I
• 13:46
  Speaker 1: think we're only going to get somewhere if we collaborate
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  Speaker 1: with them, and if we use the rules and if
• 13:54
  Speaker 1: we use our allies in bringing cases to the World
• 13:58
  Speaker 1: Trade Organization. So I think there are better methods to
• 14:04
  Speaker 1: deal with China trying to bully them, essentially by imposing
• 14:08
  Speaker 1: the carabs on them and trying to get them to
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  Speaker 1: back down, which after all, will cause their president to
• 14:16
  Speaker 1: lose faith. I just think it is a non starter.
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  Speaker 1: So what President Trump is doing is in fact inducing
• 14:25
  Speaker 1: a trade war, which is going to penalize UM companies
• 14:30
  Speaker 1: who have invested in China. Our US companies going to
• 14:35
  Speaker 1: miss out on faster growing economies that are going to
• 14:39
  Speaker 1: go their own way and strike trade deals without the
• 14:41
  Speaker 1: United States. Well, absolutely, we've just seen. We know what happened.
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  Speaker 1: The U s didn't join the Trans Pacific Partnership the
• 14:48
  Speaker 1: eleven countries. Other countries went ahead and they've removed the
• 14:52
  Speaker 1: barriers among them. So now American exporters are going to
• 14:57
  Speaker 1: be charged higher tariffs when they sell in Japan, and
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  Speaker 1: then their competitors are going to be So we're by
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  Speaker 1: not playing with other countries, by trying to withdraw, in fact,
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  Speaker 1: we're gonna we're going to damage the global economy and
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  Speaker 1: our own relationship with it. So Professor, right now, US
• 15:16
  Speaker 1: markets are largely shrugging off the risk of an escalation
• 15:20
  Speaker 1: in this trade war, at least one that would really
• 15:23
  Speaker 1: reduce economic growth globally. You've got the US equity markets
• 15:27
  Speaker 1: generally are up today. Yet again, um, do you think
• 15:31
  Speaker 1: that perhaps people are too sanguine or do you think
• 15:33
  Speaker 1: that this is not something that will ultimately be felt
• 15:36
  Speaker 1: in markets in the near future. Well, I think in
• 15:39
  Speaker 1: the short run, our economy has a lot of strength.
• 15:42
  Speaker 1: I think the tax cuts have generated very strong demand,
• 15:47
  Speaker 1: and I think actually last week's news allows the Federal
• 15:49
  Speaker 1: Reserve to to lower interest rate. But I think it
• 15:54
  Speaker 1: is rather damaging for the firms who are involved in
• 15:57
  Speaker 1: international trade. And I think we don't even see the
• 16:00
  Speaker 1: real economic effects over a much longer period of time.
• 16:05
  Speaker 1: So you can say they're too sanguine if what they're
• 16:08
  Speaker 1: reflecting is the long run. But in the short run,
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  Speaker 1: I think the timing is pretty good in the sense
• 16:15
  Speaker 1: that economy is very robust. I want to thank you
• 16:19
  Speaker 1: very much for spending time with us. Robert Lawrence is
• 16:22
  Speaker 1: Professor of International Trade and Investment at the JFK JFK
• 16:27
  Speaker 1: School of Government at Harvard University. He is also a
• 16:31
  Speaker 1: senior fellow at the Peterson Institute for International Economics, former
• 16:36
  Speaker 1: economic advisor to President Bill Clinton, joining US from Boston him.
• 16:57
  Speaker 1: You know, I have been really impressed at how much
• 17:00
  Speaker 1: drama and intrigue there has been in the soybean market
• 17:03
  Speaker 1: over the past few months as the talk of tariffs
• 17:07
  Speaker 1: heats up, and this is sort of exemplified via ship
• 17:11
  Speaker 1: that was carrying US soybeans racing to China to try
• 17:15
  Speaker 1: to get there ahead of the US implementing a twenty
• 17:19
  Speaker 1: five percent tariff. Here to talk about that and what
• 17:23
  Speaker 1: we should really be looking for in the agricultural world
• 17:25
  Speaker 1: on the heels of these tariffs, allam Burgo Joints is
• 17:28
  Speaker 1: now agricultural reporter for Bloomberg. Allen, let's just start with
• 17:32
  Speaker 1: that ship. What happened and what's next. The peak Pegasus
• 17:38
  Speaker 1: hit is idling off the coast about nineteen miles from
• 17:42
  Speaker 1: Dalian where it was supposed to be unloaded before the
• 17:46
  Speaker 1: tariffs took effect, but it didn't get there on time,
• 17:49
  Speaker 1: and now it's a shipment looking for a buyer. Now,
• 17:52
  Speaker 1: there was a little bit of a development here where
• 17:54
  Speaker 1: China threw a wrinkle into the terms of sales, where
• 17:57
  Speaker 1: basically if US soybeans are being bought for the Chinese
• 18:01
  Speaker 1: state reserve, which can be quite substantial um enough to
• 18:05
  Speaker 1: affect world markets. The government will actually reimburse for the
• 18:09
  Speaker 1: cost of the tariff um. It's basically a rebate. It
• 18:12
  Speaker 1: isn't paid upfront, but you can get reimbursed later. And
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  Speaker 1: I think this just shows how complex this trade war
• 18:18
  Speaker 1: could become, because there are all sorts of levers that
• 18:21
  Speaker 1: China can pull, and in the United States to a
• 18:23
  Speaker 1: certain extent as well, that can take what at the
• 18:26
  Speaker 1: top level looks like this really static situation and throw
• 18:29
  Speaker 1: all sorts of nuance into it. I mean, if there
• 18:32
  Speaker 1: is a rebate for the state reserve, that should be
• 18:35
  Speaker 1: good for US soybean prices, but you actually see soybeans
• 18:38
  Speaker 1: down about eighteen cents today. They're still trading at a
• 18:40
  Speaker 1: ten year low. And so it all comes down to
• 18:42
  Speaker 1: what signals are given to the market, and how does
• 18:45
  Speaker 1: the market perceive these signals in a way that it
• 18:49
  Speaker 1: shrugs it off or it see it as an opening.
• 18:51
  Speaker 1: Right now, folks seem pretty barish that anything will actually
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  Speaker 1: be resolved soon. Alan The price of soybeans is down
• 18:59
  Speaker 1: something like twenty percent since the beginning of March. What
• 19:04
  Speaker 1: are soybean farmers going to do well? At first? They're
• 19:07
  Speaker 1: going to be seeking out other markets, and you have
• 19:09
  Speaker 1: seen some signs of of other buyers rebounding just because
• 19:13
  Speaker 1: US soybeans are now so cheap, especially in comparison with Brazil.
• 19:17
  Speaker 1: The main competition which is mainly signing that China. So
• 19:19
  Speaker 1: there's a certain amount of market recalibration going on right now.
• 19:23
  Speaker 1: But if that plays out over months or years, that's
• 19:25
  Speaker 1: cold comfort. If you have a bunch of soybeans sitting
• 19:28
  Speaker 1: in your bin and you do need to get some
• 19:30
  Speaker 1: sort of capacity worked off, and you are looking to
• 19:32
  Speaker 1: pay off your loan, and you do need revenue to
• 19:35
  Speaker 1: pay off that loan, say in October. UM. As this
• 19:38
  Speaker 1: rolls on, you're going to see more of those effects
• 19:41
  Speaker 1: start to reverberate through farm country. Of course, we saw
• 19:44
  Speaker 1: a headline about ten days ago where it was reported
• 19:47
  Speaker 1: by the U. S d A that farmers had surpassed
• 19:50
  Speaker 1: corn in terms of plantings of soybeans overcorn for the
• 19:52
  Speaker 1: first time in thirty five years. A lot of farmers
• 19:54
  Speaker 1: bet on soybeans this year, knowing that China was looming
• 19:57
  Speaker 1: in the horizon, that was a risk that they took.
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  Speaker 1: Right now it looks like a bad bet, Allen. I'm
• 20:02
  Speaker 1: just wondering, has this sort of decline in soybean price
• 20:05
  Speaker 1: has gone too far at this point, because you are
• 20:07
  Speaker 1: set of getting some traders saying, you know, look, we've
• 20:10
  Speaker 1: priced a lot of bad news already into the spot
• 20:13
  Speaker 1: of futures that that could very well be the case. Um,
• 20:17
  Speaker 1: you know, you take a look at the other factors
• 20:20
  Speaker 1: that are driving the soybean market. Another expectation is that
• 20:23
  Speaker 1: there's just going to be a bumper crop because the
• 20:25
  Speaker 1: weather has been very good and growing regions this year,
• 20:27
  Speaker 1: but we're now hitting a very sensitive time of year
• 20:30
  Speaker 1: for the weather. So if you see some sort of
• 20:32
  Speaker 1: sign of too much heat or some sort of crop damage, um,
• 20:35
  Speaker 1: that is going to push prices up pretty quickly. And
• 20:37
  Speaker 1: then another question, indeed, is how much of an effect
• 20:41
  Speaker 1: is this trade war ultimately going to have on US
• 20:43
  Speaker 1: soybean sales for China. The state reserves move already shows
• 20:47
  Speaker 1: maybe a little bit of softening on China's line later
• 20:50
  Speaker 1: in the year. If Brazilian soybeans simply can't keep up,
• 20:54
  Speaker 1: you may have certain importers that will pay the tariff price. Anyway,
• 20:58
  Speaker 1: we're basically about to learned how essential the US is
• 21:02
  Speaker 1: as a supplier for the world Agriculturally, it's always been
• 21:04
  Speaker 1: seen as the buyer of last resort. We'll see if
• 21:06
  Speaker 1: that profile survives this trade war. Alan, you mentioned corn
• 21:11
  Speaker 1: and corn prices down about fifteen percent from their peak
• 21:16
  Speaker 1: that was in the end of May as well. What's
• 21:18
  Speaker 1: up with corn? Yeah, so it's important to bring up
• 21:21
  Speaker 1: corn because corn has never really been the China product
• 21:24
  Speaker 1: that a lot of traders felt that it could be.
• 21:26
  Speaker 1: So in terms of direct sales of US corn to
• 21:28
  Speaker 1: China very little about a hundred and forty million dollars.
• 21:33
  Speaker 1: But what you do have is this echo effect um.
• 21:35
  Speaker 1: You know, you have the weather um which would be
• 21:38
  Speaker 1: driving down prices anyway, So that's one factor. You also
• 21:41
  Speaker 1: have the fact that if soybeans are sitting in the
• 21:43
  Speaker 1: US unused, they'll be used for something and that could
• 21:45
  Speaker 1: be as animal feed, which will then have a knock
• 21:48
  Speaker 1: on effective reducing demand for corn. Thanks very much, Alan Bjorga,
• 21:52
  Speaker 1: our agriculture reporter for Bloomberg News, joining us from our
• 21:56
  Speaker 1: studios in Washington. Our next guest, Josh Lomyer, is the
• 22:13
  Speaker 1: head of the US investment grade credit at a Viva Investors,
• 22:17
  Speaker 1: helping to manage more than four and eighty billion dollars
• 22:20
  Speaker 1: based in Chicago. UM, I want to ask you about
• 22:24
  Speaker 1: whether the Federal Reserve will have to end their rate cycle,
• 22:29
  Speaker 1: their rate increase cycle, as well as the quantitative tightening
• 22:33
  Speaker 1: program because of what has been happening, not only with
• 22:37
  Speaker 1: trade talks, but also when it looks as though you've
• 22:42
  Speaker 1: seen big sell offs an emerging market debt as well,
• 22:46
  Speaker 1: and a strengthening US dollar. Yeah, I think you know,
• 22:51
  Speaker 1: with regards to the FAN, I think they've they're on
• 22:54
  Speaker 1: a path that is really driven by economic growth and
• 22:59
  Speaker 1: stable ization of the jobs in the US economy, and
• 23:03
  Speaker 1: so I really believe that they're quite comfortable until they
• 23:07
  Speaker 1: start to see stresses in those specific areas that they
• 23:11
  Speaker 1: don't really need to remove policy or reduce their pace
• 23:14
  Speaker 1: until they see really specific reasons to do so. You know,
• 23:18
  Speaker 1: I'm struck by the fact that even as the fedbacks
• 23:21
  Speaker 1: away from their ultra low rate policies are still very low.
• 23:25
  Speaker 1: UH investment grade bonds have done really badly, and at
• 23:30
  Speaker 1: the same time, companies have been able to sell unprecedented
• 23:33
  Speaker 1: amounts of the debt for murders and acquisitions. I'm just wondering,
• 23:38
  Speaker 1: after a loss in the first two quarters of more
• 23:41
  Speaker 1: than three percent, do you think that investment grade credit
• 23:45
  Speaker 1: is a buy now or do you think that this
• 23:46
  Speaker 1: is just a sign of what's to come? You know,
• 23:49
  Speaker 1: I think two thousand eight, teams specifically, is the year
• 23:53
  Speaker 1: of the return of more normalized volatility, and so the
• 23:58
  Speaker 1: weakness is really driven mind not so much by fundamentals
• 24:01
  Speaker 1: as it is by a slight weakening in demand. And
• 24:06
  Speaker 1: the consistency of demand be that retail, be that foreign investors,
• 24:11
  Speaker 1: and supply has remained incredibly constant. So when you start
• 24:14
  Speaker 1: to see a tightening of policy like we have had,
• 24:18
  Speaker 1: what that just means is risk assets are now going
• 24:21
  Speaker 1: to be forced to compete a little bit for for demand. Okay,
• 24:25
  Speaker 1: So then where are we in that process? I mean,
• 24:27
  Speaker 1: given the fact that we've had this three percent loss,
• 24:29
  Speaker 1: which is the biggest first quarter loss since two thousand
• 24:32
  Speaker 1: and eight for investment grade bonds in the US, are
• 24:35
  Speaker 1: we halfway there? We're going to see a lot more
• 24:38
  Speaker 1: more to come. I think that's a great point. I
• 24:41
  Speaker 1: think where we're at now is we're at a much
• 24:44
  Speaker 1: more comfortable level than where we were at to start
• 24:47
  Speaker 1: the year. The market has actually, even though we've felt
• 24:51
  Speaker 1: the pain, if you think about just the levels on
• 24:54
  Speaker 1: some of the sectors and some of the movement we've had,
• 24:56
  Speaker 1: it's been a pretty it's been a pretty stable environment
• 24:59
  Speaker 1: of a slow and steady widening versus a panic, and
• 25:02
  Speaker 1: so I think this is a more natural sell off
• 25:06
  Speaker 1: to the market. And I think where we're at now
• 25:08
  Speaker 1: is I think we're going to see periods where credit
• 25:11
  Speaker 1: does fairly well, but we're gonna put these supply demand
• 25:15
  Speaker 1: and balances that we're working through now, those aren't going anywhere,
• 25:19
  Speaker 1: and so I think I think volatility is here to stay.
• 25:22
  Speaker 1: I think it's equally likely that we continue to leak
• 25:26
  Speaker 1: wider here and and still see a little bit of
• 25:28
  Speaker 1: underperformance and credit markets, but there will be periods where,
• 25:32
  Speaker 1: um where we'll see a positive you know, rally and
• 25:35
  Speaker 1: spreads as well. So I think we're kind of in
• 25:36
  Speaker 1: a more neutral phase where we're biased to make sure
• 25:39
  Speaker 1: we keep powder dry and make sure that what more
• 25:43
  Speaker 1: volatility is definitely on the horizon, but there could be
• 25:46
  Speaker 1: pockets of positive returns. So one thing that you're talking
• 25:49
  Speaker 1: about is that we're seeing is really a result of
• 25:51
  Speaker 1: a normalization of policy more than some fundamental deterioration. And
• 25:57
  Speaker 1: yet you are seeing a record proportion of triple b
• 26:01
  Speaker 1: issuances is the lowest grade in the investment grade spectrum,
• 26:05
  Speaker 1: and people are wondering, you know, given the fact that
• 26:08
  Speaker 1: people are raising money to buy back shares to acquire
• 26:11
  Speaker 1: companies and at very high valuations, this is a credit
• 26:15
  Speaker 1: story as well. What's your thought on that and do
• 26:17
  Speaker 1: you think that there's a lot of risk building in
• 26:19
  Speaker 1: that lowest tier of investment grade credit. I think you're
• 26:23
  Speaker 1: absolutely right. I think there is a risk here. I
• 26:26
  Speaker 1: think if you think about the you know, over the
• 26:29
  Speaker 1: last couple of years, companies have been able to add leverage,
• 26:33
  Speaker 1: either just through share buy backs or you know, M
• 26:37
  Speaker 1: and A or whatever their reason is, they've been able
• 26:40
  Speaker 1: to add leverage and they have not been penalized for
• 26:42
  Speaker 1: it by the market. And so you have seen A
• 26:45
  Speaker 1: managed to downgrade, A managed to increase in leverage for
• 26:49
  Speaker 1: really no penalty with regards to the interest cost to
• 26:52
  Speaker 1: the business. And so I do think part of the
• 26:55
  Speaker 1: transition we're seeing now is triple bees are suffering more
• 26:59
  Speaker 1: than single days in this more recent a bount of volatility,
• 27:02
  Speaker 1: and I do believe that that is setting us up
• 27:05
  Speaker 1: for potentially more volatility if as we kind of transition
• 27:09
  Speaker 1: through this, you know, uh, supply demand a bounced Josh,
• 27:13
  Speaker 1: just quickly twenty seconds or so, how do you how
• 27:16
  Speaker 1: does anybody justify buying a tenure at two? That's a
• 27:21
  Speaker 1: great question, and I think you've gotta you've gotta, you've
• 27:23
  Speaker 1: gotta put that in the context of the end investors.
• 27:26
  Speaker 1: So if if there's really not a huge reason to
• 27:29
  Speaker 1: own a lot of duration risk here, just from my
• 27:32
  Speaker 1: total return perspective, you are always going to have real
• 27:37
  Speaker 1: money investors like a pension fund or an insurance company
• 27:39
  Speaker 1: that needs to match their liabilities with their assets, and
• 27:44
  Speaker 1: so that that is a very legitimate reason to own duration.
• 27:47
  Speaker 1: But if you are just looking at it from a
• 27:49
  Speaker 1: total return perspective, and you look at how flat interest
• 27:52
  Speaker 1: rate curves are today, there's really not a big reason
• 27:55
  Speaker 1: to own duration here. Josh Lomer, thank you so much
• 27:57
  Speaker 1: for being with us. Josh Lamar's head of US investment.
• 28:00
  Speaker 1: Great credit at Aviva Investors. Thanks for listening to the
• 28:04
  Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
• 28:07
  Speaker 1: to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform
• 28:11
  Speaker 1: you prefer. I'm pim Fox. I'm on Twitter at pim Fox.
• 28:15
  Speaker 1: I'm on Twitter at Lisa Abramo. It's one before the podcast.
• 28:19
  Speaker 1: You can always catch us worldwide on Bloomberg Radio