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It’s Too Late For Smaller Asset Managers To Scale Up · 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 Bramowitz. Each day we
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• 0:27
  Speaker 1: In the news recently has been consolidation among asset managers,
• 0:31
  Speaker 1: one after another after another. The latest UBS is looking
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  Speaker 1: to possibly buy another asset manager, either in the US
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  Speaker 1: or Europe in order to get scale. And this raises
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  Speaker 1: a question what is the right size for an asset
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  Speaker 1: manager in two And we have someone who's going to
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  Speaker 1: answer that question with precision. Eric Baltunis has the answer.
• 0:53
  Speaker 1: He has all the answers. He's been predicting this for
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  Speaker 1: a while. Eric a senior et f analyst for Bloomberg Intelligence.
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  Speaker 1: So Eric, what do you make of this UBS announcement
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  Speaker 1: and how big is the right size? Uh? Well, look,
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  Speaker 1: this is not a surprise to me, and I'm not
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  Speaker 1: sure that the right size the way I've always seen
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  Speaker 1: it is. Look, I mean, the data is there of
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  Speaker 1: the net cash that's invested in funds goes to products
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  Speaker 1: that charge less than twenty basis points UM, and that
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  Speaker 1: goes to less than ten So who's holding those funds
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  Speaker 1: is Vangarden black Rock. They're taking in two thirds of
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  Speaker 1: all net dollars invested in the United States. So this
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  Speaker 1: is only going to get bigger. The reason hasn't been
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  Speaker 1: bigger yet is the market performance growth has built the
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  Speaker 1: assets up of some of these people who have seen
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  Speaker 1: organic outflows. But I would imagine after a bear market,
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  Speaker 1: you could be looking at something more kin to the airlines.
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  Speaker 1: You know how there's like three big airlines that control
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  Speaker 1: about of the market, and then you have UM, you know,
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  Speaker 1: smaller airlines like Alaska Air or something that does local trips,
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  Speaker 1: something more exotic. I wouldn't be surprised if you see
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  Speaker 1: the middle just clear out and get consolidated. So just
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  Speaker 1: like other things that grow big, right other industries, Uh,
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  Speaker 1: there's three or four big ones, and then there's a
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  Speaker 1: lot of little ones that do specialty things. In that case,
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  Speaker 1: I think UM quants, hedge funds, alternatives. Uh, there's this
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  Speaker 1: emerging market specialists UM. And we were actually talking to
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  Speaker 1: John Bogel for the podcast we do called trillions shameless
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  Speaker 1: plug um And he said, actually, consolidation is probably gonna happen,
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  Speaker 1: but it won't be enough. He thinks a lot of
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  Speaker 1: these firms are going to have to convert to Vanguard's
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  Speaker 1: mutual ownership structure to survive, because and I'll tell you,
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  Speaker 1: even some of these ones that do consolidate and lower
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  Speaker 1: their fees, it's almost feels too late, you can tell,
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  Speaker 1: because the flows still are largely going to two companies,
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  Speaker 1: black Rock and Vanguard, even if another firm might go
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  Speaker 1: a little cheaper. Eric, is this a race to the bottom. Yeah,
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  Speaker 1: and we're here. I mean Fidelity wanted, which is ironic
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  Speaker 1: because Fidelity they offered, they offered that. That was why
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  Speaker 1: that was such a Yeah, Fidelity an ounce that they're
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  Speaker 1: going to offer index mutual funds for a fee of zero.
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  Speaker 1: Now keep in mind they already had index mutual funds
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  Speaker 1: that charged one point five basis points. So it's a
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  Speaker 1: formality really, but the symbolism of going to zero, it
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  Speaker 1: was it was almost like a climax. We've been building
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  Speaker 1: up to this point for fifteen years and now we're here.
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  Speaker 1: But let's face it, you can get a whole portfolio
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  Speaker 1: of everything you want for a combined fee of under
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  Speaker 1: five basis points at this point, so it's already basically
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  Speaker 1: free and that's where all the money goes. So you
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  Speaker 1: said that for big asset managers that just now are
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  Speaker 1: trying to really plow in and compete with the black Rocks,
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  Speaker 1: uh and the Van Guards, it's too late. What does
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  Speaker 1: that mean? Does that mean that they're going to be acquired,
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  Speaker 1: go out of business? You know, I don't know, probably acquired,
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  Speaker 1: probably merged with other companies. I think. You look at Investco,
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  Speaker 1: they've been doing a lot of acquisitions. It has brought
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  Speaker 1: them up to Oppenheimer Appenheimer UM. But the active mutual
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  Speaker 1: fund space is alive and well remember active mutual funds
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  Speaker 1: have two thirds more as sets then passive. The reason, though,
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  Speaker 1: is not the problem is organic growth, market returns. The
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  Speaker 1: markets of what in five years, so all the assets
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  Speaker 1: have more than doubled for these active mutual funds. So
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  Speaker 1: they're getting paid. You know, the revenue is great right now.
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  Speaker 1: What these people are starting to see is the writing
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  Speaker 1: on the wall. If the market stops being a money
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  Speaker 1: printing machine for you is an active mutual fund and
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  Speaker 1: you're down to organic growth, you're in trouble because there
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  Speaker 1: is no organic growth. Plus you're probably gonna have panicked
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  Speaker 1: investors pulling out anyway. So I think that's sort of
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  Speaker 1: what they're trying to prepare for, is when a bear
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  Speaker 1: market or a market that's more flat makes organic growth
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  Speaker 1: more of a big deal. They're like, well, we're in
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  Speaker 1: big trouble there because really only two or three firms
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  Speaker 1: taken all the money. What are we gonna do? And
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  Speaker 1: I think that's where you have them trying to figure
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  Speaker 1: out what it's going to look like. Eric. Does this
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  Speaker 1: then create a situation where the companies behind these ets,
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  Speaker 1: whether it's Vanguard or Black Croc, they become utilities. Yes,
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  Speaker 1: some people have talked about that. Someone actually had said
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  Speaker 1: that the government long time ago, should it just come
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  Speaker 1: out with a couple index funds for the regular public
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  Speaker 1: and just charge nothing. Vanguard kind of did it for him. Vanguard. Look,
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  Speaker 1: Vanguard is kind of utility. We gotta remember, Vanguard is
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  Speaker 1: owned by the investors. It's like a co op. It
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  Speaker 1: is a it is a whole different animal. Credit union. Yes,
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  Speaker 1: it's like a credit union, and so it doesn't have
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  Speaker 1: a profit motive. So it is almost like a utility.
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  Speaker 1: And Vanguard takes in the most money of any asset
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  Speaker 1: manager every year, uh, you know, for the past five years.
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  Speaker 1: So it is affecting the other companies. That's why I
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  Speaker 1: called it the Vanguard effect is the real story. Vanguard's
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  Speaker 1: a story, but the real story is the effect that's
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  Speaker 1: having on everyone else. Okay, but not all markets are
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  Speaker 1: investible through index funds, and that's what we're seeing with
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  Speaker 1: PIMCO and other big gas managers trying to get more
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  Speaker 1: into direct lending and alternative credit, alternative credit and equities
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  Speaker 1: and other strategies. And I'm just wondering, I mean, is
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  Speaker 1: that the future, especially given the fact that the private
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  Speaker 1: markets have been growing much more quickly than the public markets. Yeah,
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  Speaker 1: it could be. However, I have noticed this trend, and
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  Speaker 1: because i've especially in the fund world, there are places
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  Speaker 1: Vanguard doesn't have a fund. What you've seen, though, is
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  Speaker 1: people copy them. I call it they you know, like this,
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  Speaker 1: like Goldman Vanguarded Factor Investing. They came out with an
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  Speaker 1: et F form nine basis points. Now Vanguard was nowhere
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  Speaker 1: to be found. They just saw what Vanguard was doing
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  Speaker 1: copy them. So I would not be surprised if you
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  Speaker 1: see people vanguarding private equity vanguarding hedge funds, but how
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  Speaker 1: do you how do you vanguard a strategy that owns
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  Speaker 1: a liquid stuff. Well, you just charged less for the exposure.
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  Speaker 1: So let's say you're a private equity fund. You could
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  Speaker 1: just charge half of what people are charging on the market.
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  Speaker 1: And you're realizing that you're tapping into this cost obsession,
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  Speaker 1: which isn't just for index funds. Advisors are feeling cost
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  Speaker 1: obsession to the biggest trend of our day is high
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  Speaker 1: cost to low cost. Active to passive is debatable. There
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  Speaker 1: are other trends that you see, you know us from
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  Speaker 1: merging markets. High cost to low cost seems to be
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  Speaker 1: the thread that that combines everything, and I do think
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  Speaker 1: you'll hedge funds are already under pressure. Some of them
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  Speaker 1: have already started doing fee rebates, offering it for free
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  Speaker 1: because the Vanguard effect goes beyond what Vanguard even offers.
• 7:16
  Speaker 1: Just go ahead, give a ten second shameless plug for Trillions.
• 7:19
  Speaker 1: Trillions is a podcast to deal with Joe Webber, the
• 7:21
  Speaker 1: editor of Business Week. It's on E t f s
• 7:23
  Speaker 1: and it's aimed at the regular retail investor. We try
• 7:26
  Speaker 1: to simplify and make this stuff fun trillions. It's a
• 7:28
  Speaker 1: great podcast. Thanks very much. Eric Baucun is our senior
• 7:32
  Speaker 1: et F analyst for Bloomberg Intelligence, and you can follow
• 7:36
  Speaker 1: Eric on Twitter as we all do at Eric Baltunas.
• 7:42
  Speaker 1: Our topic now is Facebook, with the shares up a
• 7:45
  Speaker 1: little bit more than five per cent. Our guest is
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  Speaker 1: Mark Douglass. He is the chief executive of steel House.
• 7:52
  Speaker 1: Steelhouse is an artificial intelligence driven self service advertising software company.
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  Speaker 1: We're gonna find out what that is after he tells
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  Speaker 1: us all about Facebook, which is an advertising company. What
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  Speaker 1: did you make of the results? More? Um, I think
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  Speaker 1: that I'm surprised, let me say a different surprise of
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  Speaker 1: stock is up so much. But I think that people
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  Speaker 1: were very worried about Facebook engagement is really down. But
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  Speaker 1: Instagram is just doing phenomenally well right now, and that's that.
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  Speaker 1: I think that's what everyone's excited about. Well, let's home
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  Speaker 1: in on exactly what you started with that you're surprised
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  Speaker 1: that the shares are up as much as they are. Why.
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  Speaker 1: I mean, you just look at your friends, you look
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  Speaker 1: at your own usage. I just don't see people using
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  Speaker 1: Facebook as much as they used to and So the
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  Speaker 1: core Facebook platform seems to be declining, and I think
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  Speaker 1: investors are basically overlooking that because of the excitement around
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  Speaker 1: around Instagram. But I think that excitement is well warranted,
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  Speaker 1: but it seems slightly premature. Why is there such a
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  Speaker 1: popularity for Instagram? Do you believe, Well, Instagram, it's all
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  Speaker 1: about stories. Facebook basically copied stories from Snapchat and Stories
• 9:04
  Speaker 1: just to make sure it's clear, is just basically streaming
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  Speaker 1: your life just wherever you go, whatever you do. Last
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  Speaker 1: night alone, that made five five Instagram stories while it
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  Speaker 1: was out, and stories are really popular and engagement on them,
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  Speaker 1: meaning how much time people spending you doing it, is
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  Speaker 1: just phenomenal. And so there's a lot of excitement about
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  Speaker 1: how that's essentially going to rescue Facebook. Let's talk about
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  Speaker 1: the idea that Instagram is growing rapidly and really is
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  Speaker 1: the heart of Facebook at this point, whereas Facebook is
• 9:34
  Speaker 1: losing users. You know that my children do not use Facebook,
• 9:37
  Speaker 1: and you know they do use Instagram. I'm just wondering,
• 9:41
  Speaker 1: is the valuation of Facebook appropriate given the fact that
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  Speaker 1: its future is Instagram and not Facebook. Yeah, and I
• 9:47
  Speaker 1: think the um investors are betting that that Facebook will
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  Speaker 1: figure out how to monetize, how to advertise against Instagram stories.
• 9:57
  Speaker 1: I think that's a good bet. I think, frankly, Facebook
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  Speaker 1: is kind of sandbagging how easy it's going to be
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  Speaker 1: to to advertise against stories or to increase the average
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  Speaker 1: sizing on stories. So investors are excited about it. I
• 10:12
  Speaker 1: think consumers excited about the feature. Investors are excited about
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  Speaker 1: the money and so. And the money is going, it's
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  Speaker 1: going to follow. It's over a billion users. And we
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  Speaker 1: say engagement. I'm talking hours a day people spending on Instagram.
• 10:27
  Speaker 1: A lot of people are spending on Instagram. Now, the
• 10:29
  Speaker 1: Instagram story can be tied this to the fashion industry. Um,
• 10:33
  Speaker 1: Instagram stories are popular with fashion, but more importantly that
• 10:37
  Speaker 1: just popular. No, I understand, But I'm trying to figure
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  Speaker 1: out how do they make money? Well, within the stories,
• 10:42
  Speaker 1: some of the stories or ads. You click on a
• 10:45
  Speaker 1: lot of those ads, Um, you swipe up on them. Yeah,
• 10:48
  Speaker 1: and it's about discovery. You see products you might not
• 10:50
  Speaker 1: have noticed before. Um, you see you're basically discovering new products.
• 10:55
  Speaker 1: And there's actually a lot of interesting things in there.
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  Speaker 1: I have to wonder you talk about hours spent on Instagram.
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  Speaker 1: We're already talking about the use of data and addiction
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  Speaker 1: to technology. When with respect to Facebook and Twitter, what
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  Speaker 1: about Instagram? I mean, how concerned are you about some
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  Speaker 1: kind of backlash that could reduce growth materially. Well, here,
• 11:16
  Speaker 1: here's actually bring up an interesting point in terms of data.
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  Speaker 1: They answer to questions. So one is Instagram doesn't have
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  Speaker 1: the data that Facebook has. You don't write on Instagram,
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  Speaker 1: you only post, you post photos, you post videos. There's
• 11:29
  Speaker 1: not a lot of data associated with that. On Facebook,
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  Speaker 1: you actually can type, and so they learn a lot
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  Speaker 1: about you. But the the the the engagement, meaning how
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  Speaker 1: much time people are spending, seems to overcome how little
• 11:44
  Speaker 1: data is on Instagram for consumers concerned about data, it's
• 11:47
  Speaker 1: actually a good thing. Well except that there's facial recognition,
• 11:50
  Speaker 1: their ways to sort of use images as data. Yeah,
• 11:53
  Speaker 1: I mean they can tell who you're you're in a
• 11:54
  Speaker 1: photo with for sure, they have over two billion people
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  Speaker 1: in their database. But the if you wanna you know,
• 12:01
  Speaker 1: they have to guess. More like, if you want to
• 12:03
  Speaker 1: go after motorcycle enthusiasts, you have to just notice that
• 12:06
  Speaker 1: they can have algorithms that know this. There is a
• 12:08
  Speaker 1: motorcycle in the photo, it's not like you're typing the
• 12:11
  Speaker 1: word motorcycle is just not happening on Instagram. It's different,
• 12:14
  Speaker 1: but the the user engagement is just so much higher.
• 12:17
  Speaker 1: So if someone were to come to you and say, oh,
• 12:19
  Speaker 1: I have a hundred thousand Instagram followers, that's a good thing. Um,
• 12:24
  Speaker 1: that is a good thing. But it's that that's different.
• 12:27
  Speaker 1: Like in other words, their bloggers who have audiences, they'll
• 12:30
  Speaker 1: send out a post and they will attract interests. I
• 12:33
  Speaker 1: don't think that's where the real money is being spent.
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  Speaker 1: There's just not enough volume there. The real volume is
• 12:39
  Speaker 1: just within the stories. If I posted five stories last
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  Speaker 1: night alone too, so far today Facebook can throw one
• 12:46
  Speaker 1: or two ads between my stories because the content is free. Yeah,
• 12:50
  Speaker 1: the content is free to Facebook, and the more content,
• 12:53
  Speaker 1: the more ads they can run. Although I have to
• 12:56
  Speaker 1: wonder because with respect to Facebook, one reason why people
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  Speaker 1: liked it so much was why advertisers liked it so
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  Speaker 1: much was the data they could understand how to pinpoint
• 13:05
  Speaker 1: consumers based on their interests. How does that equation change
• 13:09
  Speaker 1: if the data isn't as easily accessible in Instagram? Yeah,
• 13:12
  Speaker 1: so what likely is what's likely happened? Now, let's go
• 13:15
  Speaker 1: to advertising, which is a business. I know, well, if
• 13:18
  Speaker 1: the quality of the data is lower, chances are the
• 13:20
  Speaker 1: ad rates are lower. So to make up for that,
• 13:24
  Speaker 1: they make up literally make up for it in volume
• 13:27
  Speaker 1: all the people posting stories. They'll be there's more volume
• 13:30
  Speaker 1: to monetize, but probably at lower rates. And that's the
• 13:33
  Speaker 1: case right now. The rates on Instagram are a bit
• 13:35
  Speaker 1: lower than they are on Facebook. As an expert in
• 13:38
  Speaker 1: the world of advertising, could we just shift to Google
• 13:41
  Speaker 1: and alphabet for just a moment. I want to get
• 13:43
  Speaker 1: your thoughts on YouTube and being able to turn that
• 13:46
  Speaker 1: into an ad sponsored moneymaker. Yeah, I mean, I'm not
• 13:51
  Speaker 1: personally bullish on YouTube. I don't see um a lot
• 13:54
  Speaker 1: of advertising demand on YouTube from our customers. Our customers
• 13:59
  Speaker 1: are a lot of large hundreds and hundreds of large retailers.
• 14:03
  Speaker 1: UM YouTube is kind of sitting out in the middle
• 14:06
  Speaker 1: of nowhere. Right now. You have connected television for monetizing
• 14:10
  Speaker 1: TV digitally, and now you have social to monetize. You know,
• 14:15
  Speaker 1: we were just talking about Instagram. YouTube is neither of those,
• 14:19
  Speaker 1: and it doesn't have a lot of data, and it's
• 14:22
  Speaker 1: kind of I don't I don't see a lot of
• 14:25
  Speaker 1: growth from YouTube as they exist right now. Just real
• 14:29
  Speaker 1: quick here, do you see regulatory headwinds for UH for
• 14:33
  Speaker 1: Instagram or do you think that they're much less because
• 14:35
  Speaker 1: of the data component here? Um, I don't see much
• 14:38
  Speaker 1: regulatory um headwinds for either Instagram or Facebook. I think GDPR,
• 14:43
  Speaker 1: which is the Global Privacy loil the EU is kind
• 14:47
  Speaker 1: of the gold standard for privacy laws. It's relatively strict,
• 14:51
  Speaker 1: and the companies are already figuring out how they accommodate it.
• 14:55
  Speaker 1: I don't see more anything stricter than that coming in
• 14:58
  Speaker 1: the United States, So I think it's already priced in.
• 15:01
  Speaker 1: I think it's already been dealt with and and consumers
• 15:04
  Speaker 1: are also pretty blind to this stuff. You know, once
• 15:07
  Speaker 1: you get these laws that go so far, consumers at
• 15:10
  Speaker 1: a certain point don't care. At the end of the day,
• 15:12
  Speaker 1: consumers are dumb. Him that seems to be the Well,
• 15:14
  Speaker 1: that's just play. That's not what he's saying. I'm absolutely
• 15:19
  Speaker 1: butchering it. Happy Halloween. Mark Douglas, chief executive of Steelhouse
• 15:22
  Speaker 1: talking about advertising. He was not saying that consumers are dumb,
• 15:25
  Speaker 1: just that people are willing to give up their freedom
• 15:28
  Speaker 1: with respect to being tracked in order for free access
• 15:32
  Speaker 1: to all of these social media websites. That's absolutely a
• 15:36
  Speaker 1: fair exchange. I'm Lisa Brownwood's butchering comments and this is
• 15:40
  Speaker 1: pim Fox and this is Bloomberg. The topic now is
• 15:47
  Speaker 1: China and it's slowing economy. Here to tell us all
• 15:50
  Speaker 1: about it is Michael Mike McDonough, chief economist Financial Products
• 15:55
  Speaker 1: for Bloomberg LP, and he joins us here in studio.
• 15:58
  Speaker 1: All right, Mr mc on a, how bad is it
• 16:01
  Speaker 1: in China. It's it's worse than I think the government
• 16:05
  Speaker 1: officials had been anticipating, but it's not not necessarily because
• 16:09
  Speaker 1: of the trade war. I think that's the important thing
• 16:11
  Speaker 1: that the distinction here really. Um, what you had happened
• 16:15
  Speaker 1: was you had the government undertaking a deleveraging agenda, which
• 16:19
  Speaker 1: was on the surface working fairly well. You had some
• 16:21
  Speaker 1: debt ratios going down, interest coverage was going up. But
• 16:25
  Speaker 1: the problem was, Uh, the parts of the economy that
• 16:28
  Speaker 1: really needed funding that would help boost growth, we're having
• 16:31
  Speaker 1: issues getting it, primarily because these guys were being funded
• 16:34
  Speaker 1: by the shadow banking sector, which took the brunt of
• 16:38
  Speaker 1: the deleveraging agenda. And meanwhile, UM, areas of the economy
• 16:42
  Speaker 1: that we're a little less productive, but still needed still
• 16:46
  Speaker 1: needed debt to roll over their old their old debt,
• 16:48
  Speaker 1: we're getting it. So what this cause was a sharper
• 16:51
  Speaker 1: slowdown than people had been anticipating. And then you throw
• 16:54
  Speaker 1: on top of that what's happening with the trade war,
• 16:56
  Speaker 1: which hasn't really bit yet, will really start biting in
• 16:59
  Speaker 1: twenty nine, Tina, and it's a problem. Well, okay, But
• 17:01
  Speaker 1: then I guess this raise is a really important question
• 17:03
  Speaker 1: because this morning we're getting news that China is considering
• 17:06
  Speaker 1: adding even more stimulus, and we have seen signs that
• 17:09
  Speaker 1: they are re leveraging in order to stave off some
• 17:11
  Speaker 1: of the declines and the weakness that we've been reporting on.
• 17:14
  Speaker 1: My question is if they saw deleveraging is so important
• 17:19
  Speaker 1: that they actually went ahead with it, even though they
• 17:21
  Speaker 1: knew it was going to slow the economy, what is
• 17:24
  Speaker 1: the consequence going to be of them adding more debt
• 17:27
  Speaker 1: to the already chinormous debt pile that China has. Well,
• 17:30
  Speaker 1: if your choices continue deleveraging and have growth slow more
• 17:35
  Speaker 1: meaningfully than you wanted to and far further below the
• 17:37
  Speaker 1: official government target or stability, with some leverage at least
• 17:41
  Speaker 1: short term, you're gonna go with stability, right, So I
• 17:44
  Speaker 1: think you're certainly going to see more action from the
• 17:47
  Speaker 1: government to spur growth. I think that some of it,
• 17:50
  Speaker 1: a lot of it will be through um spurring infrastructure
• 17:53
  Speaker 1: investment in some smaller cities. They need it, you know,
• 17:56
  Speaker 1: they there we Yeah, actually if it needs to be
• 18:00
  Speaker 1: very targeted. But if you think about it, you know,
• 18:02
  Speaker 1: China's urbanization rate is about if you look at most
• 18:05
  Speaker 1: developed countries, it's closer to so there is more room,
• 18:10
  Speaker 1: but it needs to be done smartly, right. I think
• 18:12
  Speaker 1: what caused the problem with the debt. The thing that
• 18:15
  Speaker 1: really catalyzed it was during the two thousand and eight
• 18:18
  Speaker 1: financial crisis when the government did a pretty big stimulus package,
• 18:21
  Speaker 1: and that stimulus package was distributed through a broken capital
• 18:25
  Speaker 1: transmission mechanism. So what that meant was and really short
• 18:30
  Speaker 1: banks were guaranteed a three hundred basis points spread no
• 18:32
  Speaker 1: matter who they lent to. So basically large s o
• 18:35
  Speaker 1: s who didn't need money got it. Uh this late
• 18:38
  Speaker 1: they don't enterprises, yes, uh, And this led to help
• 18:41
  Speaker 1: fuel the overcapacity that we saw. The real estate sector
• 18:45
  Speaker 1: was helped immensely. Uh. This led to the overcapacity on
• 18:48
  Speaker 1: that side of things. So it's it's more they've they've
• 18:52
  Speaker 1: done a lot to modernize the financial sector since then.
• 18:54
  Speaker 1: It's not done, but they've done a lot, so it's
• 18:56
  Speaker 1: not as broken. So it's trying to get the funds
• 18:59
  Speaker 1: to the right areas. And I think another thing they
• 19:02
  Speaker 1: want to do, as I mentioned, the sectors that really
• 19:05
  Speaker 1: would would be boosting growth are are some of the
• 19:08
  Speaker 1: private sectors and technology, healthcare, some of the consumer stuff.
• 19:11
  Speaker 1: So trying to get those companies funds. Uh. So it's
• 19:15
  Speaker 1: a balancing act. But the deleveraging agenda is shelves for
• 19:18
  Speaker 1: now for sure. I think that's gone for the time being. Um.
• 19:21
  Speaker 1: And you know, one thing to keep in mind, we
• 19:23
  Speaker 1: may get a little bit of a false positive on
• 19:25
  Speaker 1: China growth because you could see exports surprised to the
• 19:28
  Speaker 1: upside again before the end of the year because if
• 19:31
  Speaker 1: you look at what tariffs are in place now versus
• 19:33
  Speaker 1: what could be in place next year, it goes up
• 19:35
  Speaker 1: pretty substantially. So people want to front run that. You know,
• 19:38
  Speaker 1: people want to buy Chinese products now before the cost
• 19:41
  Speaker 1: goes up. So um, that's why I say you might
• 19:43
  Speaker 1: not really see the bite until twenty nineteen, So that's
• 19:46
  Speaker 1: something they want to They're gonna want to get ahead
• 19:48
  Speaker 1: of the real risk though, if if you want to
• 19:51
  Speaker 1: be worried, is what's going to happen with capital flows? Um,
• 19:54
  Speaker 1: there's there's a lot of debt that needs to be
• 19:56
  Speaker 1: rolled over in China. So if you start seeing like
• 19:58
  Speaker 1: you did in strong out capital outflows from China, that
• 20:02
  Speaker 1: could be rather dangerous, and that is certainly something the
• 20:05
  Speaker 1: government is going to be keeping an eye on and
• 20:06
  Speaker 1: try to get ahead of. Here's a quote from the
• 20:10
  Speaker 1: economics professor who oversees a survey that is sort of
• 20:14
  Speaker 1: like our p m I survey in China. The quote is,
• 20:18
  Speaker 1: foremost business has never been worse. What do you make
• 20:25
  Speaker 1: of that? And if you are predisposed to invest in China,
• 20:29
  Speaker 1: isn't it better to invest now than it was a
• 20:32
  Speaker 1: year ago? Well? I think that, you know, like I said,
• 20:35
  Speaker 1: that de leveraging agenda has hurt a lot of companies
• 20:38
  Speaker 1: ability to uh raise funds and it's also made it
• 20:42
  Speaker 1: more costly. So if you're running a business that's certainly
• 20:45
  Speaker 1: isn't great. Uh, it's better if you're an s OE
• 20:48
  Speaker 1: for for for state and enterprise for certain reasons. And
• 20:51
  Speaker 1: then if you look at the current outlook, right, you
• 20:54
  Speaker 1: have the US threatening wider tariffs, uh you know, and
• 20:58
  Speaker 1: you you you you not sure what's going to happen
• 21:01
  Speaker 1: with this whole U. S. China relations, which is one
• 21:04
  Speaker 1: of the most you know, the most important bilateral relationship
• 21:06
  Speaker 1: in the world world. Right now, that gives you a
• 21:09
  Speaker 1: lot of uncertainty because you're also seeing consumer spending slowing
• 21:12
  Speaker 1: a bit in China, right This isn't just weakness in
• 21:14
  Speaker 1: one isolated area. It's a slowdown, you know, broadly speaking
• 21:17
  Speaker 1: across the economy. So I could see why people might
• 21:20
  Speaker 1: be pessimistic in China US with especially with the added
• 21:24
  Speaker 1: uncertainty of what happens with those US China relations. And
• 21:27
  Speaker 1: of course, just sort of speaking to your point about
• 21:30
  Speaker 1: the concern about capital outflows, We're looking at the U
• 21:33
  Speaker 1: n which is currently the weakest versus the dollar since
• 21:36
  Speaker 1: two thousand and eight. So this is sort of the concern, right,
• 21:39
  Speaker 1: is that the more people withdraw money from the economy,
• 21:43
  Speaker 1: the weaker the currency, which just escalates from the problems. Mike,
• 21:46
  Speaker 1: We're gonna have to have you back, because it's always
• 21:47
  Speaker 1: incible to speak with you, Mike, McDonald, chief economist for
• 21:50
  Speaker 1: financial Products at Bloomberg LP here with us talking about
• 21:53
  Speaker 1: China's planned additional stimulus really interesting. At short run, it
• 21:58
  Speaker 1: makes a lot of sense for China to be adding stimulus,
• 22:01
  Speaker 1: but in the long run they still have to deal
• 22:03
  Speaker 1: with that debt overhang. General Motors reported earnings this morning
• 22:09
  Speaker 1: that we're better than expected, shares popping by more than
• 22:13
  Speaker 1: seven percent. But the question is what can we expect
• 22:17
  Speaker 1: later in the week when we get US auto sales
• 22:19
  Speaker 1: which are expected to slip into negative territory for the year.
• 22:24
  Speaker 1: Joining us now to talk about that as Alan Baum
• 22:26
  Speaker 1: his principle of Bauman Associates in West Bloomfield, Michigan, and Alan,
• 22:31
  Speaker 1: thank you so much for joining us. So how much
• 22:33
  Speaker 1: of the bad news is already baked in to the
• 22:36
  Speaker 1: auto sector. Well, I think that what we're going to
• 22:40
  Speaker 1: see going forward um is a decline on the macro side,
• 22:44
  Speaker 1: if you will. Obviously, we've got problems in the overall
• 22:48
  Speaker 1: market in both UH the North American and Chinese markets,
• 22:53
  Speaker 1: and so GM's results today, we're in fact kind of
• 22:57
  Speaker 1: a tale of two cities. And what I mean by
• 23:00
  Speaker 1: that is they controlled what they could control very well.
• 23:03
  Speaker 1: That their own business. But as I say, the piece
• 23:08
  Speaker 1: going forward is is more difficult. Alan this is because
• 23:12
  Speaker 1: GM is what selling trucks and sport utility vehicles and
• 23:16
  Speaker 1: those are higher margin products. Yes, and it goes beyond that.
• 23:22
  Speaker 1: They're holding incentives UH in line. UH their inventory of
• 23:28
  Speaker 1: product is low, which obviously helps in terms of the incentives.
• 23:32
  Speaker 1: But they're going to changeover right now to their new pickups,
• 23:35
  Speaker 1: which obviously are are profitable. But what they've done is
• 23:39
  Speaker 1: they've they've kept the loss of product to a minimum
• 23:43
  Speaker 1: by because of their multiple plants, they can keep producing
• 23:47
  Speaker 1: some of the old while producing the new and and
• 23:50
  Speaker 1: UH not having the tremendous drop in volume. Because of
• 23:54
  Speaker 1: course revenue is what keeps them them moving forward, and
• 24:00
  Speaker 1: they were able to do that to keep that from
• 24:02
  Speaker 1: declining dramatically. So he's done an excellent job. And of
• 24:05
  Speaker 1: course a few minutes ago they it just came out
• 24:08
  Speaker 1: that they're announcing buyout of their UH salary staff, so
• 24:11
  Speaker 1: they're obviously looking to keep expenses in line as well.
• 24:15
  Speaker 1: So and all around positive report for them. We are
• 24:18
  Speaker 1: not all around. It is a tale of two cities,
• 24:20
  Speaker 1: but they seem to be bearing with the decline in
• 24:23
  Speaker 1: auto sales. This here better than some of its peers.
• 24:26
  Speaker 1: What are you going to be looking for given the
• 24:28
  Speaker 1: sort of diverging market, with truck still being hot and
• 24:31
  Speaker 1: sedan's not. What are you looking for in tomorrow's auto
• 24:34
  Speaker 1: sales numbers? Well, I think we'll have a drop, and
• 24:37
  Speaker 1: the drop is somewhat misleading because we had a year
• 24:41
  Speaker 1: ago we still had recovery from from hurricane sales. Um.
• 24:45
  Speaker 1: But it is a decline we are seeing. Uh. The
• 24:49
  Speaker 1: retail sales are holding on reasonably well, although in the
• 24:54
  Speaker 1: new year I expect that to decline as well. We've
• 24:56
  Speaker 1: obviously got increasing uh interest rates. We've got to decline
• 25:01
  Speaker 1: from the impact of the tax cut, which I would
• 25:04
  Speaker 1: argue was still pretty modest with respect to the auto market.
• 25:07
  Speaker 1: And the auto market has been declining the last couple
• 25:10
  Speaker 1: of years, not terribly by any means, but it's been
• 25:13
  Speaker 1: ahead of the economy. In other words, the economy has
• 25:16
  Speaker 1: done better uh than the auto market. Um. But the
• 25:19
  Speaker 1: automakers have done a good job, as I say, of
• 25:23
  Speaker 1: holding the the cutting of holding the incentives off, which
• 25:28
  Speaker 1: would would cut into profits. That's gonna obviously get harder
• 25:31
  Speaker 1: as volumes decline. What do you see for the future
• 25:35
  Speaker 1: of GM's Cadillac brand in China. They've done reason that
• 25:41
  Speaker 1: they've done very well actually um but again and they
• 25:45
  Speaker 1: certainly have done better than than Lincoln UM and uh
• 25:49
  Speaker 1: starting to catch up to the Germans, who have a
• 25:52
  Speaker 1: very strong position in China. The obvious problem is if
• 25:56
  Speaker 1: there's an overall decline in the Chinese market, which is
• 26:00
  Speaker 1: we're expecting, does it affect the high end or is
• 26:04
  Speaker 1: it more at the uh, the broader, lower cost part
• 26:09
  Speaker 1: of the market. Uh. Again, it's it's such a competitive
• 26:14
  Speaker 1: market at the high end. As I say, cadillacts a
• 26:17
  Speaker 1: good job, but it's gonna be hard to keep that
• 26:20
  Speaker 1: going at the same rate. So, Ellen, I'm wondering. A
• 26:22
  Speaker 1: lot of people are talking about how the more that
• 26:24
  Speaker 1: the Federal Reserve raises interest rates, the more challenging challenging
• 26:28
  Speaker 1: it's going to become for US automakers. What's your take
• 26:31
  Speaker 1: on that. Basically, the idea that it's going to get
• 26:33
  Speaker 1: more expensive for people to finance their auto purchases. Well,
• 26:37
  Speaker 1: and that's obviously true. And and the other problem, of course, UH,
• 26:41
  Speaker 1: is that who buys new cars um and and and
• 26:45
  Speaker 1: generally it's the upper middle class and the and and
• 26:48
  Speaker 1: rich richer people. UH. That is by design of the automakers.
• 26:52
  Speaker 1: The automakers are thrilled with that because they can sell
• 26:55
  Speaker 1: higher end products, which are of course more profitable. The
• 26:58
  Speaker 1: good news with respect to interest rates is those people
• 27:02
  Speaker 1: are less affected by the increase in interest rates because
• 27:05
  Speaker 1: of course they have the higher income. Of The bad
• 27:08
  Speaker 1: news is there's a limit on how how many cars
• 27:10
  Speaker 1: those that part of the market will buy. Alan is
• 27:13
  Speaker 1: there a limit on the average selling price of a
• 27:16
  Speaker 1: vehicle right now it's about thirty six thousand dollars for
• 27:20
  Speaker 1: the quarter for you know, automobiles like the Chevy Tahoe
• 27:25
  Speaker 1: and and of course that's because of the swing towards
• 27:29
  Speaker 1: UH pick up UH crossovers, even in the in the
• 27:33
  Speaker 1: luxury segment, because crossovers are of course across the board,
• 27:36
  Speaker 1: but increasing throughout the market, including high end and sport
• 27:41
  Speaker 1: utilities to a lesser degree. Um. The decline in car
• 27:46
  Speaker 1: sales is of course the key UH air indicator of
• 27:50
  Speaker 1: why the those numbers are going up. And as I say,
• 27:53
  Speaker 1: the automakers are certainly on board with that. Again, we
• 27:57
  Speaker 1: get to this point where the the mountain up demand
• 28:01
  Speaker 1: has certainly been satiated because it was two thousand nine
• 28:04
  Speaker 1: when we boughtom there uh, and we've had a long
• 28:06
  Speaker 1: time since then. So it will be increasingly difficult to
• 28:11
  Speaker 1: overcome that macro impact as the market as a whole
• 28:15
  Speaker 1: starts to trend down. Thanks very much, Alan Baum, auto
• 28:18
  Speaker 1: analyst principle at Bauman Associates. Shares of general motors. They
• 28:24
  Speaker 1: are higher right now by seven and a half percent.
• 28:28
  Speaker 1: You're listening to Bloomberg Markets. Thanks for listening to the
• 28:32
  Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
• 28:35
  Speaker 1: to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform
• 28:39
  Speaker 1: you prefer. I'm pim Fox. I'm on Twitter at pim Fox.
• 28:43
  Speaker 1: I'm on Twitter at Lisa Abramo. It's one before the podcast.
• 28:47
  Speaker 1: You can always catch us worldwide on Bloomberg Radio.