Latest / Bloomberg Intelligence / High Probability for U.S.-China Trade Tension in 2018, Miller Says

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High Probability for U.S.-China Trade Tension in 2018, Miller Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: you and your money, whether you're at the grocery store
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  Speaker 1: or the trading floor. Find the Bloomberg p m L
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  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. China.
• 0:32
  Speaker 1: When we talk about China these days, it's usually with
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  Speaker 1: a bent of optimism. The economic data coming out of
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  Speaker 1: the nation has been positive. It has re upped Ji
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  Speaker 1: and Ping's tenure as the head of the country and
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  Speaker 1: seems to be showing increased unity here to sort of
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  Speaker 1: break all the myths that we might be depending on.
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  Speaker 1: As Leland Miller, president of the China Beije Book International,
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  Speaker 1: which is based in New York, and he joins me
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  Speaker 1: here from the rid Holes Wealth Management second Annual Evidence
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  Speaker 1: Based Investing Conference in New York. Leland, thank you so
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  Speaker 1: much for being with us. So what are we getting
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  Speaker 1: wrong about Chinese economy right now? Well, the thing that
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  Speaker 1: everyone has right right now is that China's economy is
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  Speaker 1: doing pretty well and is doing much better than a
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  Speaker 1: year ago. So a year and a half ago, we're
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  Speaker 1: in the middle of the China crisis. Everyone wondered whether
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  Speaker 1: this was it. UM the Chinese government intervened. They decided
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  Speaker 1: they needed a really good economy UH for the Party Congress,
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  Speaker 1: and they got it. The problem is people don't understand
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  Speaker 1: what they did in order to get them to this point.
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  Speaker 1: There's a belief that the Chinese government has been deleveraging.
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  Speaker 1: It's been the economy has been deleveraging. They've been rebalancing, UH,
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  Speaker 1: They've been cutting capacity on the supply side and commodities
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  Speaker 1: in order to get the economy on a firm or footing.
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  Speaker 1: None of these have actually been happening. So the belief
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  Speaker 1: that these things are are are You've had this great
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  Speaker 1: economic performance despite deleveraging, despite rebalancing, despite all these strong policies.
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  Speaker 1: It's a myth. Well, I want to I want to
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  Speaker 1: push back on you just I mean, if I look
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  Speaker 1: at of headlines today out of China, China is said
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  Speaker 1: to weigh crackdown on high rate micro lenders. China's scrutiny
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  Speaker 1: of H and A leads to record refinancing costs. There
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  Speaker 1: has been an increase in benchmark yields a lot, in
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  Speaker 1: large part due to local crackdowns on some of this leverage.
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  Speaker 1: How does this not count for you, Well, deleveraging means
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  Speaker 1: that different things to different people. Now, when we track corporates,
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  Speaker 1: what we're looking for is whether corporates are borrowing more
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  Speaker 1: or less, and whether they're paying more or less. And
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  Speaker 1: what we've seen over the past year is not deleveraging.
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  Speaker 1: So we have seen financial sector crackdowns, we've seen wealth
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  Speaker 1: management products been attacked, we've seen other things within the
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  Speaker 1: inner bank market's been been honed in on by regulators
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  Speaker 1: to try to keep control of what's happening between banks.
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  Speaker 1: But when it comes to whether corporates are borrowing more,
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  Speaker 1: we have seen an unmistakable trend over the past year.
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  Speaker 1: And to get this performance in seen they weren't borrowing less,
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  Speaker 1: and they weren't and they weren't paying more. There was
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  Speaker 1: significant borrowing, there was credit easing, and what we've seen
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  Speaker 1: is not just an absence of deleveraging but going the
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  Speaker 1: other way, particularly in the third quarter. So there's no
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  Speaker 1: deleveraging going on right now. And the third quarter was
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  Speaker 1: actually quite dramatic and how much the Chinese loosened the
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  Speaker 1: floodgates in order to get this performance going into the
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  Speaker 1: Party congress. So not all borrowing is the same. And
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  Speaker 1: one thing that you highlighted, UH in your recent uh
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  Speaker 1: op ed that you published with for Bloomberg View was
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  Speaker 1: that there is also a myth that China is moving
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  Speaker 1: more toward service sectors and away from industrial sectors. Can
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  Speaker 1: you talk about that? Sure? I mean, I don't know
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  Speaker 1: how many times I have to be confronted with this,
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  Speaker 1: these pie charts that the Chinese government puts out showing
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  Speaker 1: services going up and manufacturing going down, and thus we
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  Speaker 1: are rebalancing. But the reality is we tracked these things sectorally,
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  Speaker 1: and what we've seen over the course of and even
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  Speaker 1: the second half of STEEN is a reversal of rebalancing.
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  Speaker 1: So the way they got this performance was by juicing
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  Speaker 1: the old economy sectors. They said they were gonna be
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  Speaker 1: shutting down, that they were going to be cutting jobs
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  Speaker 1: in They didn't do that. So manufacturing going really well,
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  Speaker 1: property has been bloating, commodities has been exploding. UH, Services,
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  Speaker 1: retail they've been doing fine, but it's been fits and starts.
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  Speaker 1: So this is not a new economy lead, UH, a
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  Speaker 1: new economy sector led economy. This has not been something
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  Speaker 1: in which you are shifting to a new age for
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  Speaker 1: Chinese growth. They relied on their old growth measures UH
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  Speaker 1: in order to get their growth, and it's going to
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  Speaker 1: hurt them down the road. So Leland. As part of
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  Speaker 1: the Beije book, you quizzed over three thousand, three hundred
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  Speaker 1: firms across China, both about their particular companies as well
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  Speaker 1: as the larger sit of the economy. Do they have
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  Speaker 1: a more pessimistic view of the overall Chinese economy than
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  Speaker 1: say people internationally that are looking at the good growth numbers? Nodding, Well,
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  Speaker 1: this is going to be the most interesting quarter we've
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  Speaker 1: had in a while, Q one. Maybe even more interesting
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  Speaker 1: than that because for the past year, Chinese firms were
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  Speaker 1: a bulliant, and they were a bulliant because of something
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  Speaker 1: we call the Party Congress. Put they knew the government
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  Speaker 1: would never allow um instability writing up to the Party Congress,
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  Speaker 1: so even though they were dealing with a number of obstacles,
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  Speaker 1: they were very confident going forward that nothing bad would happen.
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  Speaker 1: Now the Party Congress has gone, you're gonna have at
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  Speaker 1: least a quarter in which Si Jinping's team is getting
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  Speaker 1: into place. They're not gonna allow instability there, and then
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  Speaker 1: it becomes very interesting because how is she going to
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  Speaker 1: meet these incredibly high expectations people have from He's gonna
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  Speaker 1: combat pollution, he's gonna combat corruption, he's going to keep
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  Speaker 1: jobs uh stable, he's gonna keep the growth rate stable,
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  Speaker 1: he's gonna be de leverage, he's gonna do rebounce. So
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  Speaker 1: he's supposed to be doing all these things at the
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  Speaker 1: same time as as as he's solidifying the economy. Uh.
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  Speaker 1: People are going to be in for a surprise here.
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  Speaker 1: It's not possible. So he's going to write it on
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  Speaker 1: a unicorn and everybody's going to feel happy. Do you
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  Speaker 1: think that, just real quick, do you think that the
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  Speaker 1: economy could be in for a spectacular downturn in the
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  Speaker 1: near future. I don't think spectacular downturn. I don't think
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  Speaker 1: near future. But we are very worried about not really
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  Speaker 1: from the Chinese domestic side, but from the from the
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  Speaker 1: US China trade tension side. So we think there's a
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  Speaker 1: very high probability that that the calm you've seen in
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  Speaker 1: the relationship for the past year goes away in ten
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  Speaker 1: and you start seeing some very problematic developments in the
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  Speaker 1: relationship and that will have a dramatic effect on not
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  Speaker 1: just the economy, but the currency capital outflows, and we
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  Speaker 1: could be seeing some of the headaches we've been seeing
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  Speaker 1: in past years. Leland Miller, fascinating to speak with you.
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  Speaker 1: Thank you so much for joining us. Leland Miller, President
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  Speaker 1: of China beige Book International based in New York. Really
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  Speaker 1: fascinating insight into China. This week has been all tech
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  Speaker 1: all the time. Not only have we gotten a lot
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  Speaker 1: of tech earnings, but tech executives have been on Capitol
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  Speaker 1: Hill talking with Congress explaining what went wrong heading into
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  Speaker 1: the presidential election that led to so much quote fake
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  Speaker 1: news and advertisements that were not properly disclosed. Here to
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  Speaker 1: discuss a Scott Galloway, Professor of Mark Getting at n
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  Speaker 1: y U Stern School of Business, also the author of
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  Speaker 1: a new book, The Four The Hidden DNA of Amazon, Apple, Facebook,
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  Speaker 1: and Google. Scott, you know you've talked about how Facebook
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  Speaker 1: is a young company that doesn't fully appreciate its role
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  Speaker 1: in media and perhaps the importance of being a media
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  Speaker 1: player in the US. And I'm just wondering, from your perspective,
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  Speaker 1: do you what do you think they could have done well.
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  Speaker 1: The first thing would be to acknowledge they are a
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  Speaker 1: media firm. They still haven't. They still haven't acknowledged, but
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  Speaker 1: do you think they are well? The definit into pure definition,
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  Speaker 1: according to Marion Webster, as a medium that reaches and
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  Speaker 1: influences people as media. So that's the definition. And then
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  Speaker 1: on a business level, you spent a billion dollars on
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  Speaker 1: original content, pay sports leagues to produce original content, and
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  Speaker 1: then run advertising against that content. You boom your a
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  Speaker 1: media company. So you know, crises, the crisis itself doesn't
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  Speaker 1: hurt a firm, it's the response to the crisis. And
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  Speaker 1: when a company refuses to acknowledge that there are media
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  Speaker 1: firms for fear that they might trade at a lower
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  Speaker 1: multiple or that they might expect some sort of expectation
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  Speaker 1: of responsibility that we have on media firms as being
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  Speaker 1: part of the fourth the state, I think it just
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  Speaker 1: makes us angrier and angrier. So I would argue this
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  Speaker 1: is a kind of a fast moving train wreck in
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  Speaker 1: a textbook case study and how not to handle a crisis.
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  Speaker 1: But the first thing is, you know, I am Facebook
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  Speaker 1: and I'm a media company, and they have refused to
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  Speaker 1: do that. It's absolutely ridiculous. How would that change anything
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  Speaker 1: for them? Well, be I don't think it changed anything
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  Speaker 1: for them. It would change things for us, And that
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  Speaker 1: is we could we could legitimately expect them to show
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  Speaker 1: the same type of veracity or some attempt to show
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  Speaker 1: some sort of supervision around this content. Bloomberg is not
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  Speaker 1: going to be weaponized by Russia. I'm fairly certain of that.
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  Speaker 1: How do you really know? But I'm willing. I'm willing
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  Speaker 1: to go a lot of money that because I think
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  Speaker 1: you take your responsibility and your influence and your role
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  Speaker 1: in the fourth the state very seriously, go on, go on, nokidding,
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  Speaker 1: you know, I just it's up a little bit about
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  Speaker 1: what you mentioned with Facebook and the idea that they
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  Speaker 1: could be potentially worried that their multiples would go down.
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  Speaker 1: Why does being a media company automatically sort of suggest
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  Speaker 1: that you're going to make less money, even though that's
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  Speaker 1: how we all view it. Yeah, So my guesses you
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  Speaker 1: guys are going to forget more about that than I know.
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  Speaker 1: Just crudely speaking, certain sectors traded higher multiples. People like
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  Speaker 1: technology stocks, they like software companies. So you want to
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  Speaker 1: be a technology firm, You don't want to be a
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  Speaker 1: media company puts you in a different, multiple category, So
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  Speaker 1: I guess that going forward, my first question is a
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  Speaker 1: lot of people are looking at Facebook more as a
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  Speaker 1: media company. Do you expect, uh that people's valuation of
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  Speaker 1: the company will go down as well even though it
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  Speaker 1: is reporting good earnings. I don't think so. My sense
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  Speaker 1: is that we're sort of beyond trying to figure out
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  Speaker 1: what it is. I think that them identifying themselves as
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  Speaker 1: a media company is more around setting the expectations of
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  Speaker 1: what of what they should be held responsible for or
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  Speaker 1: not use. Me. Having said that, what where you might
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  Speaker 1: see a decline in the stock if we're writing for
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  Speaker 1: consumers to step in here, it's not going to happen.
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  Speaker 1: These companies are going to continue to, in my opinion,
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  Speaker 1: grow their earnings and have incredibly robust businesses because consumers.
• 10:14
  Speaker 1: We'll talk a big game about privacy and weaponization and
• 10:16
  Speaker 1: the supply chain ethics of a dress out of somebody
• 10:20
  Speaker 1: coming out of Bangladesh, and then they want to they
• 10:22
  Speaker 1: want that little black dress delivered to them within forty
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  Speaker 1: five minutes. So consumers talk of big game about the stuff,
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  Speaker 1: but they don't vote with their pocketbooks generally speaking. So
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  Speaker 1: you're seeing this guy, I think you're going to see
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  Speaker 1: these companies perform as well or better than they ever have.
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  Speaker 1: What you might see is the risk of regulation might
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  Speaker 1: result in a lower multiple placed on those profits. But
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  Speaker 1: I don't see the profits going down. You know, I
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  Speaker 1: want to push back because Facebook is actually trying to
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  Speaker 1: vet some of their content more and they have been
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  Speaker 1: employing more people to do this. It's messy, it's imprecise.
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  Speaker 1: At what point is this, you know, going against the
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  Speaker 1: First Amendment and violating people's right to say what they
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  Speaker 1: want to say, because this ultimately wasn't just about paid advertising,
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  Speaker 1: It was about what people were posting on their personal sites.
• 11:02
  Speaker 1: Well complicated and expensive. That sounds like a decent description
• 11:05
  Speaker 1: of democracy. And they used the defense and quite frankly,
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  Speaker 1: I think you've been co opted into their narrative that
• 11:11
  Speaker 1: that they can shouldn't be an arbiter of truth. Well,
• 11:13
  Speaker 1: they're sure as hell can try. You try every day
• 11:15
  Speaker 1: to be an arbiter of truth. You try every day
• 11:17
  Speaker 1: to employ this fantastic and expensive thing called human discretion
• 11:21
  Speaker 1: around your advertisers and your content. Why shouldn't they be
• 11:23
  Speaker 1: held at the same standards as you do? You have
• 11:26
  Speaker 1: evidence that they absolutely do not have discretion over their advertisers. Yeah,
• 11:33
  Speaker 1: an intelligence unit of the Russian government paid in rubles
• 11:35
  Speaker 1: to so caught chaos in our nation. I think that's
• 11:38
  Speaker 1: pretty decent proved. But a lot of it wasn't that
• 11:40
  Speaker 1: much money, right, I mean it could have just been
• 11:41
  Speaker 1: one employee that was not author I mean, how far
• 11:44
  Speaker 1: up does this go? Well? Okay, when when the notion
• 11:48
  Speaker 1: was first proposed, they said it was crazy. Then it
• 11:52
  Speaker 1: ended up wait, a few million impressions, and now we've
• 11:55
  Speaker 1: learned that it's a hundred and twenty seven million people
• 11:57
  Speaker 1: sell you that? But how much would they have to
• 11:59
  Speaker 1: pay for that? I don't know. I don't know what
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  Speaker 1: the business model is around that. You know, because there
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  Speaker 1: are a lot of people. There are a lot of
• 12:04
  Speaker 1: eyeballs on Facebook just generally, um, and advertisements could be
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  Speaker 1: passed around you. Just what I'm trying to get to is,
• 12:11
  Speaker 1: you know, yes, big decisions are you know, a big
• 12:14
  Speaker 1: like conglomerate. It's like CBS for example, it matters whether
• 12:18
  Speaker 1: the spots for the Super Bowl or whether it's for
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  Speaker 1: a rerun of Law and Order. Right, So the data
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  Speaker 1: I'm focused on is that a hundred seven million people
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  Speaker 1: saw these apps, so that's quite a bit. And in
• 12:30
  Speaker 1: my opinion, I'm fairly certain that the New York Times
• 12:34
  Speaker 1: and CBS in Bloomberg are going to be able to
• 12:36
  Speaker 1: protect our elections from subterfuge. The New York Times will
• 12:40
  Speaker 1: do with a hundred million of free cash flow. How
• 12:42
  Speaker 1: come Facebook camp with twelve billion? There you go, Scott Galloway,
• 12:46
  Speaker 1: thank you so much for joining U. Scott Galloway, Professor
• 12:48
  Speaker 1: of Marketing at n y U Stern School of Business,
• 12:51
  Speaker 1: also the author of a new book, The Four The
• 12:54
  Speaker 1: Hidden DNA of Amazon, Apple, Facebook, and Google, which goes biblical.
• 12:58
  Speaker 1: This is Bloomberg, and as we've been saying today, we
• 13:13
  Speaker 1: are broadcasting live from the rid Holts Wealth Management second
• 13:17
  Speaker 1: annual Evidence Based Investing Conference in New York City. And
• 13:22
  Speaker 1: who do I have with me none other than Barry
• 13:24
  Speaker 1: rid Holts himself. He is the founder of it Holds
• 13:27
  Speaker 1: Wealth Management and a Bloomberg View columnist. And he also
• 13:30
  Speaker 1: has a fantastic podcast, Masters in Finance. I highly recommended it.
• 13:34
  Speaker 1: It's airs on Believe ten am and six pm on Saturday,
• 13:39
  Speaker 1: repeats all weekend Masters in Business. You can find it
• 13:42
  Speaker 1: wherever finer podcasts are sold all right, So, Barry, evidence
• 13:45
  Speaker 1: based investing, I mean, isn't all investing based on evidence?
• 13:50
  Speaker 1: You would imagine that, wouldn't you. When when we were
• 13:54
  Speaker 1: slowing around with the idea of doing this, every person
• 13:58
  Speaker 1: we presented the idea too said the exact same thing.
• 14:01
  Speaker 1: Isn't all investing based on evidence? And as it turns out,
• 14:06
  Speaker 1: not so much. Well, but what do you mean by that? Well,
• 14:09
  Speaker 1: there's lots of myths, there's lots of theories, there's lots
• 14:12
  Speaker 1: of behaviors, and behavioral economics is a big part of
• 14:15
  Speaker 1: evidence based investing. So let's assume you want to put
• 14:20
  Speaker 1: a portfolio together. How are you going to construct that portfolio?
• 14:24
  Speaker 1: One of the first questions is should you use an index,
• 14:27
  Speaker 1: should you use smart beta? Should you pick stocks yourself?
• 14:31
  Speaker 1: And when you look at the data, one of the
• 14:33
  Speaker 1: things you find is stock picking is really really hard.
• 14:38
  Speaker 1: Picking a manager who can pick stocks is even harder,
• 14:42
  Speaker 1: and then picking a manager who could pick stocks consistently
• 14:45
  Speaker 1: over time net of costs and fees is almost impossible.
• 14:49
  Speaker 1: It's absolutely a needle in a haystack. So that sort
• 14:53
  Speaker 1: of data that's out there forces you to say, what
• 14:57
  Speaker 1: am I doing, does one does what I'm doing makes
• 14:59
  Speaker 1: sense them a probabilistic standpoint, where am I really throwing
• 15:04
  Speaker 1: a hall marry here with a very low chance of success?
• 15:07
  Speaker 1: What does the evidence suggest? So if what you're saying
• 15:10
  Speaker 1: is the case, then why shouldn't everybody just go to indexing? Well,
• 15:14
  Speaker 1: we've seen a lot of people move in general towards indexing.
• 15:18
  Speaker 1: It's not a coincidence that um Tim Buckley, the incoming
• 15:22
  Speaker 1: CEO of Van Guard is gonna be speaking here next
• 15:24
  Speaker 1: and Vanguard has swollen up from a trillion dollars around
• 15:31
  Speaker 1: the time of the financial crisis, they're now over four
• 15:34
  Speaker 1: point four trillion dollars. So we look at indexing as
• 15:39
  Speaker 1: a core part of people's portfolio. It doesn't have to
• 15:42
  Speaker 1: be straight up market cap weighted indexing. There's arguments for
• 15:46
  Speaker 1: things like factor models. We just heard Cliff Assness of
• 15:49
  Speaker 1: a qu R describe ways to put together portfolios using
• 15:54
  Speaker 1: quantitative data that shows we know things that like valuation.
• 15:59
  Speaker 1: Lower cost stocks tend to do better over time than
• 16:02
  Speaker 1: more expensive stocks. We looked at we discussed the five
• 16:06
  Speaker 1: factor of Fama French model. If we want to really
• 16:09
  Speaker 1: get into the weeds, we could look at things like
• 16:11
  Speaker 1: what does that mean? So you just I think, spoke French.
• 16:13
  Speaker 1: So Eugene Fama just won the Nobel Prize last year.
• 16:17
  Speaker 1: He's a professor at at University of Chicago. His colleague
• 16:21
  Speaker 1: Can French as a professor at the Dartmouth Um College.
• 16:25
  Speaker 1: And they've crunched numbers for decades looking at what characteristics
• 16:32
  Speaker 1: of companies do better over time and just some of
• 16:36
  Speaker 1: the factors that we know. We know higher quality stocks
• 16:40
  Speaker 1: defined by low levels of dead and there's a whole
• 16:43
  Speaker 1: run of things that defines what's high quality versus low quality.
• 16:47
  Speaker 1: Not surprisingly, they tend to do better over time then
• 16:49
  Speaker 1: low quality stocks. The some of the surprising anomalies they've
• 16:54
  Speaker 1: discovered has been things like small cap small cap tends
• 16:59
  Speaker 1: over time I am and not one or two or
• 17:01
  Speaker 1: three years, but decades that tends to do better than
• 17:05
  Speaker 1: large cap. Some people actually Cliff talked about is the
• 17:10
  Speaker 1: small cap premium? Is it a liquidity premium? You know
• 17:15
  Speaker 1: big stocks trade very easily. Uh, Is it a risk premium?
• 17:18
  Speaker 1: Are you taking on more risk? We've also another factor
• 17:22
  Speaker 1: that actually Cliff Fastness created was momentum. Is momentum a
• 17:27
  Speaker 1: factor that helps people invest and and it turns out
• 17:30
  Speaker 1: that all these things contribute to better performance. So how
• 17:34
  Speaker 1: do these quantitative strategies deal with something like the tax
• 17:37
  Speaker 1: bell that we're just hearing about. Moody's just put out
• 17:40
  Speaker 1: a in a note that said that the credit implications
• 17:42
  Speaker 1: for investment grade companies was positive, whereas for speculative grade companies, UH,
• 17:47
  Speaker 1: not so much because they couldn't deduct the interest as
• 17:50
  Speaker 1: much going forward, and that would outweigh some of the benefits.
• 17:53
  Speaker 1: How would quantitative investing kind of address something like that?
• 17:56
  Speaker 1: So quality, as an example, if you're looking at a
• 17:59
  Speaker 1: qual ulity screen for companies that have less debt, this
• 18:03
  Speaker 1: isn't going to affect them. On the other hand, lower
• 18:07
  Speaker 1: quality companies, UH might be more negatively impacted by these
• 18:11
  Speaker 1: changes and deductibility. So we still, by the way, we
• 18:14
  Speaker 1: still don't know what the final tax bill looks like.
• 18:17
  Speaker 1: This is what was introduced. What do you think is
• 18:19
  Speaker 1: gonna happen with it? I think there's gonna be a
• 18:20
  Speaker 1: lot of horse trading where where whoever created the bill
• 18:24
  Speaker 1: created a bunch of anchor points corporate tax rates where
• 18:28
  Speaker 1: they're starting. That suggests to me, all right, if we
• 18:30
  Speaker 1: have to go to will go to percent repatriation rate,
• 18:34
  Speaker 1: which I which seems actually quite high to me. Well,
• 18:37
  Speaker 1: I had originally suggested nobody listens to me about this
• 18:40
  Speaker 1: first step, but I suggested it graduated. The first billion
• 18:45
  Speaker 1: is five percent, and the next two billion is this.
• 18:48
  Speaker 1: But listen, if you want to bring that, that's the carrot,
• 18:52
  Speaker 1: isn't Is there a stick also on the tax bill?
• 18:54
  Speaker 1: It's and if you don't bring it in, you're gonna
• 18:56
  Speaker 1: get wack. I haven't heard that, and that's that they
• 18:59
  Speaker 1: don't otherwise, I mean, they already bringing it back through
• 19:01
  Speaker 1: the corporate bond market. I'm not sure it would incentivize
• 19:03
  Speaker 1: them to do this. You know, if you want to
• 19:06
  Speaker 1: move some cash from overseas and bring it home to
• 19:09
  Speaker 1: do so. It seems weird that Apple, which has more
• 19:11
  Speaker 1: cash on its books than you know, than India has GDP.
• 19:17
  Speaker 1: Why are they borrowing money to buy back stocks. It's well,
• 19:21
  Speaker 1: it's that's how they're bringing the cash back because they're
• 19:23
  Speaker 1: paying less of an interest rate. Very Unfortunately, we have
• 19:26
  Speaker 1: to leave it there, but we'll have to continue this conversation.
• 19:28
  Speaker 1: Barry rid Holds, founder of rit Holt's Wealth Management and
• 19:30
  Speaker 1: Bloomberg columnists, also he is running this conference today the
• 19:34
  Speaker 1: rit Holt's Wealth Management second Annual Evidence Based Investing. This
• 19:38
  Speaker 1: is Bloomberg. Thank you so much, Greg. So, we are
• 19:53
  Speaker 1: awaiting Republican leaders to unveil their tax reform bill, which
• 19:57
  Speaker 1: is expected any minute, and care to tell us a
• 19:59
  Speaker 1: little bit about what we're expecting to be in that
• 20:01
  Speaker 1: tax legislation is Laura Davison, Bloomberg Tax Reporters. So, Laura,
• 20:06
  Speaker 1: I do know that they released some talking points earlier
• 20:08
  Speaker 1: today from those and other insights, What are we gleaning
• 20:12
  Speaker 1: about what's in this bill? Well, we're cleaning that this
• 20:15
  Speaker 1: six too much of what House Republicans have talked about.
• 20:17
  Speaker 1: You know, the big tax cuts down to a corporate
• 20:19
  Speaker 1: rate that's expected to be permanent, um, you know, passed
• 20:23
  Speaker 1: through the small businesses are getting a rate, so that
• 20:26
  Speaker 1: does carve out, uh, you know some what they're calling
• 20:29
  Speaker 1: professional services firms that could be investment managers or doctors,
• 20:32
  Speaker 1: lawyer's accountants, that sort of thing. On the individual side,
• 20:35
  Speaker 1: a new child tax creditors, three dollars doubling of the
• 20:38
  Speaker 1: standard deduction. H A lot of those headlines things that
• 20:41
  Speaker 1: they were going for are in there. The question now
• 20:43
  Speaker 1: and what what we're really passing through is what sort
• 20:46
  Speaker 1: of deductions and credits are taken away. You know, on
• 20:49
  Speaker 1: the international side, there's a lot of concerns from some
• 20:52
  Speaker 1: multinational corporations about how they're going to be taxing um
• 20:55
  Speaker 1: profits that you're bringing back on shore profits you might
• 20:57
  Speaker 1: be sending overseas. Uh. And this is always really tricky
• 21:00
  Speaker 1: and gets really drawn into the details and could could
• 21:03
  Speaker 1: cause problems for the bill moving forward. Well, one thing
• 21:06
  Speaker 1: that we were just talking with Carla Kadana about was
• 21:08
  Speaker 1: the mortgage deduction. We found out that, uh that they
• 21:12
  Speaker 1: will keep the deduction for loans that are under five
• 21:16
  Speaker 1: hundred thousand dollars, but for over that, uh, those will
• 21:20
  Speaker 1: be removed. Is that accurate? Yes, that's correct, that's there.
• 21:23
  Speaker 1: So they're basically moving that it used to be a
• 21:25
  Speaker 1: million dollars down to five hundred thousands, so basically cutting
• 21:27
  Speaker 1: that in half. And the reason is is because it
• 21:29
  Speaker 1: raises a lot of money that they can use to
• 21:31
  Speaker 1: put towards tax cuts. Mortgage interests is a very popular one.
• 21:34
  Speaker 1: It's often called like the sacred cows of of the
• 21:37
  Speaker 1: tax code. But it looks like they did a little
• 21:39
  Speaker 1: bit of a goring of that cow is there going
• 21:41
  Speaker 1: to be a lot of pushback on that front, you know,
• 21:44
  Speaker 1: home builders and UM when realtors UM are already skeptical
• 21:48
  Speaker 1: about this bill, so they may not have lost anyone
• 21:50
  Speaker 1: that they didn't have already. Uh, members are really gonna
• 21:53
  Speaker 1: have to go through and look at this and say, Okay,
• 21:55
  Speaker 1: in my district, in my state, what how would this
• 21:58
  Speaker 1: affect the home values and the people and what they're earning.
• 22:01
  Speaker 1: And that will really be the sign and we schooill
• 22:04
  Speaker 1: start seeing in the next couple of days that people
• 22:05
  Speaker 1: run those numbers of can they get behind this or not?
• 22:08
  Speaker 1: So Laura, what about the local and state tax deductions?
• 22:11
  Speaker 1: There are some talk about removing those. What does a
• 22:14
  Speaker 1: lot of what does the final bill look like? So UM,
• 22:17
  Speaker 1: I would say becaus where they landed, but I'm not
• 22:19
  Speaker 1: going to say that it's final. So they basically have
• 22:21
  Speaker 1: a ten tho dollar cap for property taxes only, so
• 22:24
  Speaker 1: you can't deduct your state or local income taxes or
• 22:27
  Speaker 1: sales taxes, but you can take up to a ten
• 22:29
  Speaker 1: thousand dollar deduction for property taxes. So that's very good
• 22:32
  Speaker 1: for New York, New Jersey where property taxes are really high.
• 22:36
  Speaker 1: The problem is, though lawmakers, especially Republicans from that state,
• 22:39
  Speaker 1: are saying, look, that isn't good enough, and they're reserving
• 22:41
  Speaker 1: judgment on whether they're going to vote for the still
• 22:43
  Speaker 1: or not again, you know, running the numbers, see how
• 22:45
  Speaker 1: it works out with UH, with some of the other
• 22:47
  Speaker 1: tax cuts there. But that's still a problem that has
• 22:50
  Speaker 1: sort of been plaguing Republicans for several weeks now. They
• 22:52
  Speaker 1: haven't been able to come to an agreement and they
• 22:54
  Speaker 1: still don't have everyone on board. So how simple is this?
• 22:57
  Speaker 1: Is this truly a simplification where we can and write,
• 23:00
  Speaker 1: are right file our taxes on a postcard? Well, so
• 23:04
  Speaker 1: it's sort of a mixed bag for for individuals. There
• 23:07
  Speaker 1: are some simplification measures, you know. The big thing there
• 23:10
  Speaker 1: is standards doubling the standard deduction so fewer people will itemize.
• 23:14
  Speaker 1: You'll have fewer forms. I don't know that it will
• 23:16
  Speaker 1: be a postcard, but it might be just be a
• 23:17
  Speaker 1: couple of pages. Uh. Though. Really on the business side,
• 23:20
  Speaker 1: that's where you see some complexity kick in of when
• 23:23
  Speaker 1: you add special benefits or things that people like, you
• 23:25
  Speaker 1: have to come up with rules to prevent companies from
• 23:28
  Speaker 1: from abusing those are coming up with a way to
• 23:30
  Speaker 1: to take extra advantage of those rules. All right, So, Laura,
• 23:33
  Speaker 1: this bill was crafted with incredible secrecy. A lot of
• 23:37
  Speaker 1: people in Congress did not see it before it was
• 23:41
  Speaker 1: unveiled or it will be unfailed formally, uh, within the
• 23:44
  Speaker 1: next few minutes. Do you have any sense of just
• 23:47
  Speaker 1: how much of a consensus GOP members have on this
• 23:51
  Speaker 1: bill right now? Well, Republican leadership would definitely say that
• 23:55
  Speaker 1: they've been having hearings and listening to members and and
• 23:57
  Speaker 1: doing the consensus building. So there was definitely some frustration
• 24:00
  Speaker 1: for members even on the Ways and Needs Committee yesterday saying, look,
• 24:03
  Speaker 1: we don't know what's going on. We don't know what's
• 24:04
  Speaker 1: in this bill, and it's you know, twenty four hours
• 24:07
  Speaker 1: we're less than that before we're set to to release it. Uh.
• 24:10
  Speaker 1: And and that's that's what happened with healthcare, remember, right,
• 24:13
  Speaker 1: it was crafted behind closed doors, and people saw it
• 24:14
  Speaker 1: and their constituents and said, look, we can't vote for this.
• 24:17
  Speaker 1: This doesn't take into the accounts of the needs to
• 24:19
  Speaker 1: be American people, and especially when you're on a really
• 24:22
  Speaker 1: compressed timeline like they are. They want to pass this
• 24:24
  Speaker 1: out of the House and the Senate by Thanksgiving, which
• 24:26
  Speaker 1: is you know, just a matter of days really at
• 24:27
  Speaker 1: this point. Um, that's really hard to get everyone on
• 24:30
  Speaker 1: board in such a short time frame, you know, Laura,
• 24:33
  Speaker 1: just some interesting market action Testlas shares extended their declines
• 24:36
  Speaker 1: after UH. The US tax bill was introduced today. The
• 24:41
  Speaker 1: idea here is that it would repeal credits given to
• 24:45
  Speaker 1: electric vehicle buyers. Can you tell us more about that
• 24:49
  Speaker 1: in any other sort of tax deductions that would be
• 24:51
  Speaker 1: repealed that would go towards more sustainable industries? So there
• 24:55
  Speaker 1: I I don't know about the electric vehicle. That's one
• 24:57
  Speaker 1: of those details that that lawmakers didn't know as they
• 24:59
  Speaker 1: were coming out the room. But we'll be in that
• 25:01
  Speaker 1: bill text either one way or the other. Uh. Nuclear, Uh,
• 25:04
  Speaker 1: there's an extension of the production tax credit for nuclear energy.
• 25:07
  Speaker 1: So that's very good down in Georgia and so after
• 25:09
  Speaker 1: aline on southern Corpse stan Us, they've had some projects
• 25:11
  Speaker 1: that have been sort of meleeyed by by sort of
• 25:14
  Speaker 1: uncertainty there. Um. There's also some other extensions for for
• 25:18
  Speaker 1: for some wind and solar provisions to UH that that
• 25:21
  Speaker 1: helps with uncertainty because there were has been UH, some
• 25:24
  Speaker 1: friction among members of Congress. Republicans typically don't like these
• 25:27
  Speaker 1: Democrats want to be them extended, but of course Republicans
• 25:29
  Speaker 1: are in power. Can you walk us through the process
• 25:31
  Speaker 1: of what will happen to turn this legislation into law?
• 25:36
  Speaker 1: So starting next week, they'll have what they call a
• 25:39
  Speaker 1: mark up in the House, which is basically the Ways
• 25:40
  Speaker 1: and Means Committee sitting down adding amendments, uh and basically
• 25:43
  Speaker 1: going through this bill step by step. That's expected to
• 25:46
  Speaker 1: be over, you know, next Friday. Uh. Then they'll take
• 25:49
  Speaker 1: it to the floor for a House vote, and they're
• 25:51
  Speaker 1: they're hoping to get that done the following week. Simultaneously,
• 25:53
  Speaker 1: in the Senate, they're looking to introduce a bill as
• 25:56
  Speaker 1: soon as next week and do that same markup process
• 25:58
  Speaker 1: and take the bills to the floor. The timely they
• 26:00
  Speaker 1: lad out to get it done by Thanksgiving is highly
• 26:03
  Speaker 1: uh ambitious. You could say even getting it done by
• 26:05
  Speaker 1: the end of the year would be a would be
• 26:07
  Speaker 1: a stretch, but it's technically possible. And how many votes
• 26:10
  Speaker 1: do they need? I mean, is it just a simple
• 26:12
  Speaker 1: majority in each in the House and the Senate and
• 26:14
  Speaker 1: that would pass or is it something else? Correct? Yeah,
• 26:17
  Speaker 1: simple majority House and Senate. Um the House, that's much
• 26:20
  Speaker 1: easier because they have a Republicans have a much larger margin.
• 26:23
  Speaker 1: Over in the Senate is trickier. They only have fifty
• 26:25
  Speaker 1: two Republicans. Uh, so you can lose two of them
• 26:28
  Speaker 1: and then Mike Pence can come in and be the tidebreaker. Uh,
• 26:31
  Speaker 1: that's very complicated. Has there been any commentary from the
• 26:35
  Speaker 1: GOP members. Is there a sense that there is consensus
• 26:38
  Speaker 1: on this at this point? And also are there any
• 26:40
  Speaker 1: Democrats who are willing to get on board? No Democrats
• 26:43
  Speaker 1: yet saying they're they're on board, especially we're in the
• 26:45
  Speaker 1: Senate side. President Trump has been reaching out to two
• 26:48
  Speaker 1: members who are in states where he wants to height
• 26:51
  Speaker 1: Camp of North Dakota Joe Donnelly of Indiana. Uh. Those
• 26:54
  Speaker 1: sorts of members um consensus. Uh. How they definitely got
• 26:58
  Speaker 1: a larger coalition and really feeling the political pressure because
• 27:01
  Speaker 1: they're all up for re election next year to get
• 27:03
  Speaker 1: something done, anything done. And sometimes when there's pressure like that,
• 27:06
  Speaker 1: the details don't matter as much. Over in the Senate,
• 27:09
  Speaker 1: there's less pressure there on a six year cycle, UM
• 27:11
  Speaker 1: and and members just typically move a little bit slower
• 27:14
  Speaker 1: and and are the dynamics are very much different from
• 27:17
  Speaker 1: the House. Uh So why there could be consents in
• 27:19
  Speaker 1: the House Senate is a different story. I just want
• 27:22
  Speaker 1: to let you know we are awaiting Republican leaders who
• 27:25
  Speaker 1: are planning to unveil their tax reform bill. House Speaker
• 27:29
  Speaker 1: Paul Ryan just walked out and shaking hands, and we
• 27:31
  Speaker 1: will bring that to you live. Laura. This is fascinating
• 27:35
  Speaker 1: and I have to wonder from your perspective, can you
• 27:38
  Speaker 1: put these tax this tax proposal into historical context. When
• 27:43
  Speaker 1: was the last time that we saw this big of
• 27:45
  Speaker 1: a change to the way that we pay taxes? So
• 27:47
  Speaker 1: the bill that we we we're seeing today, it's about
• 27:50
  Speaker 1: thirty years since we've seen changes like this with this
• 27:52
  Speaker 1: was President Ronald Reagan where they really went through and
• 27:56
  Speaker 1: and totally read redid the tax code. It's possible that
• 27:59
  Speaker 1: what we today get saled back just because of you know,
• 28:02
  Speaker 1: tight deadlines or unable to build consensus, and perhaps we
• 28:06
  Speaker 1: see something more like what we saw, Laura. I'm sorry
• 28:08
  Speaker 1: to cut you up. Paul Ryan did just start to speak,
• 28:11
  Speaker 1: so Laurie's will leave it there. Thanks for listening to
• 28:16
  Speaker 1: the Bloomberg, P and L Podcast. You can subscribe and
• 28:19
  Speaker 1: listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast
• 28:23
  Speaker 1: platform you prefer. I'm pim Fox. I'm on Twitter at
• 28:27
  Speaker 1: pim Fox. I'm on Twitter at Lisa Abramo. It's one
• 28:30
  Speaker 1: before the podcast. You can always catch us worldwide on
• 28:33
  Speaker 1: Bloomberg Radio