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The 'Sidelining' of the U.S. State Department · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim
• 0:08
  Speaker 1: Fox along with my co host Lisa Abramowitz. Each day
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  Speaker 1: we bring you the most important, noteworthy, and useful interviews
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• 0:32
  Speaker 1: And now we want to turn to our nation's capital
• 0:34
  Speaker 1: and Nick Wadhams to get a little bit of a
• 0:37
  Speaker 1: perspective on what is happening today. I know that we
• 0:40
  Speaker 1: are awaiting joint statements by President Donald Trump and the
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  Speaker 1: South Korean President Moon j In that is scheduled to
• 0:47
  Speaker 1: come up I guess in about ten or fifteen minutes,
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  Speaker 1: and we will of course carry that. It'll be a
• 0:51
  Speaker 1: joint press conference and statement at the Rose Garden. Nick,
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  Speaker 1: what's the most important thing that you believe this this
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  Speaker 1: meeting between the President and the South Korean president is
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  Speaker 1: going to yield. Well, there are two big issues here.
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  Speaker 1: One on the political front is the issue of North
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  Speaker 1: Korea and how to deal with uh it's continued ambitions
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  Speaker 1: to develop nuclear weapons in a ballistic missile program. So
• 1:14
  Speaker 1: the South Korean president President Moon is new he has
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  Speaker 1: sought to take a sort of more moderate approach to
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  Speaker 1: North Korea, possibly including negotiations. President Trump, meanwhile, is saying
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  Speaker 1: that is not what he wants to do. He wants
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  Speaker 1: more pressure, specifically economic pressure on North Korea to try
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  Speaker 1: to bend North Korea to the U. S will. So
• 1:36
  Speaker 1: how they resolve that is going to be a big
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  Speaker 1: But didn't they just slap sanctions on the Chinese bank
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  Speaker 1: that reportedly is laundering money for North Korea? That's right,
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  Speaker 1: I mean, so this is another what you see the
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  Speaker 1: new ways in which the the administration is trying to
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  Speaker 1: exert pressure. They really see China as the key to
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  Speaker 1: North Korea because trade with China constitute so much of
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  Speaker 1: the North Korean economy. So the idea is, okay, we're
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  Speaker 1: going to go after these Chinese banks basically to bring
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  Speaker 1: China into line and to try to get its help
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  Speaker 1: and more cooperation and really putting the squeeze on North Korea.
• 2:14
  Speaker 1: Nick uh the South Korean president who's beating with President Trump.
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  Speaker 1: Moon j n is new It is a month into
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  Speaker 1: his tenure as president. How does his outlook on the
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  Speaker 1: US differ from his predecessors, and how does this change
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  Speaker 1: the dynamic with respect to North Korea. Well, I mean,
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  Speaker 1: we're we're really going to see how this plays out.
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  Speaker 1: But I mean, the big one is that he does
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  Speaker 1: favor of sort of more contact with North Korea rather
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  Speaker 1: than the previous government's UH view, which is more in
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  Speaker 1: line with the US. The other is he's sort of
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  Speaker 1: ambivalent about this missile defense system that the US has
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  Speaker 1: put into South Korea UH to protect against missile launches
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  Speaker 1: from the North. So, so the South Korean president has
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  Speaker 1: has expressed US some concern about that. They've they wanted
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  Speaker 1: to limit UM basically because as as part of this
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  Speaker 1: is something that both China and North Korea really really opposed.
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  Speaker 1: They say this is a could start a new weapons
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  Speaker 1: race in the region, and and it just sort of
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  Speaker 1: inflames tensions. And so as he seeks sort of closer
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  Speaker 1: or better relations with China UM and then also to
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  Speaker 1: improve ties with North Korea, he says, let's go a
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  Speaker 1: little bit slower on this. We don't want to go
• 3:27
  Speaker 1: quite as quickly as the US has has sought. Well,
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  Speaker 1: the United States has what nearly thirty thousand American soldiers, sailors,
• 3:34
  Speaker 1: and airmen and marines in South Korea. Yeah, I mean
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  Speaker 1: this is this is a hugely important base for the US.
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  Speaker 1: The US troops are all along the North Korean border,
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  Speaker 1: and this is really a big issue for how the
• 3:47
  Speaker 1: US proceeds and something that constrains US options because North
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  Speaker 1: Korea has made clear that the U s if the
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  Speaker 1: US does anything like remotely belligerent, like a military strike. Uh.
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  Speaker 1: You know, North Korea has hundreds of on hundreds of
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  Speaker 1: artillery pieces lined up across the border. Soul is thirty
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  Speaker 1: miles away. You know, a single artillery barrage could literally
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  Speaker 1: kill tens of thousands of people, including US troops. So
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  Speaker 1: that's weighing heavily in President Trump's deliberations on this. South
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  Speaker 1: Korea President munja and began his visit to the US
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  Speaker 1: with the announcement of a number of trade deals with
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  Speaker 1: the US, agreed by more Shale agreeing to invest more
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  Speaker 1: in companies here in the US. How many of these
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  Speaker 1: moves are new and how many of them are sort
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  Speaker 1: of building on established programs that South Korea already had.
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  Speaker 1: I mean this there's a mixture. The US and South
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  Speaker 1: Korea have been working on a bilateral investment Tree for
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  Speaker 1: some time, so that that has been a huge issue.
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  Speaker 1: You know. One challenge, of course, is that President Trump
• 4:49
  Speaker 1: has made US trade deficit an important part of his administration,
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  Speaker 1: and UH really believes that predatory practices towards the US
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  Speaker 1: will not band. So he's he's basically saying that, you know,
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  Speaker 1: the US has suffered trade deficits for for many decades
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  Speaker 1: and this is a top priority. UH. And the US
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  Speaker 1: does have a trade deficit with with South Korea that
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  Speaker 1: it wants to fix. So UM, I mean, we're just
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  Speaker 1: getting sort of early commentary out of his his meeting
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  Speaker 1: with the South Korean president from the Oval Office, but
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  Speaker 1: certainly this is going to weigh on on the deliberations
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  Speaker 1: between the two leaders. President Trump's concerns over the U
• 5:26
  Speaker 1: S trade deficit. Nick. Yesterday, President Donald Trump was at
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  Speaker 1: the Department of Energy seeking about the renaissance of American
• 5:34
  Speaker 1: energy production. One aspect is natural gas. South Korea, I believe,
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  Speaker 1: has already said that they would like to import US
• 5:42
  Speaker 1: natural gas. Is that correct? That's that's right. I mean,
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  Speaker 1: this is really something that the administration has pushed UM
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  Speaker 1: and the State Department actually a couple of weeks ago
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  Speaker 1: made a big announcement about the first shipment of US
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  Speaker 1: l en G to Poland, um and, and this is
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  Speaker 1: something that the administration really sees us sort of the
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  Speaker 1: way forward, not only ensuring US energy security, but seeking
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  Speaker 1: uh you know, for the US to profit off of
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  Speaker 1: exports of energy. So uh this fits into a broader
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  Speaker 1: constellation where the US is seeking to export allergy uh
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  Speaker 1: in Asia, Europe and around the world. Nick not to
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  Speaker 1: get off script here, but I'm just wondering how much
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  Speaker 1: clout does President Trump holed with foreign leaders right now?
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  Speaker 1: He is not a popular president. He's you know, dealing
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  Speaker 1: with so much intrigue and drama, you know. And I
• 6:29
  Speaker 1: don't know how much of it is just you know,
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  Speaker 1: fit for tabloids and how much of it is actually
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  Speaker 1: uh substantive for foreign leaders. But does this matter? I
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  Speaker 1: think it does matter. And this is a big issue
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  Speaker 1: that we've all been trying to answer over the last
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  Speaker 1: several months, particularly because they are often contradictions between what
• 6:45
  Speaker 1: President Trump says and what his cabinet says. So you
• 6:47
  Speaker 1: have Secretary of State rextilis and saying one thing on
• 6:50
  Speaker 1: China and South Korea. You have President Trump often taking
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  Speaker 1: a much harder line. So officials really don't know where
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  Speaker 1: to come down. I mean, in the end, though he
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  Speaker 1: is the president of the United States, you know, the
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  Speaker 1: most powerful nation in the world, and so what we're
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  Speaker 1: seeing generally is that what leaders want to believe and
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  Speaker 1: speak within listen to. The cabinet secretaries therefore, is sort
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  Speaker 1: of forced to take President Trump seriously regardless of what
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  Speaker 1: he tweets or he says that the tweets I would
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  Speaker 1: say they understand are more toward a domestic audience, his base.
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  Speaker 1: But there is a lot of concern and confusion about
• 7:25
  Speaker 1: those contradictory messages between President Trump and his top cabinet officials. Well,
• 7:30
  Speaker 1: you're talking about cabinet officials. I want you to just
• 7:32
  Speaker 1: give us some thoughts about the Secretary of State Rex Tillerson,
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  Speaker 1: because you know, there's that ongoing internal review of the
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  Speaker 1: State Department and what the estimate is that it could
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  Speaker 1: face a thirty percent budget cut and an elimination of
• 7:44
  Speaker 1: twenty jobs. Is that going to happen? Well, I mean,
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  Speaker 1: this is certainly where the Secretary of State wants to go. However,
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  Speaker 1: the biggest opposition he faces will be from Congress and
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  Speaker 1: the fact that Congress does not want a big cut
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  Speaker 1: like this thirty percent. I mean when when Secretary Towers
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  Speaker 1: and went to the Hill a couple of weeks ago
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  Speaker 1: to defend the proposed budget cuts, the head of the
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  Speaker 1: Senate Foreign Relations Committee Tennessee Center above, Quirker basically just said, listen,
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  Speaker 1: this isn't even worth talking about. There's no way this
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  Speaker 1: budget is going to go through. So let's think sort
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  Speaker 1: of more in the future about how we can align
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  Speaker 1: our interests because there's no way we're gonna give you
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  Speaker 1: this thirty percent cut. So you have this really weird
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  Speaker 1: situation where the Secretary of State is is begging for
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  Speaker 1: cuts to the agency he leads in Congress is saying no,
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  Speaker 1: we're not going to let you cut your agency. And
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  Speaker 1: at the same time, you can reference the historical remarks
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  Speaker 1: of Secretary Defense James Maddis, who back in at a
• 8:44
  Speaker 1: National Security Council Advisory meeting said that if you don't
• 8:48
  Speaker 1: fund the State Department fully, then I need to buy
• 8:50
  Speaker 1: more ammunition immediately. He said, I think it's a cost
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  Speaker 1: benefit ratio. The more that we put into the State
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  Speaker 1: Department's diplomacy, hopefully, the less we have to put into
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  Speaker 1: a military budget. Do they not speak to each other? Uh? Well, actually,
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  Speaker 1: that's one of the more interesting things about this administration.
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  Speaker 1: Secretaries Toysts and Maddis are said to be close friends
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  Speaker 1: and to speak speak to each other frequently, I mean
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  Speaker 1: Secretary Toyist and frames this as sort of, uh, bringing
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  Speaker 1: the State Department into the twenty one century. He says, Look,
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  Speaker 1: you've seen this budget just increase by vast amounts double
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  Speaker 1: since basically two thousand and eight, So we sort of
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  Speaker 1: want to realign to a national security focus and get
• 9:31
  Speaker 1: away from a lot of the overlaps. So you would
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  Speaker 1: have special envoys for certain regions, while you also have
• 9:36
  Speaker 1: bureaus that cover those regions. So he's sort of portraying
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  Speaker 1: this as a bid to sort of streamline and consolidate
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  Speaker 1: the Department. Of course, then you have people who echo
• 9:46
  Speaker 1: Secretary Matdis, who say, listen, you can't h you can't
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  Speaker 1: cut by thirty percent and still engage in ineffective diplomacy.
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  Speaker 1: And this is just something we're gonna have to see
• 9:55
  Speaker 1: how it plays out over the next you know, coming
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  Speaker 1: months and years. Has the President appointed the relevant assistant
• 10:03
  Speaker 1: secretaries at the State Department in order to make the
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  Speaker 1: machinery of the State Department run No. I mean those
• 10:10
  Speaker 1: are starting to come in in a trickle, but by
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  Speaker 1: and large those there are dozens of posts that remain
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  Speaker 1: unfilled in the department, and that is really the biggest
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  Speaker 1: concern when you talk to career diplomats. And then also
• 10:22
  Speaker 1: to get back to your early question about foreign leaders, Uh,
• 10:26
  Speaker 1: you know, a lot of foreign investors we've spoken to
• 10:28
  Speaker 1: say they just don't know who to go to at
• 10:30
  Speaker 1: the State Department, so they end up going to people
• 10:32
  Speaker 1: at the NSC or directly at the White House. So
• 10:35
  Speaker 1: what you're sort of seeing is in large part a
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  Speaker 1: sidelining of the State Department, where because there is an
• 10:43
  Speaker 1: absence of senior staff, uh, the State Department gets avoided.
• 10:47
  Speaker 1: That happens both with foreign leaders but also with other
• 10:50
  Speaker 1: agencies in the government. They don't want to deal with
• 10:52
  Speaker 1: an acting assistant secretary or a deputy acting assistant. They
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  Speaker 1: want to go straight to the most powerful person they can.
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  Speaker 1: That usually these days means the n S see you
• 11:00
  Speaker 1: or the White House. I'm trying to put together the
• 11:02
  Speaker 1: idea that the the Secretary, that the Foreign Department is
• 11:07
  Speaker 1: not fully staffed, that we have the Secretary of state
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  Speaker 1: that is having some turmoil underneath him as well as
• 11:12
  Speaker 1: a president who doesn't always have a coherent message with
• 11:15
  Speaker 1: the people around him. And pairing this with the travel
• 11:19
  Speaker 1: band that just took effect. How much of is this
• 11:21
  Speaker 1: really having a serious, deliterious impact on the USS reputation
• 11:27
  Speaker 1: internationally or how much of this is just the classic
• 11:31
  Speaker 1: turmoil when a new president comes into office. Well, I mean,
• 11:34
  Speaker 1: this is really something we're gonna have to see how
• 11:37
  Speaker 1: it plays out, because there is a sort of standard
• 11:40
  Speaker 1: amount of turmoil that always happens where there's an adjustment,
• 11:44
  Speaker 1: particularly when it goes from one party to the other. However,
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  Speaker 1: I mean, it is undeniable that the president has shifted
• 11:52
  Speaker 1: for foreign policy to such a degree. Uh that has
• 11:56
  Speaker 1: led to skepticism. For example, when the US comes into
• 12:02
  Speaker 1: agreements with other countries like on the Around Nuclear Deal
• 12:05
  Speaker 1: or on the Paris Climate Court and then leaves or
• 12:09
  Speaker 1: express as a desire to leave those as as Trump
• 12:12
  Speaker 1: has done with the Paris Climate Deal, or saying that
• 12:15
  Speaker 1: the Iran deal was a bad deal though that's been
• 12:17
  Speaker 1: left in place for now. That just creates uncertainty. Um,
• 12:20
  Speaker 1: And so that's really what you're seeing now. The biggest
• 12:23
  Speaker 1: question overseas is a question about we don't really know
• 12:27
  Speaker 1: where the U. S stands now. We don't know what
• 12:29
  Speaker 1: their intentions are. We don't know whether President Trump really
• 12:31
  Speaker 1: wants better relationships with Russia, for example. So the biggest
• 12:36
  Speaker 1: thing is is a lack of confidence and certainty and
• 12:39
  Speaker 1: where the U S stands, Nick, I'm looking at the
• 12:43
  Speaker 1: job openings that currently exist under Secretary for Civilian Security,
• 12:48
  Speaker 1: Human Rights and Democracy, under Secretary for Economic Growth and Energy,
• 12:52
  Speaker 1: all vacant is Rex Chillisen relying on too few people
• 12:57
  Speaker 1: understand his chief of staff Margaret Peter Lynn, and UH,
• 13:01
  Speaker 1: the Policy Planning Division. I guess no, I beg your
• 13:05
  Speaker 1: pardon former Assistant Secretary of State Brian Hook. Are they
• 13:08
  Speaker 1: really the point people for for Tillerson? Yes, I mean
• 13:11
  Speaker 1: you So, what we know is that he relies on
• 13:14
  Speaker 1: a very small circle of aids UH to sort of
• 13:17
  Speaker 1: achieve his goals, and that has raised concerns about people
• 13:20
  Speaker 1: saying that their requests for information and there's you know,
• 13:23
  Speaker 1: they see guidance and things like that that goes unanswered
• 13:26
  Speaker 1: because this group is just so small and so overwhelmed.
• 13:29
  Speaker 1: I mean, what is happening and what his explanation is
• 13:32
  Speaker 1: is that, listen, we're doing a massive restructuring of this department.
• 13:35
  Speaker 1: We want to cut jobs, we want to fold bureaus together,
• 13:37
  Speaker 1: we want to reorganize things. We don't want to hire
• 13:40
  Speaker 1: people for those jobs until we know we want to
• 13:42
  Speaker 1: keep those jobs. So this is a process that's going
• 13:44
  Speaker 1: to take six months or so. But currently, yes, it
• 13:47
  Speaker 1: is a very small circle of advisors that he relies on.
• 13:50
  Speaker 1: Nick Waddams, thank you so much for joining us and
• 13:52
  Speaker 1: helping us understand this really complicated situation. Nick Wadhams is
• 13:55
  Speaker 1: a foreign policy reporter for Bloomberg News. To learn more
• 14:11
  Speaker 1: about the municipal market, who better to turn to than
• 14:14
  Speaker 1: the editor for Bloomberg Briefs municipal markets, Joe my Sect. Joe,
• 14:18
  Speaker 1: thank you very much for being here. Um boy, I
• 14:20
  Speaker 1: guess you would be a rich person if you've got
• 14:22
  Speaker 1: a nickel for every time you got to utter the
• 14:24
  Speaker 1: words Illinois or Puerto Rico this year. Let's start with Illinois.
• 14:28
  Speaker 1: What is going on? Are they really going to put
• 14:30
  Speaker 1: together a budget eventually? I don't think so. All right,
• 14:35
  Speaker 1: done and dusted, they thank you so much. Yeah, um,
• 14:42
  Speaker 1: you know, there is each side in this battle. Has
• 14:47
  Speaker 1: so much invested that it's almost, um, it's almost philosophical.
• 14:52
  Speaker 1: So you have no, it's exactly philosophical. So you have
• 14:54
  Speaker 1: these two different political points of view, and to tell
• 14:59
  Speaker 1: people that are not f million necessarily with the internal
• 15:01
  Speaker 1: politics of the state of Illinois, what is going on here? Okay?
• 15:04
  Speaker 1: And I guess the simplest way I could put it
• 15:07
  Speaker 1: is that the Democrats have been in power for you know,
• 15:10
  Speaker 1: it seems like decades now, and they're a Republican governor.
• 15:13
  Speaker 1: And the Republican governor has said, well, you know, we
• 15:16
  Speaker 1: should be doing more republican things. We should be cutting spending,
• 15:20
  Speaker 1: and we should be lowering taxes, and we should be
• 15:24
  Speaker 1: paying attention to this enormous pension debt we have. And
• 15:28
  Speaker 1: the Democrats are digging in their heels and saying, well no.
• 15:33
  Speaker 1: And so it's essentially a big battle, I would say,
• 15:37
  Speaker 1: between your sort of Democrats slash public employees and the
• 15:45
  Speaker 1: Republican governor on the other side. And you know, they've
• 15:49
  Speaker 1: gone two years without a budget, and I could very
• 15:52
  Speaker 1: easily see them going another two years without a budget.
• 15:55
  Speaker 1: I mean, right now, there's almost from a philosophical point
• 15:59
  Speaker 1: of view, there's almost no point in uh, you know,
• 16:03
  Speaker 1: giving up what you believe in. So I think both
• 16:05
  Speaker 1: sides are gonna stick uh to to their guns and
• 16:10
  Speaker 1: they're not going to pass a budget. Right. Well, um,
• 16:12
  Speaker 1: I love philosophy, and I'd love to go a little
• 16:15
  Speaker 1: bit deeper into philosophy. But let's get to the reality.
• 16:17
  Speaker 1: What is the actual consequence of not having a budget
• 16:21
  Speaker 1: for two years and then another three years and then
• 16:23
  Speaker 1: ever horrible? Uh, you know, it's cascading through the system.
• 16:28
  Speaker 1: We carried a story just the other day about how
• 16:30
  Speaker 1: the universities may lose some of the universities, their public
• 16:33
  Speaker 1: universities may lose their accreditation because the money is going
• 16:37
  Speaker 1: to be cut off. There's just not enough you know
• 16:40
  Speaker 1: money in your various continuing resolutions and the way you
• 16:43
  Speaker 1: could get money out there for them. And you know,
• 16:48
  Speaker 1: very gradually you see the state become paralyzed. And you know,
• 16:53
  Speaker 1: what do we see you know after that? Well, I
• 16:56
  Speaker 1: know S and P, for example, has warned the stay
• 17:00
  Speaker 1: It specifically that if they don't have a budget by
• 17:04
  Speaker 1: this evening actually July one, that they may lower their
• 17:11
  Speaker 1: rating to junk. They become the first junk rated state.
• 17:15
  Speaker 1: All right, Well, that is a distinction that I don't
• 17:18
  Speaker 1: think anyone really wants to put on a bumper sticker.
• 17:20
  Speaker 1: But did they do the people involved, whether it's the governor,
• 17:23
  Speaker 1: whether it's the democratic lawmakers, do they recognize the long
• 17:29
  Speaker 1: term effects of what they're doing. I think that they
• 17:35
  Speaker 1: they are sticking to their philosophical guns on this one.
• 17:40
  Speaker 1: But you can't eat philosophy, right, I mean, you have
• 17:43
  Speaker 1: to pay the bills, by the groceries, and you know,
• 17:45
  Speaker 1: fund the police and so on. Uh, you know, there
• 17:49
  Speaker 1: there's no popular uprising. That's an election next year and
• 17:52
  Speaker 1: that's you know when when things will be decided. Uh,
• 17:57
  Speaker 1: it's it's shocking to me. It's astonishing. And yet what
• 18:00
  Speaker 1: we have here, it's just it's almost purely political. Illinois
• 18:04
  Speaker 1: is a very wealthy state. There's lots of things they
• 18:07
  Speaker 1: could do. Um, this is almost all political. There's nothing
• 18:11
  Speaker 1: economic about this. And yet right now the bills are
• 18:14
  Speaker 1: piling up and the certainly the pension liabilities you're growing. Yeah,
• 18:18
  Speaker 1: the bondholders they don't care. They're like, yeah, opportunity. Well
• 18:22
  Speaker 1: some of the yes, you're right. Some of the big
• 18:24
  Speaker 1: banks this week and last week put out call saying,
• 18:28
  Speaker 1: you know, there could be some real opportunity in this
• 18:31
  Speaker 1: Illinois paper, and they're probably right because that service is
• 18:35
  Speaker 1: going to be one of the last things to be affected.
• 18:37
  Speaker 1: Great well, philosophy turns into profits for somebody, but certainly
• 18:41
  Speaker 1: not the Illinois I want to move to Puerto Rico
• 18:44
  Speaker 1: because you're moving to Puerto Rico, alright, be very happy
• 18:49
  Speaker 1: that you did so. I will be honest right now,
• 18:51
  Speaker 1: I could, I could. I could live with being on
• 18:53
  Speaker 1: an island and enjoying palm trees at an ocean. But
• 18:56
  Speaker 1: I wanted to touch a base about the Federal over
• 18:59
  Speaker 1: Sighteboard voting unanimously to push the government's electric utility into bankruptcy.
• 19:05
  Speaker 1: This is after they had a pact with creditors that
• 19:07
  Speaker 1: they decided to uh negate renegon what's going on here?
• 19:12
  Speaker 1: I mean, does this set a bad tone for the
• 19:14
  Speaker 1: rest of the bankruptcy proceedings or does it not even
• 19:16
  Speaker 1: matter because it's such a mess and who cares um?
• 19:19
  Speaker 1: I think that the Federal Oversight Board taking a taking
• 19:24
  Speaker 1: some action, taking a point of view here is probably
• 19:27
  Speaker 1: what a lot of people in the bond market who
• 19:30
  Speaker 1: view it objectively have been waiting for. Of course, not
• 19:34
  Speaker 1: the bond holders and certainly not the people who were
• 19:38
  Speaker 1: stood to get eighty five cents in the dollar and
• 19:41
  Speaker 1: the settlement on that, on those PREPA bonds. And of
• 19:43
  Speaker 1: course right now those PREPA bonds, the Electric Power Authority
• 19:47
  Speaker 1: in Puerto Rico, they're trading it around fifty cents on
• 19:50
  Speaker 1: the dollar. So wow, Yeah, the the board is becoming
• 19:56
  Speaker 1: more activists, as it should, and the politicians, let's face it,
• 20:01
  Speaker 1: are going to use the board as uh, something to
• 20:05
  Speaker 1: hide behind. There's going to be things done that the
• 20:09
  Speaker 1: Board decides that the politicians are going to say, well,
• 20:12
  Speaker 1: our hands were tied. But you know what's interesting about this.
• 20:14
  Speaker 1: When this Fiscal Control Board was implemented, and this was
• 20:18
  Speaker 1: under US legislation that in stated this board, a lot
• 20:22
  Speaker 1: of bondholders thought that it would benefit them that this
• 20:25
  Speaker 1: fiscal Control Board would come in and exercise some restraint
• 20:29
  Speaker 1: in government and curb excessive spending and help create a
• 20:33
  Speaker 1: more conservative budget. And then this board has turned out
• 20:36
  Speaker 1: to be anything but friendly to them. Well, uh, yes,
• 20:41
  Speaker 1: you know, you're right. Several bond holders, some bond holders thought,
• 20:45
  Speaker 1: you know, finally that they would get some help here,
• 20:50
  Speaker 1: but no, the Oversight Board. You know, when there were
• 20:53
  Speaker 1: several members of the Oversight Board, one of whom David
• 20:56
  Speaker 1: Skale uh advocated bankruptcy for states at that point. He
• 21:02
  Speaker 1: was advocating it thinking that mainly public pensions would get hit.
• 21:07
  Speaker 1: But of course we now know that the bond holders
• 21:11
  Speaker 1: seem to be almost the first in line. Well, Joe,
• 21:14
  Speaker 1: you know, it strikes me that the board, for example,
• 21:17
  Speaker 1: has already warned that if the budget is not corrected right,
• 21:20
  Speaker 1: they want more cuts. They want more specifics. Uh. You
• 21:23
  Speaker 1: could end up with furloughs or a reduction or elimination
• 21:27
  Speaker 1: for example, of the Christmas bonus that is paid to workers.
• 21:30
  Speaker 1: These are all things that the governor of Puerto Rico,
• 21:33
  Speaker 1: Ricardo Rossello, has said, No, we were this would you
• 21:37
  Speaker 1: know this is not a good thing because if you
• 21:39
  Speaker 1: start taking away money from these people, there's not going
• 21:42
  Speaker 1: to be in any economy in order to get out
• 21:45
  Speaker 1: of the hole that they've already dug for themselves. Well,
• 21:48
  Speaker 1: but trims do have to be made, cuts do have
• 21:51
  Speaker 1: to be made. The the size of the governmental sector
• 21:55
  Speaker 1: in Puerto Rico is entirely too large. Uh, so you
• 21:59
  Speaker 1: know there are going I mean, then the governor has
• 22:01
  Speaker 1: to say what the governor is going to say he's
• 22:03
  Speaker 1: a very politically ambitious fellow. Um, but there are austerity
• 22:10
  Speaker 1: is going to take place, and it's probably gonna be
• 22:13
  Speaker 1: ten years of austerity, if if we've learned any ten years. Yeah,
• 22:17
  Speaker 1: I feel like this is the slowest moving train wreck
• 22:20
  Speaker 1: ever because I feel like we've been talking about it
• 22:21
  Speaker 1: forever and people are going to talk about it for
• 22:23
  Speaker 1: the next uh ten years, and it's you know, it's
• 22:25
  Speaker 1: sort of slow moving, and it's a huge issue. What's
• 22:28
  Speaker 1: the next deadline we should be looking for? They could
• 22:30
  Speaker 1: possibly offer some clarity and what the road forward will
• 22:33
  Speaker 1: look like. There's you know right now the I know
• 22:38
  Speaker 1: there are some hearings in July. UM, but you know
• 22:43
  Speaker 1: clarity from Puerto Rico. No, no, no, Well, but but
• 22:47
  Speaker 1: you know, for example, I'll give you a sense there
• 22:50
  Speaker 1: was something there was a story that caught my eye yesterday,
• 22:52
  Speaker 1: uh that the SEC is going after some Wall Street
• 22:57
  Speaker 1: banks for selling Puerto Rico at in two thousand fourteen,
• 23:01
  Speaker 1: underwriting a couple of billion dollars of new bonds even
• 23:06
  Speaker 1: though the island was clearly in financial distress. Do you
• 23:09
  Speaker 1: know anything about this? I mean, is that something that's
• 23:11
  Speaker 1: important to you predicted here first several several weeks. They're
• 23:17
  Speaker 1: going after All Street and who could possibly be surprised
• 23:22
  Speaker 1: by this. They're going after the underwriters, They're going after
• 23:25
  Speaker 1: salespeople who sold bonds under road bonds. Uh, you know,
• 23:30
  Speaker 1: who could be surprised after Puerto Rico built up this
• 23:33
  Speaker 1: seventy four billion dollar debtload. You know the You know,
• 23:39
  Speaker 1: you could sort of on the one hand, you could
• 23:41
  Speaker 1: sort of accept it and say, well, this is this
• 23:43
  Speaker 1: is what's going on, and they'll, you know, honor their debts.
• 23:46
  Speaker 1: On the other hand, you could keep the idea in
• 23:49
  Speaker 1: mind that this is getting way out of hand. This
• 23:52
  Speaker 1: island is ferociously over leveraged and it cannot come to
• 23:57
  Speaker 1: a good end, which indeed it has not. I was
• 24:00
  Speaker 1: just looking also at the pension liabilities. I think the
• 24:03
  Speaker 1: public pension liabelary. I think it's forty five billion dollars.
• 24:07
  Speaker 1: I know this is going to be a story that
• 24:08
  Speaker 1: keeps on giving, and you're gonna keep giving us the details.
• 24:11
  Speaker 1: Thanks very much. Joe Maisak is the editor for Bloomberg
• 24:14
  Speaker 1: Briefs Municipal Market Letter. Always a pleasure. Thank you very
• 24:17
  Speaker 1: much for being with us. All right, Well, let's uh,
• 24:32
  Speaker 1: let's talk a little bit more about manufacturing in the
• 24:34
  Speaker 1: United States and it's connection to trade. I want to
• 24:36
  Speaker 1: bring in James Manyika. He is the chairman of the
• 24:39
  Speaker 1: mackenzie Global Institute, is also a senior partner at McKinsey
• 24:43
  Speaker 1: and Company, and he comes to us today from the
• 24:46
  Speaker 1: Aspen Ideas Festival and Aspen, Colorado. Mr Manuka, thank you
• 24:51
  Speaker 1: very much for being with us. Tell us about this
• 24:53
  Speaker 1: new report that McKenzie has released about manufacturing jobs in
• 24:57
  Speaker 1: the United States and the role of manufacturing UH in
• 25:00
  Speaker 1: the global economy that we play. UH, So, thank you,
• 25:05
  Speaker 1: thank you for having me. Manufacturing is actually a very
• 25:07
  Speaker 1: important sector for the US economy. It makes huge contributions
• 25:11
  Speaker 1: to value, the growth to productivity, to our trade balance UH,
• 25:15
  Speaker 1: and it also contributes to R and D and innovation.
• 25:19
  Speaker 1: So it's a very important sector for the U s
• 25:21
  Speaker 1: economy that punches way above its weight. And I think
• 25:24
  Speaker 1: what's exciting is that when you look forward many of
• 25:27
  Speaker 1: the trends of the global economy, everything from what's happening
• 25:30
  Speaker 1: with digitization, what's happening with advance manufacturing, what's happening with
• 25:35
  Speaker 1: how the the factors that we need as inputs such
• 25:39
  Speaker 1: as energy are playing in America's favor, this actually sets
• 25:43
  Speaker 1: up America to actually do very well in manufacturing. The
• 25:46
  Speaker 1: thing that we point out though, is that I think
• 25:48
  Speaker 1: it's important to remember that manufacturing it now only employs
• 25:53
  Speaker 1: about nine percent of the workforce. So while in fact
• 25:56
  Speaker 1: America can do better and revive manufacture ring, uh, it's
• 26:01
  Speaker 1: not going to be the massive, big solver for the
• 26:03
  Speaker 1: job's challenge that we've gotten that states. I think we
• 26:06
  Speaker 1: can do better than nine percent, but it's going to
• 26:08
  Speaker 1: take you know where. It's not going to reverse the
• 26:11
  Speaker 1: trend that we've seen in job growth in the US
• 26:14
  Speaker 1: economy wide. It's a very very important sector. James, Can
• 26:17
  Speaker 1: you just give us a little bit of perspective on
• 26:20
  Speaker 1: why now, Why will the US be able to gain
• 26:23
  Speaker 1: share in manufacturing now, albeit perhaps not in the form
• 26:27
  Speaker 1: that it used to be. Uh? Well, four things going on. One,
• 26:32
  Speaker 1: we're seeing all these industries digitized, So the advent of
• 26:35
  Speaker 1: three D printing, the adventure of use of digital technologies
• 26:39
  Speaker 1: and manufacturing, those are things that the US has enormous
• 26:42
  Speaker 1: strengths and and they are transforming manufacturing. So we start
• 26:45
  Speaker 1: on that first factor. On a on a position of strength.
• 26:48
  Speaker 1: The second thing is that if you look at value
• 26:51
  Speaker 1: add in manufacturing, it's migrating towards what you might call
• 26:55
  Speaker 1: the advanced industries, things that we're good at, things like
• 26:57
  Speaker 1: aircraft manufacturing, unery, medical products, and so forth, and away
• 27:03
  Speaker 1: from the factors that used to be labor intensive, like
• 27:06
  Speaker 1: textiles and furniture manufacturing and so forth. So that's the
• 27:10
  Speaker 1: second important factor. And the third factors you have to
• 27:14
  Speaker 1: recognize the huge boon we've had in energy costs. There
• 27:17
  Speaker 1: are parts of manufacturing like chemicals, uh in other places
• 27:21
  Speaker 1: where the cost of energy makes a big difference. And
• 27:25
  Speaker 1: so now that we've become a low cost energy provider,
• 27:28
  Speaker 1: that actually tilts the balance in our favor. And of
• 27:31
  Speaker 1: course we have to remember that the US is stilled
• 27:32
  Speaker 1: by a fign large the largest market demand markets for
• 27:36
  Speaker 1: manufactured products. So all of those things work in our
• 27:40
  Speaker 1: favor and they're shifting and tilting the balance in our favor.
• 27:43
  Speaker 1: But we have to step up and deliver the skills,
• 27:45
  Speaker 1: make the investments to be able to capture those opportunities.
• 27:49
  Speaker 1: And James, what role do foreign companies and foreign direct
• 27:53
  Speaker 1: investment in the United States play in the manufacturing sector.
• 27:58
  Speaker 1: We were just talking earlier about manufacturing in things such
• 28:00
  Speaker 1: as appliances, electronics as well as automobiles, they play a
• 28:05
  Speaker 1: huge role. I mean, historically, if you look at the
• 28:08
  Speaker 1: last sort of chances fifteen years, the US has not
• 28:10
  Speaker 1: historically gotten what i'd call its fair share of foreign
• 28:14
  Speaker 1: direct investment. But that has been changing in the last
• 28:17
  Speaker 1: few years. So most foreign companies will look to the
• 28:20
  Speaker 1: United States and say, we want to be close to
• 28:23
  Speaker 1: the end markets to where the demand is. So you've
• 28:25
  Speaker 1: seen that happening automotive. You've seen that happening in even
• 28:28
  Speaker 1: in regionally in places like South Carolina, where we've now
• 28:31
  Speaker 1: started to get more direct foreign investment. And that's a
• 28:34
  Speaker 1: good thing because what it does is that's more investment
• 28:37
  Speaker 1: into this economy. It strengthens those manufacturing clusters, and it's
• 28:41
  Speaker 1: a good thing. So we need more of that and
• 28:43
  Speaker 1: we should encourage it. So how could the US just
• 28:46
  Speaker 1: real quick, what are the three things the US could
• 28:48
  Speaker 1: do to kind of expedite uh this expansion of its
• 28:51
  Speaker 1: market share with respect to manufacturing. I think a few things. First,
• 28:55
  Speaker 1: we all we have to unleash the the ability head
• 29:00
  Speaker 1: frank and the incentives for companies both domestic and foreign
• 29:03
  Speaker 1: to invest in this economy. That's why any changes, whethers
• 29:06
  Speaker 1: to the tax code or two incentives that open up
• 29:09
  Speaker 1: the ability to invest in encourage investment here will make
• 29:12
  Speaker 1: a big difference. Second, I think we have to embrace
• 29:16
  Speaker 1: the innovations that are coming digitization and so forth already
• 29:19
  Speaker 1: received in our own work at mackenzie. Not enough, not
• 29:23
  Speaker 1: enough companies are embracing the possibilities of digitization. A few
• 29:27
  Speaker 1: firms were the frontier making big investments. We need more
• 29:30
  Speaker 1: to make investments. And finally, we've got to solve the
• 29:33
  Speaker 1: skills challenge. And one of the biggest challenges of manufacturing
• 29:35
  Speaker 1: is the massive skills gap we have between what these
• 29:39
  Speaker 1: this sector needs and what we're producing. A big challenge.
• 29:42
  Speaker 1: We're gonna have to leave it there. Thank you so
• 29:44
  Speaker 1: much for joining us. James Manka, Chairman of the McKenzie
• 29:47
  Speaker 1: Global Institute, based in New York City. This is Bloomberg.
• 30:03
  Speaker 1: Well you may soon be buying your groceries from an
• 30:06
  Speaker 1: Amazon owned company, namely Whole Foods. And here to tell
• 30:10
  Speaker 1: us about some of the opportunities that the deal has
• 30:14
  Speaker 1: presented his own, Bill Smede. Bill is the chief executive
• 30:18
  Speaker 1: Officer and the Chief investment Officer of SMED Capital Management,
• 30:22
  Speaker 1: helping to manage more than two point two billion dollars
• 30:24
  Speaker 1: of assets. He is based in Seattle and he can
• 30:28
  Speaker 1: be followed on Twitter at Smeede cap So Bill Smeed
• 30:33
  Speaker 1: Amazon it's going to own everything, we know that. But
• 30:36
  Speaker 1: in the meantime, before they get to that world domination position,
• 30:40
  Speaker 1: you might be able to make some money betting the
• 30:42
  Speaker 1: other way. Correct, Well, I don't need against them. But
• 30:47
  Speaker 1: the way we like to frame it is three weeks
• 30:50
  Speaker 1: ago everyone that invests said I have to adjust everything
• 30:55
  Speaker 1: to the new world of the Jetsons cartoon show. You
• 30:58
  Speaker 1: remember the Jetsons. So you jumped in the vehicle and
• 31:02
  Speaker 1: said where you wanted to go? It took you there.
• 31:03
  Speaker 1: The robotic Lady Robot that that that was the maid Rosie, Yeah, Rosie,
• 31:09
  Speaker 1: the whole thing, and their dog Elroy Dent. So, so
• 31:14
  Speaker 1: the Jetsons got priced into everything three weeks ago. And
• 31:19
  Speaker 1: the problem is whether it was seven years ago, with
• 31:23
  Speaker 1: electronic electric cars, whether anything like that. It always takes
• 31:29
  Speaker 1: way longer to happen than people think. Well maybe so,
• 31:32
  Speaker 1: but certainly we have seen the retail sector completely disrupted
• 31:36
  Speaker 1: by Amazon and the Amazon effect. And you know, certainly
• 31:40
  Speaker 1: there is pressure and it is increasing on some of
• 31:44
  Speaker 1: these grocery store chains to uh lower their prices compete online.
• 31:50
  Speaker 1: How do you counter that? I mean, how it does
• 31:52
  Speaker 1: a wal Mart compete with an Amazon when Amazon has
• 31:55
  Speaker 1: a grocery chain as well. Well. The biggest problem on
• 31:59
  Speaker 1: prices and the growth store business has been food deflation.
• 32:03
  Speaker 1: And you know, six months pick up in commodity markets
• 32:06
  Speaker 1: would would in agricultural commodities, would go a long way
• 32:10
  Speaker 1: to solving that problem for them. So so I think
• 32:14
  Speaker 1: everybody needs to be careful because a lot of the
• 32:18
  Speaker 1: technology right now that people are excited about takes away
• 32:22
  Speaker 1: things to do. And we use the extreme example of uh,
• 32:27
  Speaker 1: the Native Americans are getting back at white people by
• 32:29
  Speaker 1: sucking money out of them at casinos all across the nation,
• 32:32
  Speaker 1: and gambling casino revenue is at record levels. And why
• 32:36
  Speaker 1: is that? Because people need something to do. So one
• 32:40
  Speaker 1: of our eight criteria is you've got to meet an
• 32:43
  Speaker 1: economic need. And there's a point of diminishing returns taking
• 32:47
  Speaker 1: things to do away from people and and so uh
• 32:52
  Speaker 1: that nobody thinks about that much, but we're going It's
• 32:56
  Speaker 1: like in in in drug and biotech, they have a
• 32:59
  Speaker 1: thing called bio fix, Right, what what is the ethical
• 33:02
  Speaker 1: factor involved in it? So you're making two points here, right,
• 33:05
  Speaker 1: So one of them is people need to do something
• 33:08
  Speaker 1: with their day. Uh So going to the grocery store
• 33:10
  Speaker 1: is one of those things. And people aren't going to
• 33:12
  Speaker 1: do everything online because at some point they actually have
• 33:14
  Speaker 1: to stand in in order to prevent atrophying of their muscles.
• 33:16
  Speaker 1: So that's number one as a point. And then the
• 33:19
  Speaker 1: number two point is Uh, that you're saying any kind
• 33:22
  Speaker 1: of weakness we've seen in the grocery store sector has
• 33:26
  Speaker 1: less to do with Amazon and more to do with
• 33:28
  Speaker 1: food deflation. So if we see any kind of agricultural
• 33:32
  Speaker 1: inflation that will solve that. Is that correct that you're saying? Basically,
• 33:35
  Speaker 1: people shouldn't throw the baby out with the bathwater. Some
• 33:37
  Speaker 1: of these grocery store chains might actually have more upside,
• 33:41
  Speaker 1: especially if there is some kind of inflation in agriculture. Yeah.
• 33:44
  Speaker 1: For example, uh, much more than retail. In retail, Amazon's
• 33:51
  Speaker 1: hurt retail. But also there hasn't been a big wave
• 33:55
  Speaker 1: of fashion change, and fashion changes for example, for a
• 33:58
  Speaker 1: coming like Nords from is a huge thing. Uh, so
• 34:00
  Speaker 1: fashion change is a big factor the same way that uh,
• 34:04
  Speaker 1: you know, price deflation has been a big negative for
• 34:06
  Speaker 1: the grocery stores. So remember, uh this the percentage we're
• 34:13
  Speaker 1: dealing at the margin. For twenty years, delivering groceries has
• 34:18
  Speaker 1: been where money goes to die. Think about that? Do
• 34:22
  Speaker 1: you do you realize the worst career move in the
• 34:24
  Speaker 1: history of the United States of America was the senior
• 34:27
  Speaker 1: managing partner of Anderson Consulting leaving and taking the job
• 34:32
  Speaker 1: as the CEO web Ban, who three years later was bankrupt.
• 34:37
  Speaker 1: Four years later Accentia went public. He would have been
• 34:39
  Speaker 1: worth hundreds of millions of dollars today if he still
• 34:43
  Speaker 1: had the stock he would have got. So so that
• 34:46
  Speaker 1: is a great art. You show me one company that
• 34:49
  Speaker 1: has proven that they can deliver profitably. All right, now,
• 34:52
  Speaker 1: let's let's let's leave that debata side for just a second,
• 34:56
  Speaker 1: and I want you to talk to us about Walgreen
• 34:58
  Speaker 1: Boots Alliance that is into the news, right aid and
• 35:01
  Speaker 1: so on. It is great to snap your fingers and say,
• 35:04
  Speaker 1: all right, we're gonna buy a company and it's all
• 35:06
  Speaker 1: gonna be great. We're gonna put everybody else out of business.
• 35:09
  Speaker 1: You have a different perspective coming about wal group. First
• 35:11
  Speaker 1: of all, that's a heavily regulated industry with pharmacies, pharmacy,
• 35:17
  Speaker 1: the pharmacies. There's three main drug distributors in the United
• 35:22
  Speaker 1: States of America. So for example, let's just hypothesize that
• 35:26
  Speaker 1: actually Amazon did have a successful foray into that area. Well,
• 35:31
  Speaker 1: Walgreen's owns of one of those three distributors, a marisours Bergen,
• 35:37
  Speaker 1: and if they wanted to, they could just buy the
• 35:40
  Speaker 1: other seventy percent, so they would then be distributing to
• 35:44
  Speaker 1: Amazon as well. So so the beauty of it is, uh,
• 35:48
  Speaker 1: them getting hit by that is ludicrous. But here's the
• 35:52
  Speaker 1: pricing difference. It's a staple. Walgreen is one of the
• 35:56
  Speaker 1: staple companies. The average staple trades at twenty two to
• 35:59
  Speaker 1: twenty five times earnings with a similar dividend to theirs,
• 36:02
  Speaker 1: and it trades at fifteen. So so you know, uh,
• 36:06
  Speaker 1: the death by Amazon is costing in them one third
• 36:09
  Speaker 1: of their market compilation. That's what drive stock pickers like us,
• 36:12
  Speaker 1: That's that's how we make our money. And it just
• 36:14
  Speaker 1: happens to be run by Jim Skinner, who used to
• 36:17
  Speaker 1: be the CEO of McDonald's Bill Smith, thank you so
• 36:20
  Speaker 1: much for joining us. Bill Smide, chief executive officer and
• 36:23
  Speaker 1: chief investment officer of Smede Capital Management, which oversees uh
• 36:27
  Speaker 1: nearly two and a half billion dollars and it's based
• 36:29
  Speaker 1: in Seattle. Thanks for listening to the Bloomberg P and
• 36:35
  Speaker 1: L podcast. You can subscribe and listen to interviews at
• 36:38
  Speaker 1: Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm
• 36:42
  Speaker 1: pim Fox. I'm on Twitter at pim Fox. I'm on
• 36:46
  Speaker 1: Twitter at Lisa Abramo. It's one before the podcast. You
• 36:49
  Speaker 1: can always catch us worldwide on Bloomberg Radio