Alberto Gallo on How the American Dream Turned into Greed and Inequality

Dream turned into greed and inequality. It was authored by Alberto Gallo, portfolio manager and head of macro Strategies at Algebra's Investments Limited in London, and he joins us now. Alberto, I thought this was a fascinating piece that you authored. The main point was that monetary policies have sort of patched over a lot of sort of policy deficits and have allowed the weakest links to just hack on credit at the expense of actually improving their place in society.

Can you give us a sense of what has caused us and what has allowed this and what the potential consequences are. Good morning, Lisa. We have seen as investors in the market every day every month in the last nine years, markets rising, but our struggle is that this wealth, this benefit hasn't reached the real economy. There's a big divide between Wall Street and Main Street. And in the end it's negative for everyone because we have seen that countries become more and more split as they have and

they have not followed different political directions. Um. And also geographically, you have areas which are very rich versus areas that are very poor, like the West and East Coast versus the Midwest, or in the in the UK, London versus the rest of the country. So you have a very usset rich but wage poor recovery. You have countries that look very good in GDP terms, but look very bad

in the distribution of this wealth. The trickle down is is some is an illusion, uh, and it generates political instability, Alberto, Is this any different than it's always been? No, because we are at the endpoint of a very long dead supercycle. We started using credit to boost wealth with Nixon, with Freddie May Fanny mac being created and privatized, with the idea that you could replace productivity with a loan. The

American dream would be possible. You could go to university, you can get a student loan, you could get a mortgage just because Uncle Sam would help you to get that. But then what happened is that all the tuition fees started to go up, all the house prices started to

go up, and then you needed even more credit. So they started really with the baby boomer generation, which and with the government subsidy to private debt, which generated a growth in debt to GDP private debt to GDP from four So we used four dollars of debt private debt to generate to to grow GDP GDP group, but private debt outgrew GDP by four times between the sixties and the two eight crisis. The US did it first, then it was Europe done China in the last ten years.

The question is now you're at the end of the game. Because interest rates are records low. You can't lower interest rates even more so central banks have bought twenty three dollars of assets around the world, but this is effectively a debasement of money. Remember money is credit and credit

means faith in the system. When you depreciate money by increasing the value of all the assets that money can buy, you implicitly depreciate faith in the financial system, which is why people today are looking at buying bitcoin and buying gold or buying alternatives because they think that will be even more q E and their money will be less

worth in the future. Uh. These are all shortcuts, um for what politicians should have done, investing in productivity, investing in education, giving everyone an opportunity, and we are I'm sad today to see that politicians are cutting taxes for the rich rather than investing in productivity. Alberto, is this something you see as just a phenomenon of the last fifty years, because you know, post a pre World War Two, there were very few opportunities for financial assistance from the

government for just about anything. So I don't understand exactly where this American dream that you're describing comes from, except if you agree that it is an anomaly as a result of the victory of the United States after the Second World War, Because I mean, if you go back a hundred years, hardly anybody owned their own home, and now homeownership is let's say six However, we got here and previously you had to put down a down payment

of about fifty So whatever the financial rigamarole, I'm wondering, is it better now because we've appreciated people's lives and maybe depreciated the value of money at the same time. I in my view, we need to think about what's the dream that we want? Is it about home ownership? Does ome ownership make you happy? And today many young people can't afford to buy a house um for example. Um, but maybe we have substituted the idea of a dream,

the idea of home ownership, UM with with happiness. While happiness is really linked to social mobility, to the chances you have in life to end up in a better position than your parents. And data today shows that social mobility is actually lower in the US than it is in Scandinavia for example, or in some other European countries

that have a much less dynamic economy. And more importantly, um, even if you think that you may make it to get to the one percent regardless of where you're born, Um, do you want to be in a society where, in particular the bottom cannot afford uh food? You know? Or in the UK one third of children living poverty. Do you want to be the successful person in a society which is deeply divided and where nurses are on food banks?

So this this is I think the question we need to ask all there too, just real quick, do you think they were close to the breaking point at this at this at this juncture. I think the question we are increasing economists are asking themselves is about, you know, some of the assumptions that we use in the last twenty thirty years, and politicians, on the other hand, are

capitalizing on this inequality and this anger. Paradoxically, the irony is that in the UK and the U S, which are the most flexible economic systems, we have seen more political protest vote, more anti establishment votes with you know, the Trump administration and Brexit. But these um political moves, the movements sometimes are associated with policies that are are long term. We have been waiting for general electrics, grand vision for how to proceed going forward after a pretty

horrible year. And here to explain to us, just to give us a review of what this plan looks like, is Brook Sutherland, an m and a columnist for Bloomberg Goad Fly. Brooke, thank you so much for joining us. I know today has been a crazy day for you. The stock market is responding to ges plan, with the shares down more than five cent. You had written long ago GE needs to cut its dividend and it will.

Is this plan still not enough? It's not. And I think you know, when we initially saw the dividend cut this morning, I was thinking, Okay, well this is good. They're being dramatic about it. It It was a fifty cut. That was what people were facting and what they sort of needed to do. And then they came out with

their slide deck with their numbers. And when you sort of drill down into what those numbers are, I think you have to wonder if they did go far enough or if maybe they should have cut the divid in more. And you know, I think that's raising questions for people. I think the other thing is that Flannery promised this comprehensive review and we didn't. Yeah. Sorry, um. And if you know, he I believe him when he says he really drilled down through these businesses and looked at you know,

units within businesses and everything. But what we got is kind of I mean, like, you know, they're talking about getting rid of the industrial solutions business, which is great because they've already sold that, so then you know it's not new. And they're talking about lighting and transportation and these are all sort of ancillary businesses that people were

already expecting them to divest. There's no real new surprising, you know, grab your attention at AGY here, and I think you know what that means is that we're just basically looking at a few years of a really tough slog at GE. They're committed to staying in markets like power, and power is not going to get better for at least a few years, even by g s own admission, and you know, some analysts worry it might not ever get better. It might just sort of trend down to

this new normal of lower profitability. And I think you know, if you were looking for radical change, this this is not it. What about the sell off of the majority

stake in Baker Hughes. That's new ish, But gees prior management had communicated that a spinoff of that or some sort of investor was possible when they announced this deal, and that's something that investors have been speculating about basically ever since they decided that they were going to buy the Baker Hughes business and emerge it in this combined entity.

So this is the first time ge has publicly said, yes, we're looking at that, but they've sort of indicated it's possible, and people have been expecting that to come, so, you know, I think that is a good step, but that's also not the kind of thing that they're going to be able to do tomorrow. They own, you know, nearly six of this business. If you sold that all right now, you're not going to get a great price for it. Um They're going to have to do it in stages.

They probably have to wait a while for some of these commodity markets to recover. I'm wondering about whether they're gonna have to cut the divid in more. I think that that is sort of the question, and I you know, I don't think we would expect anything, you know, in the coming months or anything like that. I think a lot of it's going to depend on how team plays out. But when you look at those numbers, I think it

does make you nervous. And even after they cut it, they're still going to have one of the highest dividend payout ratios among high grade industrials. Talking about high grade, I know that g E is on watch for downgrade, and you know that I'm obsessed with bonds, so I was looking at their von price action and in fact, the market is treating them as though they have already been downgraded to the lowest rung of investment grade. I have to think that's also a headwind because that raises

their borrowing costs going forward. No, absolutely, and you know they're borrowing about six billion to front pay their pension um and you know, but you can't just keep going to the vond market to keep your business going so well fair enough, but um, yeah, you know. I I just think that there was so much hype for this event, and part of that is g s own fault. I mean,

the way that they set this up. This November date has been on the calendar since September, and then we had that horrible earnings report and they kept promising to wait, wait with us until we get to November. We're gonna tell you this grand plan. And it's basically a reiteration with maybe a little bit more details here and there of what they said on that third quarter earnings call. And so you know, they sort of set themselves up for this where they really sort of promised something grand

and this is not This is not it. I mean, this is maybe the best that they can do, and maybe this is the what they think is right, But this is not the kind of thing that's going to be a magic fix for g stock. Is there a is there a thought you have about the compensation plan that has been announced because they seem to at least be putting their own money where their mouth is in

terms of compensation. Is going to be in stock? No more of these long term performance awards, well, some of it's going to be in stock, more of it than it was before. I think, you know, that's certainly going to be a good step. UM. A lot of investors were looking at these big payouts that that former executives got in cash at times when the company was struggling, when you know, what's stock price was not delivering for investors. UM. So I think that certainly was a watch item. I

think this is a good step. I do think you have to wonder if down the road there's going to be any sort of clawbacks of what was paid to former executives UM and if that should be including perhaps I mean, you know, I don't think anything has been proposed yet, but I know this is something that investors I've talked to are wondering about and whether there's any grounds there. UM or you know, the head of the

power business, Steve Bowles. He ran that business for a very long time, and John Flannery is basically saying it was his fault. It was poor execution. You know, power is a troubled market, but we were worse off than other people in the power market because of the way we handled that business. Well, investors seem to agree with you. The shares of Gear down more than five percent right now. Thanks very much for being with us. Brook Sutherland is

m and A. Thomas Bloomberg Gadfly. All things mergers and acquisitions much appreciated. Not shopping on Ali Baba Group holding site, well you were one of the few, not one of the many. The site generated more than twenty five billion dollars in sales in China's Singles Day, the perhaps largest retail shopping day in the world. Here to tell us more about it is Shura over Day. Our technology columnist are Bloomberg gad Fly and you can follow Shira on

Twitter at Shira over Day. Of course, shar thanks for coming into the studio. What is why is this so important? So Ali Baba essentially created this fake shopping holiday which they hold on November eleven every year, and it is basically sort of a celebration of shopping and frankly, it's a marketing event for Ali Blab, but it's a way to draw attention to themselves from all across the globe

from these enormous sums of sales that they do every year. Yeah, well, I mean they're not alone, right, because Amazon also has Cyber Monday. I mean, why not create an artificial holiday to to have people spend money on your site. The fact though, that people spent twenty five point three billion dollars in sales is remarkable now, I mean, can you put this in a perspective and is this just sort of a blow away as far as what people were expecting.

It is a staggering number. And we should remember that China is the largest um market in the in the world, both for or electronic commerce and for a number of people on the internet, so the numbers in China are always going to be big. But billion is roughly equivalent to the total quarterly sales on eBay, so and that was done in a single day, So it's a lot.

But it's also important to remember that Ali Baba, unlike Amazon, to which it's frequently compared doesn't make money directly from merchandise sales, or doesn't make the majority of its money from merchandise sales. It makes money from the merchants who advertise to make those sales on ali Baba. So the actual total daily sales, even on a marketing day, are not really that material to Ali Baba. Do they make money in terms of margin on this kind of stuff?

I mean because that you can have a artificial shopping day, cut the prices, you get great sales, and then you go back to the other three something days of the year and you realize, although you gotta make up for that one bad day we had. Well, I think the better question is do the merchants who sell their stuff through ali Baba make money? And I don't know, and I think it probably varies a lot by merchant um. Again, because ali Baba is not selling products directly, it's more

of a middleman. For companies that are selling directly to consumers, their sales tend to be pretty profitable because they're they're essentially making money from advertising, which is a high margin business for most digital media companies are digital advertising companies. So Shara, you know me really well, and I imagine you were expecting me to ask about bonds because Ali Baba is selling some and the US asking me about

flow flow your mind. Um, but you know Ali Baba selling seven billion dollars in US dollar denominated bonds pricing at some point this week. This is the first sale of the company in the U S Why they just sold all this like material? They? I mean they why do they need money? I mean, I think the answer to any tech companies selling debt these days is because

they can. Um that we've seen the the last few years. Um. Now seven the top seven companies in the public companies in the world by stock market value or all tech companies, um. And you know investors see that and are willing to loan money to these companies because of their enormous size, profitability, and market power. Right. But you know, if I could borrow money at a four percent rate or four and a half percent rate, unless I'm going to use it for something, it's a drag, right, I mean, is it

going to be for refinancing debt? Is it that they're going to build out operations in the US. Is there a sense of what it's going to be going toward? Right, whether it's true that Ali Baba does have debt that they're trying to refinance, so certainly that's part of it, and they weren't very explicit about what they will do with the money. But it's also true that Ali Baba

has been an acquisitive company. They invest a lot, both in startups and in other companies around the world, not so much in the United States, but um certainly in their home country and in places like the Middle East. And this is a company that has global ambitions. Again, maybe not US ambitions, but um global US ambitions. You know. One of the things I noted about this particular Singles Day is that Ali Baba has rolled out a kind of artificial intelligence fashion aid as well as an artificial

reality game. So in a variety of restaurants, and I believe in some select malls, you can go online, you play an artificial reality game, you earn coupons that are then valid for shopping on Ali Baba's site. I'm wondering is that something of a strategy that could be adopted in the United States. I mean, we don't see anything like that, this merging of online shopping, but with online game playing in the real world. So I think two things.

One is that artificial intelligence and virtual reality, these are sort of buzzwords that every company is going to dabble in UM and TBD whether that will be an effective sales strategy. But the second point is that I think ali Baba to the extent that we have not really

seen here in the US. They have been very savvy about uniting online and physical commerce, and again in a way that even a company like a smart company like Amazon has not really done, including in groceries by the way, where Ali Baba is trying to sort of do that merging that Amazon is also trying to do a physical grocery shopping and digital grocery shopping. Of course, ali Baba also has the benefit of not having to deal with different security and privacy rules, and they can use all

of their data to monopolize their client customer. The Chinese technology giants have certain advantages that US tech giants don't have. True, that's the diplomatic way of putting it. Shira Day, thank you so much for joining us. As always, Shira Ovidate, technology columnist for Bloomberg gad Flyer. Stuff is great. Read it Bloomberg dot com, slash goad fly shares of Mattel soaring up more than the stock of Hasbro, up about

six and a half percent. Will these two toymakers come together, Well, let's bring in Sarah Halzac, our retail columnist our Bloomberg gad Fly, and she joins us from our Bloomberg studios in Washington, d C. Sarah, what can you tell us about this potential merger? We're gonna see hot wheels driving around the monopoly board soon. Yeah, I think there's a

good chance of it. And here's why. The toy industry is really in a place of big change right now, and I think Hasbro and Mattel could confront it better together. So one thing is that these companies are having to develop new core competencies. As we all know, play is getting more digital. They can't just make molded plastic blocks anymore. Um. They have to learn how to make YouTube videos, apps, and even get onto the big screen, as Hasbro has

done with My Little Pony movie. So they have to learn how to do new things and they can probably do that better together. Well, I'm just wondering, Sarah, why this didn't happen earlier, because the retail industry and even the toy industry has been under pressure for a while. Yeah, it's a good question, Um, but I think one thing we can consider is how the toy industry in particular has been looking, and in fact, were blockbuster years for the industry. I think was its best year in over

a decade. And you had a number of different things fueling that. It's a really strong year for movies. For example, that was when Star Wars first came back after about ten years of no new films. You had properties like shopkins, You had all sorts of things that were sort of a rising tide lifting all boats in the toy industry, sort of making things look good and making tough decisions

like this look less urgent. Is this going. Is this potential combination going to affect companies that the license their products and their brands to the toy makers in order to make their products, whether it is a Disney or a movie maker. Yeah, I think that's still kind of clarifying itself, to be honest, because, um, it is true

that they'll have some competing licenses. One will have a license for d C comics, one will have a license for Marvel comics, and sort of what challenges that presents or what weakal issues that presents that they were to get together, I think is still clarifying at this point. Do you have a sense of whether the Toys r

US bankruptcy kind of pushed this into high gear. I think it's fair to say that it probably did in the sense that, you know, Mittel really took a bath after its latest earnings report, um, when sales just plummeted, and they attributed about half of that decline in North America. Eleven percent of that eleven line was because of the Toys r US bankruptcy, and uh, you know, Mitchel just lost so much market value after that that I think

it suddenly became a much more attractive takeover target. What are some of the potential obstacles from an antitrust perspective other than those license deals? Yeah, simply just that, Um, these companies are so huge, right Um, them and Lego

are clearly the titans of the toy industry. Uh. So that's said, though, the toy industry is more fragmented than we sometimes think, and I think even if you look at what's going to be hot this holiday season, you can see that so hatch moles are projected to be a huge seller. Well, those are made by spin Master. They're not made by Hasbro or Mattel. Fingerlings are flying off shelves and around eBay for much higher prices. Those

are made by a small company called Wowie. So shopkins are made by Moose Toys, a small company based in Australia. So there definitely will be some hurdles there since it has Brown Mattel are so large. But the market is a bit more broken up than you might expect. I'm feeling this pit of doom in my stomach because I haven't heard of some of those things that I know my children will be asking for them. So I'm concerned. I'm looking at hate you don't you don't know hatchem

I like. I like giving them a brown, brown paper bag and telling them to make a puppet. But just just lastly, you know, I'm just wondering. You know, yes, a combination makes sense given the pressures, but will this materially change the dynamic at all? With the competent competition from Amazon and other sources. It might give them more power frankly in dealing with Amazon to you know, dictate

pricing and that kind of thing. So it could be helpful in that way, and then I think the other thing to think about is just what this does for them in emerging markets. What we know is that the growth, the majority of growth in the toy industry over the next five years is absolutely going to come not from North America but from emerging markets, and the power that these companies combined would have in dealing with Ali Baba, for example, might be helpful to them in their growth

mission as well. Sarah Hawzac, thank you so much for joining us. Sarah Howzac is a retail columnist with Bloomberg Godfly, and she joins us from our studio in Washington, d C. Just to give you a sense of how the shares are responding to this potential combination. Mattel shares up more than twenty percent, Hasbro shares up more than six and a half percent, So certainly it's being cheered on the street.

It's still unclear to me whether they could compete with an Amazon or even some local kinds of alliances with some of these upstart uh you know, toymakers that have less overhead and just saying wow, we fingerlings and hatch themles. You're gonna hear a lot about Thanks for listening. To the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at

pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio