Big Take: Xi Jinping's Capitalist Smackdown

one trillion Dollar Reckoning. That's the title of the Big Take today and Tom Orlick, one of the authors, joins us to discuss UM. And it's been such an interesting process to watch. Tom. So many people have different ideas of what's going on, from the ant U I p O to UM, what happened with d D and now with the ed tech UM move. The question is is it about you know, Uh Jing Ping's grip on power or is this really about UM data security? Or could

it be about supporting the middle class? What do you see? I think it's all of the above. UM Si Jinping in twenty two will be looking for the NOD to take a third term as president, the term as chair of the Communist Party so building public support ahead of that is crucial. At the same time, I think this is a Chinese government which is willing to wield the kind of the big stick of authoritarian power in order

to try and deliver on some social priorities. So that includes national security, making sure that sensitive data isn't leaking over oversure. It also means taking a big swing at the monopoly power of companies like Ali Baba, ten Cent, making sure that workers, making sure that smaller startups get a fair shake. So there's kind of the crackdown within the market targeting private sector companies. How does that then

translate into the Chinese economy? So I think what we're seeing is a Chinese government which is willing to take a short term blow to the markets, maybe even a short term blow to growth, in order to deliver on what they see as more important long term development priorities.

They'll take a swing at some of the biggest tech entrepreneurs in the country, Jack mar of Ali Baba first among them, because they think that having a having big monopolies strangling competition in the economy is not going to be good for China's longer term growth, not going to be good for China's squeezed middle class. How do we know when this is over? I mean, or what's the

next shooter drop? That's a really good question. So we've already had China's regulators come out swinging against the big tech companies Ali Baba, May Juan, the giant delivery company d D China's answer to Uber. We've seen them coming coming out swinging against property. One of the big frustrations for China's middle class is that property prices too expensive. They can't get their first hand on the bottom rung of the property ladder, and they've come out swinging against

ed tech. The concern there is that children are spending too much time and parents are spending too much money on the educational rat race. Where do they go next, Well,

one possibility could be the private medical industry. China's households they want to educate their children, they want to buy a house, they want to be healthy, and so I think it's quite likely that China's policymakers, China's regulators will take a close look at private healthcare providers next, try and make sure they're not gauging Chinese households, trying to make sure they're delivering quality care. How does the US

fit into all of this time? So historically, for the last forty years, we had a trajectory where China was moving towards being a more market based economy and a more open economy, and that meant closer ties with the US. What's happened in the last four or five years, especially since the Trump administration had their turn in the White House, is that China has realized, you know what, we're facing

a more hostile global environment. We're facing a US which is going to impose trade tariffs, impost sanctions, try and ally with other countries to sort of put limits on our tech development. And what that's done is it's put China into kind of defense mode. And so we're seeing China saying, you know what, maybe we don't want our tech companies to I p O in the United States.

Maybe we need to do more to boost self sufficiency at home in terms of our ownership of key technologies and in terms of who's financing our develop so and I mean the the for me, the most interesting thing is that one man, or at least the head of the party, can do this right. He doesn't have to deal with all the special interests and lobbyists that we'll keep will hold America back, possibly in trying to improve what we've we've got going on here. Same I'm sure

it's two in the UK, etcetera across Western democracies. How powerful is j Ping? Do I just see it that way or is he really the man? Well? I mean, she who must be obeyed was the kind of the joke when she Jinping came into power and sort of started wielding the big stick of authoritarian governance to get things done. I mean, certainly she is an incredibly powerful leader, probably the most powerful leader China has had since chair and Mao. But that comparison with Chairman Marrow, of course,

also highlights some of the risks with an authoritarian governance system. Yes, we might look enviously at a Chinese system that can get things done really quickly, pushed past vested interests that try and block reforms, but let's not forget that authoritarian governments can get things right really quickly. They can also get things wrong really quickly as well, just quickly. Because we did get p M I s from China over the weekend, What do you make of the deceleration in

growth there has it been over exaggerated. So there's a couple of things going on, Caylee. So the first one is kind of a normalization of China's growth. China was first into the COVID shock, also first out of the covid shock. They had their period of rapid acceleration at the end of twenty and the beginning of now great

is steadying back towards a more normal level. The more troubling thing, though, is that we've also now got the virus coming back in different parts of China, some cases in Nanjing, some cases in Wuhan, which you remember was the epicenter of the virus last year. That return of the virus is prompting more controls on what people can do, more social distancing, and that is also weighing on growth heading into the second half. All right, Tom, thanks very much.

Tom Warlock joining us there with his story Jumping's capitalist SmackDown sparks a trillion dollar reckoning. That is our big take for the day. You can check that out in the Bloomberg terminal if you like, Just type NI big take Go Now. I want to bring in David Cats right now. He joins us from Matrix Asset Advisors, where he is the chief investment officer, and David. We're just hearing from Dave Wilson about the optimism in this market.

We're seeing targets raised left and right. Earnings are are proving out eighty nine percent growth from the same quarter last year. What do you think, I mean, how much for there can we see stocks continue to run well? We think the underlying environment is quite positive. The economy is very much on the mend. As you just said, Earnings for companies have been very strong. That level of beating consensus is probably the best we've seen in over

a decade. And interestingly the beats have been in ten and twenty cents per share rather than one and two cents. So there are a lot of good things out there, and interest rates are low. Having said that, you've had an enormous rally over the last twelve and fifteen months, so we think a lot of those good things are priced into the market. From here. We're expecting a good deal of volatility, both good and bad. We think you probably will have some delta scares and some other geopolitical scares.

We'd be buyers into the weakness. We would not chase rallies like today. We think ultimately stocks and the year higher than they are today, but we do expect some rotations of things that haven't worked to do better and some of the hottest areas to slow down. So, David, when you're thinking about the puity market outlook, do you just have to make a decision to ignore whatever bonds are doing. I'm looking at a tenure yield now down around one. Yeah, we don't get it. On the bond side.

The economy is robust, inflation is picking up, and we think that the bond rates and yields lower is an outlier. And if anything, if you own intermediate or long term bonds, we think this is a great time to be selling,

locking in your profit and shortening maturities. From a stock market perspective, on one hand, it's very good when you have low interest rates like this because it makes stocks that much more competitive, and we don't think the bond market is really for telling a slowdown in the economy or really any significant issues. Let's talk about some of your top stock picks. Um, what are you most excited about when you come to the office or when you when you're talking to a client. What what gets you

going well, it's an odd thing. The things that have worked over the last year are probably what we're least excited about because a lot of the good things are already in their stock prices. So we've got a lot of technology that's had a great run. We're less enthusiastic from here. So what we're most excited about our companies that really haven't done a lot in terms of the stock price, but the businesses are very good. So we

like the financials a lot here. They've had a good run in the first six months, they slowed down in the last month. We think that's a poise that refreshes, and we think you can buy companies like Bank of New York, M and T Bank, p n C, Truest all very good. We also like healthcare, which has been an absolute dog in the last seven months. We think

that's boys to do better. And there are a few overlooked technology companies like a Cisco or a five Serve that we think of good long term prospects um but really haven't had this type of rally that technology overall has. How do you think about pricing power when factoring you know what stocks you want to own, what you're going to put in a portfolio, especially considering the pretty serious input cost elevation we are seeing a number of companies

talking about in their earning skulls. Well, it looks like most companies feel that they can raise prices. They're just as a one or two quarter legs. So if you look at the consumer staples, for example, many of them have lowered expectations for the year because prices rose quicker than they were able to raise their own prices. We think ultimately there's going to be a catch up there,

so you just want to be aware of it. But again, even in terms of some of the consumer staples, we think you can put money in, uh, simply because the stocks haven't done a lot and they're cheaper than they've been in a very long time. So a company like Coca Cola or Kimberly Clark or Kellogg, we think are very fairly priced with good prospects over the next eighteen months, and again when the economy ultimately slows down, those stocks

could become attractive to investors. Again, what about Viacom, You've got that on your list, um, And I'm just wondering if the reopening has anything in store for Viacom because you know, obviously we were all stuck inside watching their content, but now we can actually get out. Well, we think that certain players will not do as well as people get out, But in terms of Viacom, they have a robust movie business, and that movie business is going to get a lot better, So we don't think they're hurt

by the reopening play. We think on the margin is probably a little bit better and it's a very interesting company. Here stock said about ten times earnings. We think they definitely are going to be a winner in the streaming space. You get CBS, which is a great business, uh and Paramount which is a great business, and you're not paying a whole lot for it, so we think ultimately somebody could buy them or the stock is worth sixty to seventy, so we think it's a low risk investment. We had

owned Viacom earlier this year. We had bought it um a year or two ago. We sold it anywhere from sixty to a hundred. When the stock came down in the end of March, we rebought our entire position and continue to add to it. Here, David, thanks very much, David Katz. They're talking to us from Matrix Asset Advisors, where he is chief investment Officer. David Kats and the Cats family also own those stocks that we were talking about. Just in the interest of full disclosure, this is Bloomberg.

Let's talk a little bit. What's going on in European markets. We're looking at UM. Well, we saw bigger gains I guess in European markets across the board than we than we have in US markets today. UM. But the question is are there bigger gains to come, especially if you believe the reopening trade UM has yet to really hit. Tim craig Head joins US. He is a senior strategist, Senior European strategist, also the director of Research Content for

Bloomberg Intelligence. So, Tim, Um, what's your read through what especially when you look at earnings in Europe versus earnings in the US. So Matt Um, We're we're pretty constructive if you look towards you look out towards the end of the year, the next several months, UM set August decide, UM, we think that you've got global economic recovery UM that transitions to expansion. We we are in the transitionary inflation

camp as opposed to the persistent inflation camp. We think companies can manage through it, and that sets up a pretty good backdrop, especially for companies that are cyclically oriented. Um. You know, two Q results themselves are fed into a lot of good evidence supporting this sort of construct in our mind. Well, and earnings growth has been really solid to tim on the stocks that centered. I'm looking at average earnings growth of the companies reported thus far of

a hundred and seventy six percent. I mean that is wild, and you're seeing revisions upward, revisions accelerating as well. How big of a drop off are we going to see in the third and fourth quarter? Though? Yeah, Um, it's it's a good it's a good point. Um, we're about it on our account. Um. Uh, we're about three quarters done. If you look at market cap um having reported, Um, you know our number, and we're calculating it slightly differently

as a hundred. But the important point is that when we started the earnings reporting period that number was a hundred and thirties. So it's accelerated through the results period. And interesting another stat for you, UM, we're looking at roughly sixty having beat estimates having missed now European earnings are are typically a lot more blocked than in the US, where you know, US companies moved to to keep expectations low and beat UM. That doesn't happen so much over here.

So these are these are extraordinary. UM, there is no doubt. You have to see a slowdown and as you get into three Q and four Q. But it's not so much the slowdown because the market already knows that. UM. In our mind, it's that revisions continue to tick up. And it's not only revisions to overall two thousand, twenty one and twenty two earnings. They are up UM. And

that's true costs most of the European major markets. But actually even margin expectations are rising, which is particularly surprising giving some of the concerns that others have been voicing about inflation, and you know it's going to hit margins, It's true, except for consumer staples. That's a problem. UM. What's the problem with consumer staples? Yeah? From yeah, I'm well, I mean, from our perspective, they just don't have the

economic leverage to be able to manage through UM rising costs. UM. I mean to to us, that's the one segment of the market UM, where the whole sort of cost inflation higher or raw material costs is more problematic and interesting enough, if we look at two Q results, that's the one place that actually are showing negative earnings growth, I mean through down one percent as opposed to the overall market up whatever D sixty UM. So they stand out and

evaluations aren't cheap either. Can we talk about buy boxing dividends. Are we going to keep seeing those increased? Yeah? Quick answer is we think so UM and yes, you'll see what the results were seeing show UM better free cash flow, better cash generation UM. Importantly, then you've got to think about where is that being utilized and M and A is going to happen. We've done some interesting work on that. Capex is gonna happen. We need that to have a

sustained economic recovery UM. In addition to some of these policy measures like the European Recovery Fund or the US Infrastructure Plan, et cetera. But importantly, shareholder renumeration is coming back to dividends, buy backs are on a rising. A big thing in Europe has been the restriction on financials, specifically banks um UH dividends and buy backs and that's

being lifted by the ECB. Um. You know, nice announcement by HSBC just today with their results um actually bringing forward um uh their announcement relative to what we had not thought was going to happen until next year. So I think it's a good news. The other one I would mention to you that I think it's interesting are the commodities um, the miners and the oils which are so big. For example, for the foot see um, they're still being restrained on their capex, their bump ben dividends

and buy back, which is great. And if they can restrain the capex, then you've got an opportunity for a more sustained UM sort of price environment for them, as opposed to thinking it's going to be bloom bust. All right, Tim, thanks very much for joining us. Really appreciate Tim Craighead, their senior European Strategy director of Research content for Bloomberg Intelligence, talking to us about the earnings landscape in Europe. This is Bloomberg. That would have been the big take, but

we are talking now to Marcus Ashworth. Excuse me, Marcus, pleasure. I can be a big take if you want me to be, or even a big fake. No, no, no, you're the real deal. And now I remember we're gonna talk about the stay at home economy to stay at home recovery. Are we stuck there? What is your big take on that issue? Well, I'm I'm actually getting an increased worried, as I say, sitting at home rather than

in the office. And I was in the office on Friday, but you know, it shocked me how empty everything was around the city of London. The tubes, the the subway, that the trains, shops which are closed. I mean, this is I know it's summer, and I know it's still theoretically in some pandemic, but we're supposed to have had

Freedom Day in the UK. It really hasn't happened. It's been a damp squib and I think what worries me is that damp I have heard that phrase more times in the last week, considering that I never does everybody know what a dance squib is? I'm not sure our American listeners necessarily do, and I think a lot of British people don't even really know what a dance squib is. Marcus, care to explain something it doesn't like very well? Should we say squire is something you used to like something else,

say firewoks like that. No, it just means that you know, it's not going to go off. It's not gonna go bang, and nothing's gonna happen. And you know, we've we've got to worry here because you know, the train lines are empty, the cities are are empty, and that's because people are not going back into into the city centers, which means restaurants, hospitality, etcetera. None of it flows, none of it works. Now we're seeing a lot of sectors doing better than they were before.

That's because you know, but they will mean revert back to normal. Normal restaurant bookings are going to stay high forever um all the zoom meetings, etcetera. But it's the stuff which isn't going to get back to it's that stuck at ninety or now and they need an extra boost and they're not getting it. And the government ought to get a bit clever. Well, isn't this just the idea of the new normal that we can never go back to pre COVID. Well, I mean that's what we

want to try and avoid. I'm not saying anything should go back to how it was. I'm saying a better way of doing it. We can all talk forever about build back better and all the other platitudes, but you're gonna get people back into the city mostly, and you've got to get people away from hunkering down and feeling scared of going back into society and a normal life. Otherwise there will be permanent scarring and you won't be

able to get that back, and that's a mistake. I think that there are better things that can be done, particularly even if it minds subsidizing commuter fairs and e g. Tourists coming into the center of London. It can be done for the rest of this year or for a few months. They did a thing would eat Out to help out last summer. It perhaps they worked too well, being a super spreader event, but it got people back into restaurants and bars, and the government needs to do

something similar. I'm sure where London goes it will be exact the same in New York City from what everyone tells me. So there's there there. Surely there are pieces of this that are going to stay with us forever, right, I mean, are people going to be masking forever? Are we going to be getting boosters forever. That's not your concern. Your concern is, uh, I'm trying to think of a corner shop in London. Gregg's will no longer be open for sausage rolls all day. It's it's not just that,

it's just that we're not careful. We're going to end up with a halfway house whereby it's not going to satisfy and then enclosed the econom me recovery we could and should be having, and that the ends days get the engine of the economy going, which means people moving around doing things. You sure the store means you can do a three day week, or you can work from home.

Sometimes that doesn't mean we lose all the benefits of what of what we've seen in the last year or two, but we really ought to get the economy functioning as best we can, and that means transportation, it means well. But if we're working, we're only working three days a week in the office. And I've noticed here, Marcus, the same things that you noticed there. Um, it's much worse

than in Berlin. I say, I walk around our headquarters here at one Lexington Avenue, which used to be surrounded by businesses that we're always you know, full of you know, workers that were here for the day. So many of these businesses have closed down, not just like clothes for now, but empty and store for rent signs on the windows that that doesn't seem like it's going to come back very quickly. If you're a real estate landlord. This is permanent,

permanent scarring. We're not gonna see the end of the song of five or six years. And that's I think where people aren't understanding, they aren't thinking through this fully, is that people have their circle quality of life and there's there is a happy medium, and we're not at the happy medium. We need to get stop hunkering down and get some semblance of normality back, get the economy

movie again, and we will all benefit for it. But if we don't, we will we will miss out, I think, particularly the in the cities, not just but particularly in the cities. So Marcus, there's getting people using transportation and going out doing things. There's also getting people to deploy their savings. And as you point out in your piece, the savings ratio is nearly three times the pre pandemic level.

What entices consumers to start, you know, emptying their bank account. Well, it's it's propensially to spend, and the people who are saving the money are the old or wealthier people who have less prepensive to spend anyway. So we're just we're just confounding, and these people may never come back into the economy in the way they were before. If don't go into the inner cities, they don't go to the theater, they don't go to the restaurants or let alone go

to work in offices. But you know, there is there's a knock on effect which I think is is something which the government will end up permanently missing out on on on a percentage point or two of g d P and that has knock on effects for taxes and a whole raft of different stuff. So you know, there's been some intelligent stuff done, the furlough schemes, whole raft

other things. They've missed a trick in the UK, certainly particularly with subsidizing rail fair to get people back into the office and not feel sticker shock, which is I don't know a you I walk around in restaurants and bars in the city now I am shocked about how much you know, food costs, a glass of wine costs a beer. It's it's a it's a people are price gouging, and that is putting people off even coming into this.

It is unbelievable. I went to J. G. Mellen's the other day, which is I think seventy four and Lex, you've been there somewhere on the Upper East Side. I have the best burgers in New York. They're they're up there. I mean, I know, everybody has his own idea of what the best burger in New York is. I ordered a bacon cheeseburger with my kid brother. We both had fries and a beer. Ninety dollars with the fries extra. Yeah, but ninety dollars for a burger and fries. Um, it was.

It was pretty insane. Marcus, thanks so much for joining us. Marcus Ashworth. There Bloomberg opinion columnists talking to us about what needs to be done in order to get the economy back to full speed. Um, we're not there yet, and especially with these delta spikes, it seems like it could take a while longer than you may have thought as well. This is Bloomberg. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews

with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Put on bo Sweeney. I'm on Twitter at pt sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio