China Beige Book: Could See China Growth Under 2%

Bloomberg dot com. Well Leland Miller, a chief executive officer of China beige Book International, has nailed at time and again when it comes to looking at preliminary data coming out of Chinese companies, nonofficial data and estimating the increase or decrease in activity ahead of the official pm MY data that we got out of China that was incredibly ugly record weakness that we saw in the manufacturing sector.

Leland Miller was saying that that we were going to see a contraction in the Chinese economy in the first quarter. That seems almost to be an uncertainty. The question now is going forward, how quickly can China ramp back up production and get supply chains working again. Leland Miller joins us here at our Interactive Broker Studios. So do you have a set based on preliminary data luland of how

much we're seeing manufacturing come back online from China. Yeah, we're we're seeing firms go back to work, we're seeing workers show up. So we're seeing a trend towards firms opening. But the question is how productive are they are they actually being? Um, you know, there's a there's a real question about this. You know, when we break down the data to how many firms are open, to how many are working in normal operations, the ratio is very low.

It's better than it was two weeks ago. Uh, And we're and we're you know, we're tracking this data every single day as it comes in, but this is China's not back to work yet. What we do know is that Beijing has given us their bad data that will be the low no matter what happens. And asteroid could hit Beijing at this point, and they're going to report

better data going forward. And so the question is how much of this going back to work will be a cover for rising p M s and A and a better GDP number and better industrial production number when the underlying reality doesn't doesn't reflect that. And I think we're just waiting to see that because China is going back to work, but we don't know whether they're going back

to growth. So is this literally, as I think about China going back to work, is it literally moving millions of people who are on their lunar holiday in their villages back to the city's, back to the factories and getting them working again. Is that kind of what we're talking about. That's a big chunk of it. So what we're seeing right now in some cases are buses being filled with micro workers who are being driven with police

escorts from certain cities back to where they're needed. Uh. Jent Paying wants growth back at all costs, and so they are they are going to restart factories come hell or high water. But the question is again is you know, is this are we back? You know? Is this? Is this going to stay this way? Are the firms gonna be able to operate this way? Do they have the inputs to be able to build going forward? And none

of this is clear at all yet. There was also a story that caught my attention about the potential to fudge data by having factories actually run electricity without necessarily having the workers to do the work. Are you seeing anything? I mean does that seem like a dominant type of development or just sort of a one off example. It's very Chinese. Look, the the Beijing has been doing things

like this for years. And the reality is, and we've been warning people for years on this, electricity production is not a gauge of the Chinese economy. There's a lot of reasons for this, but the major reason is is that as soon as you came out with the lead Cut Young index, uh, you know, a number of years ago, the Chinese understood people were using that as a barometer,

and they started manipulating the data. So what we've been trying to explain is that if you're out there using the lead Cut Young Index thinking you've got a brometer on economy, you're just listening to the Chinese story like any other piece of data. But this is actually really important because a lot of people have turned to soft data satellite images electricity production as a way to engauge the activity levels in China because they don't trust the

official data. You're saying that this is also potentially fudged or being manipulated. What do you look at them for a reliable gauge? Well, look, we when we started trying

to figure out different ways of tracking the economy. We went through all the different you know, obviously official data is tainted, but then looking through all the sort of private data sources, and what we found is that if you don't collect the data yourself and it's being used on a broad enough scale, the Chinese figure this out and they start manipulating it. You know, this is not some sort of conspiracy theory. It's very smart on the on on Beijing's bath, they want to make sure they

control the narrative. So all these things, whether it's rare rail cargo, whether it's electricity, whether it's whether it's other bits of data. Uh that you know, they want to control the narrative, which means they're going to control the data. And that's why we just got around to collecting it ourselves, because we figured out unless you take Beijing out as the intermediary, you cannot trust the data, particularly in a crisis. All right, so let's talk about China slowly getting back

to work. Give us a sense of how you think this might ramp here on the mid first quarter into second quarter and maybe the ultimate impact on for China. Right, Well, so what the Chinese idea is to have everything bottom out in February and to have more workers come back in and be able to announce much better uh much matter data in March and April, and then have if not a v V recovery maybe but you know, just a nice steady recovery that shows the competence of the party.

The problem is one, we don't know whether the outbreak has actually been contained, so there are medical issues that

we can't we we can't understand yet. The second is this is now spreading around the world and that hits demand, So you have a lot you know, you have a hit to demand domestically as well as it hit to production domestically, and then you have a hit to global demand is hitting tourism, this is hitting all kinds of of of of companies that are normal buyers of Chinese goods, and so the idea that they're going to have a bounce back in demand, I know that's what the narrative is.

I know that's what they're aiming for. This now depends as much on what's happening outside of China as what's happening inside China. How low could growth go in China? Well, what will they announce. I won't announce a number less than say, you know, if we had a full on global outbreak, they'll still announce four percent plus GDP. What could it go? Look, I think that you could have

Q one contraction. You could have Q one barely positive growth, and then you know you're back to your barely positive growth, and then your normal numbers um are are probably around three at a normal times. I mean, you could have one or two percent growth for the year if things were really bad. The Chinese would never announce that. But the reality is if things got much worse, you could see you could see growth under two percent. Certainly, How much of a problem, if at all, is this crisis

for presidency? He's he's having a rough year or two. Yeah, Like Hong Kong and trade war and and and coronavirus. Uh, I think this is more dangerous than all of them, because because this goes to vulnerabilities of the party. It is not a mystery outside of China, but also inside of China that the reason that spread like it did is because officials lied in, covered it up, and and did a bunch of things you're never supposed to do when you've got an illness starting to spread. And this

is not a mystery. I mean, you see it on we chat, you see it in domestic conversations. So the question is, how can they throw enough junior people under the bus, redeem the senior officials in terms of the wonderful response, and and sort of redeem the party's role in this. And one of the things you're seeing and you're going to see going forward is China is already starting to sell itself as the global authority on pandemic control.

You know, will help you out here. We don't need any favorites United States, Iran, you want our help, it'llly you want our help, We're here, we show you how to do it right. It's a it's a clever narrative. It's ridiculous, but it's a clever narrative narrative. Leland Miller, as always, we appreciate your commentary. When it comes to all things China, we learned so much. Leland Miller is

the chief executive officer of China based Book International. My go to person for things on China, which is, uh, you know, you have to really dig under the hood. There a lot of questions surrounding the markets right now. A key one is how long will the effect of the shutdown that we saw in China effect manufacturers in

the United States will affect supply chains. There's no one better to talk about that than Brooks Sutherland, Bloomberg opinion columnist cover enjoining us here in our interactive Broker Studios. I want to start with the data that we got out today showing that manufacturing declined more than people expect

to the United States in the month of February. I'm trying to understand as people game plan this out, do we have a sense of how long it will take for supply chains to get ramped up manufacturing to get ramped up once we have a sense of stability here. I do think with that I s M number, the headline is somewhat of a misnumber there, because if you look at what's bumping that number up, part of it is a lengthening out of delivery times, and typically that's

supposed to be a good thing. It means demand is so strong that suppliers are struggling to meet that. In this case, it is likely an issue with people just not having the parts that they need because they're not able to get them from various different parts of the world. So to me, this says that the worst is yet to come for manufacturers, that you'll likely start to see some of the aftershocks from the supply dick chain disruption later on in the second quarter. So correct me if

I'm wrong, Brooke. But is I think back to the list just a few weeks ago, when we were in the thick of earnings, you know, other than Apple and maybe a couple of the companies that were calling out the coronavirus as a reason to change their auto we didn't or did you, Did we hear much of anything from your industrial companies that you come No, not really, which is interesting because their earning season came a little bit earlier, and so at that point in time, most

of the outlooks didn't really include any impact from the coronavirus. Now, the exception was Emerson Electric, which did come out at the end of last week and said they're increasing their expectation of the revenue hit from coronavirus to as much as a hundred and fifty million. It had been, you know, significantly lower just a few days before when they had held their investor day conference. So this sort of shows

you just how fast moving this is UM Now. I do think you'll probably start to hear some guidance updates from these companies in the coming weeks. Uh. You know, g E is set to report its outlook on Wednesday, and so certainly we'll be keeping an eye on that for any guidance there, particularly around the coronavirus. But you know, I think the key issue for the manufacturing side is this supply chain disruption. But I do think you can look at some of these other companies a sort of

a tell as to what we might see. I mean, if you think about a company like three M. On the one hand, they make face masks, which they're seeing a huge spike in demand. On the other hand, they make components for the electronics industry, and we did have Microsoft come out and warn about supply chain disruptions for its Windows PC unit. UM. Honeywell is another company that makes personal protective Year, but it also supplies components to the aerospace industry, and that is a much bigger, much

more profitable business for that company. And I do think there's a risk of pretty significant downturn in aerospace when you talk about supply chain. So just think about how China is trying to get everybody back to factories and demonstrate that they are ramping up production. How do we have any precedent historically of how long it takes to get things back up and running and supply chains working

as they had been. I don't know that we do, because I think what we've seen is that the response here has been so much more dramatic than what we saw with Stars in two thousand and three. And part of the reason for that is that China didn't account for as much as the of the world's supply chain at that point in time. But I think about Cafe Pacific,

so they've cut about seventy of their capacity. And I saw one analyst report this morning saying during Stars that was So that's a really significant shift as you think about sort of the magnitudes of the response here and how we come back from this. But it's not just China anymore. Now we're dealing with Europe. Now, we're possibly dealing with the U S and maybe even travel restrictions domestically.

I mean, we just don't know. And as if you start thinking about how you get parts from point A to point B, there's a lot of obstacles and a lot of unknowns, and so I think this is going to take a while for companies to bounce back from So Brooke. While we have you here, um Boeing. I saw a story that they're out there hiring a lot

of people for the seven thirty seven Max. Does that suggect that that maybe they're close to getting this thing back in the air, you know, I think they want to be prepared because I think to shut down a manufacturing line for an aircraft is a really significant step for them to do that. I mean, they put that off as long as they possibly could, and that a big reason for that was a concern about having the labor there to be able to manufacture the planes once

they do restart that. And there's also a lot of steps involved here with once the Max is on grounded, you have to get all of those planes ready to fly again. We've already seen you know, potential issues with that or bowing and said they've found you know, debris and some of the fuel tanks, whether that be like rags or you know, sort of leftover tools, and so they have to make sure that all of that gets fixed. And you have to bring these planes out of hibernation.

I mean that takes time, that takes people, that takes effort. So look, I mean I think Boeing is progressing towards getting this plane ready to fly, but there are niggling issues that keep coming up and you know that may take a little bit of time to work through. There was a important the Seattle time not too long ago about the risk of this timeline potentially slipping a little bit. Now we're not talking about major shifts like we saw the course of last year, but there is potentially a

risk there. What is the latest date? Do we have a date for? Boeing is stuck with mid But what means maybe there's some wiggle room there in terms of your definition. So all right, thank you very much brook Sotheran, and thanks so much for joining us. She covers all things industrials for Bloomberg Opinion. You can read her work excellent work on Bloomberg dot Com, Slash Opinion or if you're on a terminal O P I N go for books, work and all the other work from a Bloomberg Opinion.

She joins us here in our Bloomberg Interactive Broker Studio. Well, despite the risk on field to the equity markets. Treasury yields continue to grind lower. We got the two year down about eleven basis points to zero point eight four percent, just extraordinary levels on treasuries. To get a sense of where yields could go. We welcome r J. Gallo. He's a senior portfolio manager, head of the Missable Bond Investment Group ahead of the Duration Committee for Federator Hermes. They

have about eleven point seven billion under management. They're based in Pittsburgh. Of course, r J, thanks so much for joining us once again. All right, so we the coronavirus is there, it's spreading. Markets are trying to discount the impact. I guess one of the next issues for the market to really get a handle on is when will the

FED cut and how much will they cut? What are your thoughts, well, I think it's pretty clear that this central bank, under the leadership of Powell as well as his most recent predecessors, have been eager to be proactive in the when faced with crisis or challenge, Yelling put off a plan tightening because markets got really volved all the way back. I think it's BERNANKI certainly got very aggressive.

He's the one who sort of pioneered que all um Inen tightened maybe more than the markets would have liked, maybe more than was perhaps needed at the time, and quickly reversed course. So I don't think they are inertial. And I think the statement that came out last week from Powell indicates that the FED will move. Um. I don't know if in a textbook sense everybody agrees they

should move, but I don't think it hurts anything. Uh. They can't cure the virus, they can't produce a vaccine, but they can help cushion the blow economically by lowering short term rates in such a way as to help bolster somewhat interest rate sensitive sectors that otherwise wouldn't get

the boost from lower rates. So I think they are going to ease the three eases almost four eases that are on the work now seems extreme to me, but I know some highly respected research firms and research areas in the marketplace names everybody knows, UH suggests they're going to cut hunter basis points. So there's you know, there's your basis point eases. UM. I wouldn't be surprised if

it'll be less than that. So yeah, Deutsche Bank and Coleman Sacks primarily among them, coming out with analysts saying they expect for rate cuts or a hundred basis points of cutting. I will just note that as you see stocks rally, the number of expected rate cuts is coming down precipitously. UH four year end now at just about a little over three full rate cuts by the end of January next year, so coming down. And I want

to talk about that. How much do you think this erodes FED credibility if basically stock sell off and everyone looks to them to just cut rates to prop up valuations. I mean, is that the single data point that the FED is looking at this point? I actually don't think it is. I think that the FED cares very much about financial conditions. You all provide the Financial Conditions Index. Uh, it's on everybody's terminals. Have people have a terminal in front of them. UM, it's now down uh negative one

standard deviation. UH. The FED wants markets to work. They want capital to be provided at reasonable prices. UH. They don't want gapping or volatile markets UH to to present a headwind to economic expansion. And the Financial Conditions Index sort of looks at volatility and valuation and tries to um you know, quantify if you will, that tricky measure of financial conditions, and they've clearly contracted with all that's

gone on so rapidly over the last couple of weeks. UM. It's not just the stock market, the high yield corporate markets UH certainly slowed down, and I think the deals got pulled last week. There's no planned issuance at this point. I don't think that's a challenge to the Federal reserves overall framework that they want functioning of financial markets. So the easy isn't just to target a stock price or

avoid a loss. I think it's to make sure that the financial UH flows in the economy don't grind to a halt. Twelve years ago when the financial crisis was starting up, it's when those financial flows ground to a halt, When when the provision of liquidity, when the transactions and repo markets, when the issuance of bonds ground to a halt, there was a clear sign of deeply challenging problems that the Fed needed to act to. I don't think we're

there right now. I think that we have a more robust financial UM system right now, much better capitalized banks, sharp moves in markets are challenging for many, but financial prices changing does not beget a financial crisis. Um. The feds willingness to ease, on the other hand, is more looking at how the financial markets are sending a signal how the real economy will react in a public health crisis of a magnitude we have not seen if this

gets as bad as people think it might. A highly transmissible virus that has a mortality rate that's somewhere around five to ten times the influenza which we did with every year. Um, there are stark steps that are being taken. Look what China did. They shut down cities worth fifty million people. That real economic consequences are very profound. So the Fed's easing isn't just to sort of blow the

stock market, uh back up. It's it's to try to cushion the blow from an economic standpoint of all of the measures that may emerge in the United States as testing takes place. We're going to see many more cases in this country, and you're gonna see school district shutting down, you'll see less travel, you'll see events shutdown. That's what the FEDS reacted to. R. J. Gallow thank you so much for being with us. R J. Gallo, senior portfolio manager and a head of the Unicipal Bond Investment Group

as well as the Duration Committee it federated. Hermes Let's shaft gears a little bit talk politics. Former Vice President Joe Biden had a landslide win in South Carolina over the weekend, and of course tomorrow is Super Tuesday. To put it all in a framework, we welcome Wendy Schiller. She's a professor of political science and public policy at Brown University in Providence, Rhode Island. Wendy, thanks so much for joining us. Let's start with Saturday. What really changed

in the Democratic Party on Saturday? If anything? Well, I think two things came out of South Carolina. One is the you know, absolute importance of African American voters to the Democratic Party's fate in November, but also to each individual candidate running. I think that was really evident. And the resurgence of Joe Biden. I mean, we saw him a little bit better in the in the most recent debate,

and he won resounding. It didn't quite pass fifty. I think that would have been really, you know, the striking victory, but he you know, really trounced Bernie Sanders in that respect. So the question is does that pattern hold going into tomorrow's primaries well, And there also is the development of Pete Budge dropping out mayor Pete dropping out of the race and throwing his support behind Joe Biden, And I'm wondering how much momentum you think that does give Biden

against the Bernie Sanders ticket. I'm not persuaded that this is an automatic gift to Biden visa vis Sanders, because Sanders did well in Nevada particularly it's a caucus state, granted, not primary, but there are a lot of Latino voters in the DEM Party in Nevada, and Sanders did well with Latinos. So I'm looking at Texas. Obviously California Sanders

is polling pretty well, but Texas is also crucial. If Bernie Sanders can show that he can get you fifty six of the Latino voters tomorrow in some of these key states, I think that puts him in the conversation about leading this very diverse party to victory in November and takes a little wind out of Biden's sales because it's not just the African American vote. It's a higher turnout among African Americans, but certainly there are a lot of Latinos, and I think getting um, you know, Democrats

get about seventy percent Latinos. Getting that vote and getting that vote up I think gives Bernie Sanderson bragging rights if that's what happens tomorrow. So Whendy, Tomorrow is a super Tuesday, a lot of delegates up for grabs. Who is it make or break for tomorrow? I think the obvious person is Amy Clobachar. So Amy Klobachar is leading in Minnesota right now by sort of national agate poles, but she's not trouncing Sanders right Sanders isn't within striking distance.

If for some reason Sanders wins Minnesota and she loses Minnesota, I think there's just it's gonna be very hard for her to stay in the race. If you can't win your home state. Ask Al Gore Circuit two thousand when he law to his home state in the general election. You've got to win your home state. Same thing for

Elizabeth Warren. You can make an argument about Massachusetts proximity to Vermont and Bernie Sanders popularity there, but she's got to come really close to winning, if not outright winning Massachusetts to really make a claim that you can, you know,

successfully compete at the national level for the presidency. Professor Sheller had given your experience working with a variety of politicians and particularly serving on the staffs of Senator Daniel Patrick moynihan as well as Governor Mario Cuomo of New York, I'm wondering from your perspective, whether the Democrats are consolidating support enough early enough. In other words, what is sort of the make it or break it time when we have to see a certain degree of momentum emerging behind

one candidate. Well, I'm not convinced that that they have to do that, because we look at what happened with Trump in UH and you know, there wasn't a lot of consensus there. He kept doing pretty well in terms of the proportional representation states earlier in the in the primaries for the Republicans and just emerged a somebody who they weren't going to be able to beat. That could

very well happen with Bernie Sanders. So eventually, you know, Republicans unify, even if they say they didn't want Trump by election day, they got out the door and they voted in a unified way for Trump. Democrats did not do that for Hillary Clinton. So the D Day for Democrats is always election day in the in the national scope of things. But I just think, you know, Democrats have to decide. If they don't unify, they can't win.

So this is just gonna be whoever it is. Bloomberg, Sanders, Biden and Bloomberg also could benefit from Pete Bout dropping out. If Amy Klobuchar drops out, then you know, creeping up and sort of being competitive with Biden. If Bloomberg can show that he can get some African American votes tomorrow in addition to latinos, he becomes a viable alternative to Bernie Sanders. So at some point Democrats are going to decide, as Republicans always do, that they're just going to get

behind whoever the candidate is. And we should note that Michael Bloomberg is the founder and principal owner of Bloomberg LP and this radio station. So Wendy, let's talk about Mr Sanders here. Bernie Sanders can he beat Trump? And do you think do you agree with the concern that

maybe he could actually hurt Democrats down ballot. You know, it's really sort of, you know, exploded all of our ability to predict really the average voters inclination a to get out the door to vote, which is something underestimated in terms of Trump supporters. And that's the magic ticket for Bernie Sanders. If he can win. He wins with the same kind of strategy the Trump had, which is

tremendous enthusiasm among his supporters. So you know, people who like Bernie are getting out the door and they're going to make sure to vote. If he can actually, as he says in the debates, if I can expand that number of people who are really enthusiastic about me, he can sort of pull a Trump like victory. I do think there are challenges to that for him in particular areas, in particular swing states, but I don't think it's impossible

to do if he follows that same playbook. And the thing to watch is African American turnout turn out generally in the primaries tomorrow among Democrats, but also African American turnout in places like North Carolina. If turnout is high, even if it's because bidens in the race or whatever reason, you want to say, if people vote in the primary, they're gonna vote in the general. That's usually what we see.

So if Bernie can generate high turnout in the primaries, he's got an argument that those people will still come back to the polls in November. So I don't think anything should be you know, counted out as a possibility. I think it's going to be harder for him to explain how he'll pay for things that he's promised to do. But enthusiasm is the number one, you know, a component of turnout, and that's Bernie Sanders has that right now amongst a decent size of the Democratic Party. Wendy Schiller,

thank you so much for being with us. Wendy Schiller, Professor of political science and public Policy at Brown University in a Providence, Rhode Island. Thanks for listening to the Bloomberg pen L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa bram Woyds. I'm on Twitter at Lisa bramw wits one before the podcast. You can always catch us worldwide on Bloomberg Radio,