China Clampdown Could Reverse Global Real Estate Prices, Orlik Says

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well news crossing today that on Bang Insurance Group is getting pressured to stop buying so many assets overseas and possibly sell the iconic Waldorf Astoria hotel in New York, which it bought for almost two billion dollars. In with us to talk about this is Tom or Like, chief Asia economist for Bloomberg Intelligence, normally based in Beijing, but he is in New York today in our eleven three oh studios. Tom,

thank you so much for joining us. I want to start with what's behind your request by China to a Bang and others to reduce overseas investments and to sort of, you know, like what exactly triggered this. I think the lens through we have through which we have to see this is a broader attempt by China's policymakers to crack down on financial risk and to crack down on capitalite

flows and and bank ticks both of those boxes. On financial risk, they're issuing short term, high interest rate investment products to finance a liquid long term assets. That's a massive asset liability mismatch. On capital outflows, well, they're making a bunch of purchases overseas, so it's trying to crack down on these two areas and banging other firms are

coming very clearly into the regulators crosshairs. Tom, Can you put this into the context of government policy in China and their Silk Road initiative, And because they seem to be putting a lot of money in overseas development, they just wanted in a certain way and under a certain control.

I think China's policymakers are firm believers in their own ability to walk and chew gum at the same time um, and that means that they think they can pursue an aggressive outbound investment strategy on the Belt and road building infrastructure in Southeast Asia into Central Asia at the same time as cracking down on what they see as the riskier aspects of capitalite flows, as it was the case with Ambang. So to me, this is this is really compelling.

If Unbang does sell the Waldorf Storia, which have bought just three years ago, what other assets could it sell And could we see a mass sale among other assets by other companies that are engaging in similar practices. So I think we're still a little bit in the realm of speculation here. We have a well sourced story on the Bloomberg terminal. On this, we so far do not have confirmation from China's policymakers, and A Bang are certainly

not affirming that they've been required to sell their overseas assets. Um. If it does come to that, um, then I think we're going to see some reversal in that excitement about real estate prices. Well, I mean, that's sort of what I'm getting at, even if it's let's say, even if they're not going to confirm it, or even if they don't sell the idea that Chinese companies may avoid some of the big purchases I'm thinking in particular property purchases in the in the New York area, for example, or

in London. That changes the dynamic for those markets. Now, yeah, I think that's right. I think one of the underlying positives for global real estate markets in the last few years has been this idea that the big Chinese buyer in the case of the prestige project like Waldorf, or the just the middle income Chinese buyer in the case of run of the mill residential property is going to be there with a wad of cash willing to drive up prices. If that story starts to change, clearly there

are some important implications. Tom. Before you came in, you mentioned that you know you've been in China for about a decade, perhaps even longer. What are some of the biggest misconceptions that you try to dispel from people who just read the headlines or news but actually don't live there and spend time there. I think what people underestimate is the capacity which China's policymakers have to pull policy levers to change the dynamic in the short term. UM

So we underestimate the power of the Chinese government. I think people are right that China's government and China's economy faces some really serious problems in the long term, particularly on the over extension of the banking sess system and the overborrowing by the corporate sector. UM what people underestimate is the capacity of China's policymakers to move things around in a way which delays any kind of day of reckoning. Are we seeing any sales of assets overseas on the

part of bigger Chinese companies yet? I haven't seen any of that so far. So so far, there's been absolutely no evidence that this is going on in any way. I think this is the beginning of the story, not the end, got it? And so what about wealthy individuals? Are they still moving money overseas or is that slowing down a bit? So if we look at the bigger picture on China's capital outflows, the government has really been extraordinarily,

extraordinarily successful in stemming the outflow. If you go back to the end of two thousand and sixteen, capital light flows were picking up again. The big fear was that we were going to see a flood of outflows at the start of two thousand and seventeen and we'd be back to panic mode on China's economy. That hasn't happened. At the end of last year, we saw the beginnings of a crackdown on corporate and household outflows. These latest stories on and bang h Na Dally and Wander show

an extension of that policy. And if we look at the numbers, China's capital light flows have come right down from fifty sixty billion dollars a month at the end of last year, too close to imbalance in the latest data. One of thank you very much for coming in and spending time with us. Tom Orlick is our chief Asia economist for Bloomberg Intelligence. We hear a lot about the souring US Russia relations, and really underpinning it is the

ongoing investigation into President Trump. And here to give us a little bit more color from the Russian perspective and from a deeply knowledgeable and informed place, is Richard Khan, managing partner at Eurasia Advisors, based in New York City,

also has offices in Moscow. And Richard, you have a deep background with Russia, with financial dealings of all sorts between Russia and the US, and I just want to start with you know, how serious do you think that this is being overblown, the Russia investigation into President Trump? And do you think that it's not fair to say that this is really at the heart of the ongoing conflict between the US and Russia. I do not think

it's being overblown, Lisa. From the first time I spoke with you, roughly a year ago, I highlighted some red flags, mentioning people's names such as, you know, Paul Maniford and Carter Page, folks who I felt or indicative of efforts

by the FSB to place people around Trump. And since, and I've of course been cautious about stating what I really think may happen in that context, but I think we now have a pretty good picture of what's going on, and those of us who spend time in Russia and are familiar with the FSB tactics really have I think very little doubt that there's a tremendous amount of fire here. And there are a variety of criminal UH statutes that may well have been violated that I'm sure Mueller is

looking at right what UH. I would give several examples. One would be cyber intrusion, another, campaign finance laws, false statements to federal agents, foreign ancient registration, f c p A, RICO,

money laundering, espionage, possible obstruction of justice. Of course, all of these things I can give examples of in terms of how I think they may play out, But one simple one would be well, first, let me just say during the time period when when we do not know all of the facts, if there is a fire, let's say regarding money laundering, the Russians are aware of that, just as they were aware of the meeting in Trump Tower, but did not disclose that during those time periods when

they know it but we do not. That's what's called compremat. That puts the Russians in a position of having information that's embarrassing to the President and his team and allows

them great leverage. But in the money laundering context, as an example, I'm sure that Mueller is looking at a very classic technique used in the high levels of Russian government, which is the movement of capital to real estate markets to clean money by basically by paying high prices for real estate and eventually having the ability to sell those assets and have the money at that point be utilized. In Schedule three countries meeting countries which are on the screen, Well,

this all ties to two very recent developments. Because it's clear that Congress doesn't fully trust President Trump in his dealings with Russia. That could be an interpretation of popular one from the sanctions that were by passing a bipartisan fashion through Congress UH that resulted in Russia's retaliation by ejecting the more than seven hundred diplomats that are in Russia. And then of course there's this escalating concern about Russia's

interactions with North Korea, with Venezuela. I mean, this is getting very complicated with Trump. I mean, how much leverage does he have within the US even to deal with Russia, even if Russia does have compromont on him. Well, the way I think of it, and I look going first say we eurased advisors. We want to see good relations with Russia. That's what we're really about is trying to build bridges, trying to see business move ahead, resolve problems.

But that has to start in a situation where the United States is being represented by people who are trustworthy and both in terms of not having complet model them, not having been paid as some of the people around Trump have been, and in addition being in a position to have the confidence of the population behind you in order to make deals. I actually view Trump right now

as the major impediment to better relations with Russia. And I say it that way because I don't think it's possible having Trump in power given all that we already know about him, and I believe there will be a

great deal more that comes out. I don't think he's going to ever going to be in a position where people in the United States, whether they're in Congress or just a population generally, are going to have a confidence that he's actually acting exclusively in the best interests of the United States, without any concern for information that people may have on him or for his own business dealings. And as you were just saying, Lisa, the tentacles of

this go far beyond Russia. This this comes into play when you're dealing with relations with China, with Turkey, with Greece. It comes into play when it comes to the undermining of our civil society in the United States, whether in other words, attacking anyone who is going to be part of the accusations against him, anyone who is essentially playing a prosecutorial role, whether that's the court system, whether it's

the media, whether it's an individuals such as Mueller. I think he has made the decision from a fairly early stage because he knew what was out there, that he had to undermine these sources of attack on him, and I think he's done that in a very broad manner

and it's extremely harmful. So it's a matter that I think that affects all of us as he tries to deal with these allegations, although a lot of people would say that they have been overblown, that there has been no proof that you know, he is generally moving forward with the consensus of a pretty big corps of people who think that he's still doing a good job despite you know, some of the less popular polls, and they have come out, and you know, he's basically put some

pretty respected people in right below him, and they certainly like McMaster, who is absolutely respected broadly, so you could say that, you know, they could act and negotiate to a decent level. Well, Look, I have respect for many people whom he's hired. I know Rex to Learsten somewhat from having served on a board with him years ago.

And I think many people and I would assume he's in this category trying to be helpful in the situation, recognize that there are serious problems with Trump and many and his team and want to be responsible and our patriots trying to do the right thing. I'm not sure

that's going to be successful for them. And I also don't think that at the end of the day that that is going to be enough to over in any way overcome the uh the undercurrents that we are now seeing coming out in terms of actual links between Russia and the Trump team. And as I said, I think there's gonna be a great deal more of that. What we look forward to your commentary and your thoughts. Richard Kahn is the managing partner at Eurasia Advisors, speaking about

US Russia relations. All right, here to tell us what to do with your money is Phil Orlando. He is the chief Equity market Strategist, group head of Macro Balanced and Growth and Income Teams at Federated Investors, and he joins us here in our eleven trio studio. Phil, thanks very much for being o. Hey, Pim, thanks for very much for hearing me. So let's let's try to just understand exactly where we are in the market right now. And you know, we've heard these calls that equities are overvalued,

bonds don't return a lot. What are you suggesting to your customers right now, Well, we don't think that stocks are revalued per se. We're sitting here at about nineteen times this year's estimated earnings of a hundred and thirty dollars. But I gotta tell you that the earnings are just coming in beautifully. You know. The first quarter is a fifteen percent year every year, best quarter in five years. Second quarter we're about sixty done. We're up about ten

eleven percent, another solid quarter. Journal this morning made a comment that this is the best six month period we've seen in corporate earnings since um and but how much does that due to the weaker dollar? Well, currency is absolutely headwind. But but you know, why do we Why are we gonna penalize companies because the dollars weeken? They're the large cap companies are selling more stuff overseas. That's

the environment in which they're dealing with. And if the earnings were terrible now because of the strong dollar, uh and and I would say, well, we've got to compensate for the strength of the US dollar being a headwin as opposed to tailwin, you'd say, and just just treat the earnings as they are. That's true. We wouldn't say that. I have to say, when you came in here and we were gonna we were talking ahead of the segment you were talking about, you're expecting a three to five

percent pullback. How do you think about that and how do you sort of see that being triggered given the fact that earnings are coming in fantastically and that there isn't really anything that seems to shake confidence of investors. So you're in great shape right now with the earnings

valuation at nineteen times is not that excessive. But earning season to end in a couple of weeks and then you know, seasonally, we've got this August September period, which, you know, the duldrums of the summer tend to lead to corrections. You've had a twenty move in the market since, uh, since the election. Uh, Washington can't seem to get out of its own way, for reasons that I still don't understand.

They keep they keep trying to pound this you know, round peg of of healthcare into a square hole here, as opposed to pivoting over to something that actually matters, which is to focus on corporate tax reform and infrastructure and repatriation, the things that will move the needle. So at some point, maybe the market just says, you know what, we're just frustrated as hell with the fact that this administration can't can't shoot straight and and maybe that is

what you know, triggers a little bit of an air pocket. Well, they might be frustrated, but if you're invested in the SMP five hundreds, you're up more than ten percent so far this year correct on the basis of earnings that there's no Trump. You know. But let's say, as an investor, you don't do you really care why it goes up. If you're long you just are happy that you're you know, your trade played out or your investments. Well, all right,

so at Federated investors were long term investors. And the way we see this cycle playing out is we think the SMP, you know, at two thousand or so last election, we thought we had a nice clean run to three thous and looking out into the spring of so as as as we see that fifty percent move, we have no problems with what's playing out. But we're not the average investor. The average investor is looking at day to day, week to week stuff. The hedgees are not looking out

to it for a year. Let me just challenging them, because when you say average investor, let's just I understand what you're saying. You know, it's like at the margin, they may set the price on any given day. But as you just described, if you're a long term investor, if you're looking to make an investment now for three to five years down the road, couldn't you be considered to be like an actual investor as opposed to a speculator. And if we were to get a three, five or

seven percent declined, what would you be buying? Oh, we would absolutely be buyers. And the areas that we have shifted our focus to post election were those areas that are economically sensitive that we think will will benefit from the improved economy. So technology, financial services, energy, materials, industrials, the areas that you know will do better than the

big stable dividend pairs. So I want to go back fil to what you were saying about the three to five percent correction, that we're entering the dull drums period of the year, and that typically that's a good time for a sell off. Of course, um, that is not enough of a catalyst that people are bored to to trigger a sell off, because otherwise they would have sold

off a long time ago. But you know, I think a Rist cost Rich of Black Rock was on Bloomberg Television earlier today and he was talking about the build up of leverage at hedge funds and other investors in particular to buy stocks. And I have to wonder what that means for short term interest rates. If they rise, that leverage becomes much more expensive. Perhaps you get margin calls or having to post a more collateral and all of a sudden that could trigger a sell off. Do

you see that as a potential catalyst. If not, what are some of the other potential catalysts. So Russ is a smart guy and and looking at the leverage of head funds, hedge funds is certainly an issue as we look at the potential for rising interest rates. Uh. We we know on the calendar that that we've got the FED Dr Yellen giving a key speech at at Jackson

Hole in UH. I guess in about a month or less, little less than a month's time, where we think she's gonna lay out, you know, UH, a firmer plan in terms of the Feds unwind of uh, you know, the early stage of shrinking that four and a half trillion dollar balance sheet. We think the Fed kicks off with that, uh,

definitively at their fo MC meeting in mid September. So so perhaps somewhere in there the market has the reality of the shrinking of the balance sheet, which is another way of saying that the Fed will continue to to withdraw accommodation from the market. Maybe maybe that is a trigger that that that gets investors starting to take some chips off the table. So it's really hard to sit here and say definitively that this is the issue that's going to trigger it. Uh, there may be three or

four things that the markets nervous about. And given the fact that that you're you're entering sort of a typically perilous time with the stock market having done phenomenally well. Uh and and maybe we're just gonna, you know, nitpick our way to a small correction. Fel gonna be nit pick our way to that small correction. We're gonna be doing it with a lot fewer stocks. Do you have any thoughts on this idea that inn we had about seventy five hundred publicly traded companies that wasn't like the

Wilshire five thousand. Right now we have about thirty five hundred that's at the kind of fifty percent. That's just fewer stocks to invest this maybe even growing amount of money. Uh. That's an issue. I would think that with a stronger economy, uh, with more business friendly fiscal policies, uh, we would start to see a wave of I p O s that would bring more, you know, fresh companies into the market.

Another concern to your point, Pim, and we were discussing this at our morning meeting this morning, is that in the past, you know, you'll remember this, you're an old guy like me. Uh, companies when the stock price gets to a certain level, would split the stock two four three four. Don't they don't do that right now? Not are? Are are? One of our Dan Paris, the head of our strategic Vale You franchise, was bemoaning the fact that that, uh,

you know that that McDonald's is trading it. I don't know, it's north of a hundred bucks. Was a hundred fifty bucks right now? In the old days, you know, Uh, companies would say, okay, we want to keep that stock somewhere between thirty and fifty dollars a share, and you would periodically get these two for one three for one splits. Now everybody's working up towards a thousand dollars, you know, Warren Buffett saying, we don't need to split the stock.

Let's just keep you know, keep Berkshire Hathaway up at you know, these stratospheric levels. So that that also creates an issue because the retail investor, per se, doesn't really have the ability to buy a Hunter and hundred fifty dollar stock. They like to buy stocks that are of share, so they go to index funds where they can buy them all. Phil Orlando, thank you so much for joining us. It's always a pleasure to speaking. Thank you so much.

Enjoy the rest of your summer. Thank you too, Phill Orlando. Chieffectuty Equity Market Strategistic Federated in Investors, joining us here in our Bloomberg eleven three oh studios. Well he's real, he's here with us today. Paul Sweeney US director of Research and senior Media Internet Analysts for Bloomberg Intelligence. He can be followed on Twitter at pt Sweeney r I P T. Sweeney tell us about this combination Scripts, Networks

and Discovery. Why are they getting together? You know, I think they're getting together simply to get scale in a consolidating media business that is being disrupted by the likes of the Netflix and Hulus and you know, all the other types of Internet enabled commerce and entertainment. So we saw in the last you know, a couple of years, a lot of consolidation on the distribution side of the business.

We saw a T and T by Direct Tv, UH, Charter Communications, by Time Warner Cable, and now I think we're seeing kind of the flip side, some consolidation on the content side of the media equation. UH. And this is a deal Discovery and Scripts that investors have been speculating on for a long time. It really makes the

most UH strategic sense. You've got two companies that are very good, high quality cable network companies, but you know, in this relative to the UH Foxes of the world and the Disneys of the world, are probably a little bit subscale. And by merging they can get a little bit of scale to compete against some of these big distributors. And they're hoping that people will continue to want to watch people renovate their bedrooms for perpetuity. I want to

get a sense from you, Paul. Discovery shares down more than six percent right after the open on this news. Are they overpaying. UM. You know, I don't think they're overpaying, but it's um. What happened this morning also is um uh Scripts reported earnings that came in blow expectations, that they pre announced their earnings in controjunction with the deal, and they also took down their their guidance for the

remainder of the year. So it just highlighted once again that the cable network business, UM, you know, isn't quite as good a business as it used to be, and in fact, the cord cutting issues are are impacting all cable networks, including the ones that Scripts and Discovery UH. So I think, you know, in the context of the price tag paid in in light of the reduced estimates for Scripts, I think some investors are taking it out

on the Discovery. But again, it just kind of highlights one once once again the challenges that these companies, no matter how big they're going to get, UH, will continue to face in terms of cord cutting and the ability that and the impact that has us on its advertising revenue and on on on its affiliate feed revenue. Well, does that mean that they really haven't taken the opportunity to change the business model at all? From just relying

on advertising, specifically a lot of advertising from automobile companies. Yeah, the the cable network business historically has been the best part of the television advertising UH story over the last ten to twenty years, as people spend more time with the cable networks versus the broadcast networks. But that is

essentially played out now. The story is can these cable networks and the broadcast networks, but particularly the cable networks, how do they get their content to the consumers If the consumers are cutting the cord or maybe never even signing up for paid TV at all? How did they get their content in front of consumers and get paid

for it through advertising or affiliate fees. So we you know, they need to go direct to consumer, much like HBO has gone direct to the consumer with HBO now um and I think they need to be a part of some of the skinny bundles that some of these consumers are signing up for. They need to have a direct

to consumer solutions. So I think one of the expectations is that Discovery and Scripts will pull their content and create a direct to consumer kind of brand to go right to the consumer, much like Netflix goes right to

the consumer with its content. Well, the market might not be that enthusiastic about the price and especially the earnings of Discovery, but stock traders are very happy with the news that UH soft Bank might purchase Charter shares at the highest level ever, up more than four percent so far in trading. UH, can you just give us a sense of why soft Bank would want to buy Charter?

The recent soft Bank would want to buy Charter is because soft Bank also owns Sprint in the United States, and Sprint is a company that is not performing well, that is really challenged from a strategic perspective. It is the fourth of the four wireless carriers in the United States, so it's in a weak strategic positions, and it's in

a relatively weak financial position, and it Massa. Siro Son believes that by combining with Charter, a much stronger company, a company with a diversified business of video and high speed data and landline phone, that this would be a good way to shore up Sprint. But you know it's strange, Okay, So SoftBank tried to get Charter to buy Sprint outright, they said no. So now soft Bank is trying to

just buy Charter. Sprint shares not up, they are down. Well, it's surprising to me, it is a little bit, and I think I'm I'm actually surprised a little bit that that Charter is up as much as it is, because I think the there's a high level of skepticism in the marketplace that Massa son Um can in fact pull

off by transaction and acquisition of Charter Um. You know, if you factor in some type of premium for Charter an ACQUA system, Charter would approach two hundred billion dollars when you include the sixty billion dollars in debt that Charter has. So this is a huge transaction, UH, and it would be very difficult from also to pull off from a financial UH perspective, even if Charter wanted to sell. And let's remember when we talk about Charter once again,

we're talking about John Malone. He has a significant shareholder of Charter Communications, and he would have to agree to any deal. And I do not believe that he is looking for an outright sale of Charter. Is he willing to do some type of UH strategic transaction with Sprint or with Massa son Very possible. John Malone is the you know, a prolific deal maker. So maybe there's some stret strategic outcome here, but I don't think an outright

acquisition of Charter is in the cards right now. Well, I mean that's a that that's something I guess they haven't figured out yet because they're trying to make this deal happen. I mean, I wonder if the technology is up to date. I know, yeah, Sprint, you know, it's you know, I just talked to John Butler are telecom antals here, and he made the comment to me that Sprint, because of its uh you know, a week financial position, has not been investing in its network. Paul Sweeney, As always,

we love hearing from you. Paul Sweeney, thank you for joining us. He is US director of Research and senior Media and Internet Analyst for Bloomberg Intelligence. 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.