EU Rejection Poses Bigger Danger For May Than Brexit Rebellion

Theresa May speaking in Parliament a raucous sex session of Parliament, and one of the comments that you made is that what we're proposing is challenging to the European Union and speaking in detail about several of the areas that the United Kingdom is negotiating as a Brexit position with the European Union. Here to help us understand what's going on right now is Clive Crook. He is editor for Bloomberg Opinion.

You can follow Clive on a Twitter at Clive Underscore Crook, and he comes from our studios in Washington, d C. Clive, what do you make of Teresa May's statement regarding the ongoing negotiations over Brexit and whether the United Kingdom will really have the ability to craft its own trade agreements? Well, I think the statement was actually pretty good, Um, but it doesn't actually alter the politics of the situation all

that much. You know, she was pretty clear about what the deal she wants to put to the EU represents, and I think as a matter of fact, there's a lot to be said for the approach she's adopting. But the problem is, the political problem is that her own party is split right down in the middle on this issue. Um.

That's why you've seen the resignations from the cabinet. Um. And the question is whether she can keep the party together sufficiently well to actually advance uh, this proposal and make it, you know, make progress with Europe and getting to a good deal and acceptable deal. At the moment, you know, basically the government is is hanging on by its fingernails, and I don't think the statements she just made actually is going to make a huge difference to that. Yeah,

it seemed, um, quite quite boisterous. Raucus was the word that Pim used. I was looking at the predicted prediction markets and noticing that the chances that Theresa May will be the Prime Minister of the UK your end went down quite significantly in the wake of Boris Johnson's resignation can you walk us through what would happen to remove Theresa May and whether you think that that's a likely possibility.

I think it is more likely than before because you have now a plausible, a somewhat plausible rival for me in the running. I mean, that's the point. That's the point about Boris Johnson's resignation, that you can imagine Johnson

running against May in a leadership contest. Well has to happen is that a sufficient number of Labor MPs f T eight to be precise, need to sign letters saying they have no confidence into Race and May's leadership, and then there would be a vote in the Conservative partium on the Conservative MPs to dislodger, and a hundred and fifty nine out of three hundred and sixteen of those MPs would need to vote against her, and then there

would be a competition to replace her. Now, I think there are enough votes for the beginning of that process. In other words, I think there are forty eight votes to say, you know, we have no confidence in Race May and we want a leadership election. But I don't think there are a hundred and fifty nine votes to replace her. So I think the likely scenario is if the rebels, if the Brexit people, the hard Brexit people, decide to try and bring May down, I think the

chances are that they will fail. Clive Crook, then why do you believe that Boris Johnson, a former Foreign secretary in David Davis, the Brexit secretary, Why would they have resigned if they didn't line up support for their position beforehand. Doesn't this then strengthen the Prime Minister's hand? Well, as I say, you know, what's happened increases the danger for me, there's no question. But I think in the end she

can prevail. I don't think there will be sufficient support in the Tory Party to replace a part because you know, Tory MPs understand that if that happens, you know they're moving along a path that leads to another general election. That's a general election that they could very well lose. So I don't think they're going to want to do that. But I mean it is a you know, a moment

of maximum political Unsurgeonty. There's no question about that. Now, coming back to what David Davis was calculating, what Boris Johnson was calculating, I think you have to understand that these are two these are two somewhat different cases. I mean, Davis was in a position where he was having to be uh, you know, the pre innstbole negotiate with the EU as this deal moves forward, and he was in a position of having to defend a policy which he

thinks doesn't make sense. And on top of that, I mean, I think May has sort of gone out of her way to disempower him in that job. And towards the end, I mean this Checkers meeting, there was this ridiculous business of you know, a briefing to the cabinet minister's attending that said, you know, if if any of them reside, they could make their own way back to London. You know,

there'd be no ministerial car to take them back. And Steve Baker, who another junior Brexit minister who resigned at the weekend, basically said he felt like resigning over the sheer childishness of that threat. And I must say when I read that, my first instinct was to think, this can't be right. You know, they surely can't. They can't

have done that briefing. It's it did seem childish, completely idiotic, But apparently it happened, and I think, you know, this is one of a series of uh moves that make made Davis Field. You know, what am I even doing in this job? I don't believe in the policy. I'm not being listened to. Uh you know, May has taken close control of the Brexit reins. I don't really have a job. So I mean, I think in this case there's no mystery at all about why I resigned. All right,

So what's the road ahead here? Given how split the UK government is and given the fact that Teresa Mayson that the proposal that the European Union put out there leaves a serious risk could lead to no deal. Well, we are at a moment of great uncertainty. There's no you know, there's no no denying that. But my my guess is that May will prevail because there won't be sufficient support in the Tory Party to bring her down.

And I think you will move to a position where she has a camera which is more squarely behind the policy. And then the then the question shifts to Okay, what is the EU going to make of this proposal that she's made. I mean, it's very important to remember that this proposal that she's made is unpopular with Brexit MPs

because it's too friendly to Europe. Europe is going to take the view that this is no good for them because it isn't close enough to the model they would prefer right which is the Norway Single Market membership model. So I think that is that that is a bigger danger for May right now myself, rather than rebellion within the Tory Party, that when the EU gets around to responding to this new position she's taken, they will say sorry, we're not interested, and then I think May would be

in more serious trouble. If the EU says, okay, we can talk about this, we can do business along these lines, then maybe Britain can move towards a soft Brexit of the kind that May is suggesting, but that the action pretty soon will shift to Europe and Europe's reaction to May's proposal. Clive Crook, thank you so much for being with us. Clive Crook is Bloomberg Opinion editor coming to us to talk about the ongoing turmoil in British politics,

as well as the Brexit path ahead. Ian Bremer, a long time strategist who runs the Aurasia Group, just tweeted out shambolic is too understated to describe present British political process. Certainly, that talk that Theresa May gave to the legislature was raucous and fraught with a lot of jibing and mocking

and all sorts of things. As the rhetoric heats up between the US and China and other nations over trade, there is a question of what are the potential consequences, and our markets overly sanguine or really perhaps heated up or overly dramatizing what's going on here? To answer that is Robert Lawrence. He's Professor of International Trade and Investment at the John F. Kennedy School of Government at Harvard University. He's also a senior fellow at the Peterson Institute for

International Economics and former economic advisor to President Clinton. Robert, thank you so much for being with us. I just want to start with a line in a recent article that you wrote, it may be impossible to prevent the

d globalization of the US economy. What did you mean by that, Well, the way we make things today is in global supply chain, and so products are no longer singly made in one country and then sold in the second, but rather many components are shipped in and then they're assembled. And so when you put tariffs like we're now seeing imposed, you disturbed these global supply chains. And that's what's happening.

And that's what I meant by saying, in the long run, firms are going to be unable to plan and to invest in order to service the global economy. So isn't this what President Trump wants, which is to bring more jobs back to the US and not outsource them to a lot of other countries. Well, in one sense, it is what he wants. But the problem is that what's going to happen as he imposes these tariffs is that a lot of American jobs are also going to be lost.

We saw last last week, for instance, how Harley Davidson has decided that they, because of the retaliation that President Trump was invoked, they're going to have to move now to Europe to produce their motorbikes. I was just Robert Lawrence. I'd just like to get your thoughts on the movement of people, basically because they're seeking some kind of economic saw us from poverty and being disenfranchised, particularly in Latin America. And I'm wondering whether that is a factor when it

comes to trade. In other words, would better trade policies lead to healthier economies outside the United States, thereby mitigating what the President has already described as a flood of economic immigrants into the United States. I think absolutely. You know, when President Selinas of Mexico was talking about the original Masta, he said, America, your choice is simple. You can take

our goods or you can take our people. And in fact, I think by um causing, by disrupting the supply chains like those that we have currently with Mexico, we're going to lead to economic instability in Mexico, and that could put even more pressures on our borders. Professor, I want to I want to talk specifically about the relationship between the US and China. I know you've done a lot of research on the history there, and I'm just wondering.

You know, there is an argument that China's practices have been UH anti competitive against the US, have disadvantaged the US UH and that President Trump is right to go after certain of these practices. Would you agree with that? Well, I would agree that there are numerous practices of the Chinese that we need to go after, but I would disagree very strongly that the right way to do it is by breaking our international trade commitments and imposing paraffs

on them. I think we should be using the legal processes of something like the World Trade Organization to deal with some of the practices, and in other cases we have power because we should be preventing the Chinese from investing in our country if we can't invest in this. So my problem is that I think there are genuine issues with China, but we need to deal with them

in a way that doesn't damage our own economy. I think a lot of people would agree with that, and I think that the disagreement comes with exactly how to how to do that, And I think a lot of people are wondering. You know, President Trump has gone after certain things. We don't know what he's going to do eventually. How does China's transformation uh from a relatively poor country

to the world's second biggest economy affect these discussions? Well, definitely. Um. I think firstly, we can't push him around in the way that perhaps President Trump thinks he can. And I think we're only going to get somewhere if we collaborate with them, and if we use the rules and if we use our allies in bringing cases to the World

Trade Organization. So I think there are better methods to deal with China trying to bully them, essentially by imposing the carabs on them and trying to get them to back down, which after all, will cause their president to lose faith. I just think it is a non starter. So what President Trump is doing is in fact inducing a trade war, which is going to penalize UM companies

who have invested in China. Our US companies going to miss out on faster growing economies that are going to go their own way and strike trade deals without the United States. Well, absolutely, we've just seen. We know what happened. The U s didn't join the Trans Pacific Partnership the eleven countries. Other countries went ahead and they've removed the

barriers among them. So now American exporters are going to be charged higher tariffs when they sell in Japan, and then their competitors are going to be So we're by not playing with other countries, by trying to withdraw, in fact, we're gonna we're going to damage the global economy and our own relationship with it. So Professor, right now, US markets are largely shrugging off the risk of an escalation in this trade war, at least one that would really

reduce economic growth globally. You've got the US equity markets generally are up today. Yet again, um, do you think that perhaps people are too sanguine or do you think that this is not something that will ultimately be felt in markets in the near future. Well, I think in the short run, our economy has a lot of strength. I think the tax cuts have generated very strong demand, and I think actually last week's news allows the Federal

Reserve to to lower interest rate. But I think it is rather damaging for the firms who are involved in international trade. And I think we don't even see the real economic effects over a much longer period of time. So you can say they're too sanguine if what they're reflecting is the long run. But in the short run, I think the timing is pretty good in the sense that economy is very robust. I want to thank you

very much for spending time with us. Robert Lawrence is Professor of International Trade and Investment at the JFK JFK School of Government at Harvard University. He is also a senior fellow at the Peterson Institute for International Economics, former economic advisor to President Bill Clinton, joining US from Boston him.

You know, I have been really impressed at how much drama and intrigue there has been in the soybean market over the past few months as the talk of tariffs heats up, and this is sort of exemplified via ship that was carrying US soybeans racing to China to try to get there ahead of the US implementing a twenty five percent tariff. Here to talk about that and what we should really be looking for in the agricultural world on the heels of these tariffs, allam Burgo Joints is

now agricultural reporter for Bloomberg. Allen, let's just start with that ship. What happened and what's next. The peak Pegasus hit is idling off the coast about nineteen miles from Dalian where it was supposed to be unloaded before the tariffs took effect, but it didn't get there on time,

and now it's a shipment looking for a buyer. Now, there was a little bit of a development here where China threw a wrinkle into the terms of sales, where basically if US soybeans are being bought for the Chinese state reserve, which can be quite substantial um enough to affect world markets. The government will actually reimburse for the cost of the tariff um. It's basically a rebate. It

isn't paid upfront, but you can get reimbursed later. And I think this just shows how complex this trade war could become, because there are all sorts of levers that China can pull, and in the United States to a certain extent as well, that can take what at the top level looks like this really static situation and throw all sorts of nuance into it. I mean, if there is a rebate for the state reserve, that should be good for US soybean prices, but you actually see soybeans

down about eighteen cents today. They're still trading at a ten year low. And so it all comes down to what signals are given to the market, and how does the market perceive these signals in a way that it shrugs it off or it see it as an opening. Right now, folks seem pretty barish that anything will actually be resolved soon. Alan The price of soybeans is down something like twenty percent since the beginning of March. What

are soybean farmers going to do well? At first? They're going to be seeking out other markets, and you have seen some signs of of other buyers rebounding just because US soybeans are now so cheap, especially in comparison with Brazil. The main competition which is mainly signing that China. So there's a certain amount of market recalibration going on right now. But if that plays out over months or years, that's

cold comfort. If you have a bunch of soybeans sitting in your bin and you do need to get some sort of capacity worked off, and you are looking to pay off your loan, and you do need revenue to pay off that loan, say in October. UM. As this rolls on, you're going to see more of those effects

start to reverberate through farm country. Of course, we saw a headline about ten days ago where it was reported by the U. S d A that farmers had surpassed corn in terms of plantings of soybeans overcorn for the first time in thirty five years. A lot of farmers bet on soybeans this year, knowing that China was looming in the horizon, that was a risk that they took.

Right now it looks like a bad bet, Allen. I'm just wondering, has this sort of decline in soybean price has gone too far at this point, because you are set of getting some traders saying, you know, look, we've priced a lot of bad news already into the spot of futures that that could very well be the case. Um, you know, you take a look at the other factors

that are driving the soybean market. Another expectation is that there's just going to be a bumper crop because the weather has been very good and growing regions this year, but we're now hitting a very sensitive time of year for the weather. So if you see some sort of sign of too much heat or some sort of crop damage, um, that is going to push prices up pretty quickly. And then another question, indeed, is how much of an effect is this trade war ultimately going to have on US

soybean sales for China. The state reserves move already shows maybe a little bit of softening on China's line later in the year. If Brazilian soybeans simply can't keep up, you may have certain importers that will pay the tariff price. Anyway, we're basically about to learned how essential the US is as a supplier for the world Agriculturally, it's always been seen as the buyer of last resort. We'll see if

that profile survives this trade war. Alan, you mentioned corn and corn prices down about fifteen percent from their peak that was in the end of May as well. What's up with corn? Yeah, so it's important to bring up corn because corn has never really been the China product that a lot of traders felt that it could be. So in terms of direct sales of US corn to China very little about a hundred and forty million dollars. But what you do have is this echo effect um.

You know, you have the weather um which would be driving down prices anyway, So that's one factor. You also have the fact that if soybeans are sitting in the US unused, they'll be used for something and that could be as animal feed, which will then have a knock on effective reducing demand for corn. Thanks very much, Alan Bjorga, our agriculture reporter for Bloomberg News, joining us from our

studios in Washington. Our next guest, Josh Lomyer, is the head of the US investment grade credit at a Viva Investors, helping to manage more than four and eighty billion dollars

based in Chicago. UM, I want to ask you about whether the Federal Reserve will have to end their rate cycle, their rate increase cycle, as well as the quantitative tightening program because of what has been happening, not only with trade talks, but also when it looks as though you've seen big sell offs an emerging market debt as well,

and a strengthening US dollar. Yeah, I think you know, with regards to the FAN, I think they've they're on a path that is really driven by economic growth and stable ization of the jobs in the US economy, and so I really believe that they're quite comfortable until they start to see stresses in those specific areas that they don't really need to remove policy or reduce their pace

until they see really specific reasons to do so. You know, I'm struck by the fact that even as the fedbacks away from their ultra low rate policies are still very low. UH investment grade bonds have done really badly, and at the same time, companies have been able to sell unprecedented

amounts of the debt for murders and acquisitions. I'm just wondering, after a loss in the first two quarters of more than three percent, do you think that investment grade credit is a buy now or do you think that this is just a sign of what's to come? You know, I think two thousand eight, teams specifically, is the year of the return of more normalized volatility, and so the weakness is really driven mind not so much by fundamentals

as it is by a slight weakening in demand. And the consistency of demand be that retail, be that foreign investors, and supply has remained incredibly constant. So when you start to see a tightening of policy like we have had, what that just means is risk assets are now going to be forced to compete a little bit for for demand. Okay,

So then where are we in that process? I mean, given the fact that we've had this three percent loss, which is the biggest first quarter loss since two thousand and eight for investment grade bonds in the US, are we halfway there? We're going to see a lot more more to come. I think that's a great point. I think where we're at now is we're at a much more comfortable level than where we were at to start

the year. The market has actually, even though we've felt the pain, if you think about just the levels on some of the sectors and some of the movement we've had, it's been a pretty it's been a pretty stable environment of a slow and steady widening versus a panic, and so I think this is a more natural sell off

to the market. And I think where we're at now is I think we're going to see periods where credit does fairly well, but we're gonna put these supply demand and balances that we're working through now, those aren't going anywhere, and so I think I think volatility is here to stay. I think it's equally likely that we continue to leak wider here and and still see a little bit of underperformance and credit markets, but there will be periods where, um where we'll see a positive you know, rally and

spreads as well. So I think we're kind of in a more neutral phase where we're biased to make sure we keep powder dry and make sure that what more volatility is definitely on the horizon, but there could be pockets of positive returns. So one thing that you're talking about is that we're seeing is really a result of

a normalization of policy more than some fundamental deterioration. And yet you are seeing a record proportion of triple b issuances is the lowest grade in the investment grade spectrum, and people are wondering, you know, given the fact that people are raising money to buy back shares to acquire companies and at very high valuations, this is a credit story as well. What's your thought on that and do you think that there's a lot of risk building in

that lowest tier of investment grade credit. I think you're absolutely right. I think there is a risk here. I think if you think about the you know, over the last couple of years, companies have been able to add leverage, either just through share buy backs or you know, M and A or whatever their reason is, they've been able to add leverage and they have not been penalized for

it by the market. And so you have seen A managed to downgrade, A managed to increase in leverage for really no penalty with regards to the interest cost to

the business. And so I do think part of the transition we're seeing now is triple bees are suffering more than single days in this more recent a bount of volatility, and I do believe that that is setting us up for potentially more volatility if as we kind of transition through this, you know, uh, supply demand a bounced Josh, just quickly twenty seconds or so, how do you how

does anybody justify buying a tenure at two? That's a great question, and I think you've gotta you've gotta, you've gotta put that in the context of the end investors. So if if there's really not a huge reason to own a lot of duration risk here, just from my total return perspective, you are always going to have real money investors like a pension fund or an insurance company that needs to match their liabilities with their assets, and so that that is a very legitimate reason to own duration.

But if you are just looking at it from a total return perspective, and you look at how flat interest rate curves are today, there's really not a big reason to own duration here. Josh Lomer, thank you so much for being with us. Josh Lamar's head of US investment. Great credit at Aviva Investors. 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