Former Acting CIA Director Devine Is 'Very Concerned' About Korea

with Korea. There's still with North Korea where there's still a lot of lovers that we can pull. Uh. You had the US is top general reassuring South Korean UH President that we are going to try to reach some kind of peaceful agreement To get us a better sense of where we are in all of this. I want to bring in Jack Divine, founding partner and president of the ark And Group. He also was a former Acting director of the CIA and founding partner of this security group.

So Jack, I'd love to get your sense how close are we to a nuclear conflict with North Korea. I don't want to be alarming, But it's been a long long time since I thought we were in a situation where it's conceivable that we could have a military confrontation that could end up in and some sort of nuclear incident. Um.

I think back to the Cuban missile crisis. Were not there, but you know, in Cuba they didn't have missiles on the I mean they did, that's not that's an accurate we didn't learn about them until a few years later. So I think this is a very serious and threatening situation. I'm hopeful that we'll be able to walk the dog back, but I think it's um. I wouldn't minimize this at all. I could do that in all candor. So how do

we walk the dog back? Well, I think, first of all, uh, any rational person would not want to get into any sort of military engagement which could then lead to a nuclear incident. I mean, there's no way. I mean, we have the finest military in the world, finest intelligence people. But I've been the business long enough that even with all your preparation and the best equipment, things go wrong. I mean, even if the very successful been ladding one

of the helicopters you know, crashed. I mean we had an operation to try and get our hostages out of Iran and three of them crashed into the desert. So there's no way you can have a military operation where general can say, I give you a security here that we're going to take out all their their missiles. So I don't see how the military confrontation can end up with anything but a catastrophe. So I think one way or the other, we have to go back to the table.

And as you know, I I've been putting forth the idea they try and go back to the Six party talks. But one way or the other, if we're not going to have a confrontation, we have to get back to the table. And while things may be taking place in back rooms, and I'm sure they are, I haven't seen it other than uh the South Korea proposing direct talks with North Korea. So I think we have to get

back to the table. I think we need to be strong demonstrating with our b twos in our military positioning, and I think Trump is right to speak tough to them. But I think all that aside, there's no way this ends without negotiations. So let's talk about who we're negotiating with. I mean, China has been pinpointed as the main sort of negotiator in this whole business just because they could potentially cut off all global economic ties with North Korea.

They seem to be unwilling to do that. And then there's a question which I want to pose to you of how effective would that act really be? I mean, quit China conceivably, uh stop Kim Jong's efforts to build a nuclear arsenal. Remember, our our interests are not directly lined up with the Chinese. I mean, there's clearly some overlap. Neither of us want to see a nuclear confrontation, certainly don't want to see one in their area, but they don't want to see United career either. They don't want

to destabilized career. You have to guarantee after whatever confrontation you have that you know what's going to happen the next day. So the Chinese are not and sync with our interest On the other hand, they have a lot of equities with us, and we with them. Historically, I think they've under underinvested in trying to be helpful here.

I think too many people over the past several years, and many of the articles that are written today talk about how key China is, but they don't talk about how you get the Chinese to do something that they're not convinced as in their interests. So there has to be a great deal pressure put on the Chinese. And it's one of the reasons again I think it would be important to get a group of people at the table. Is easier, it's easier to make concessions when you're in

a group than one on one in my view. And you have to have the world sort of with you. If you have the six major countries and for those that don't follow to be Russia, South Korea, United States, and North Korea South Korea, so you have, you know, the world sort of trying to resolve this problem. And uh, it's it's harder for everyone just to fold their hands.

I do think now that the North Koreans have tested and they've gone a long way, they may be because of the economic pressures on them, might be more willing to They're not going to bend in the program. Anyone that's hoping for that good luck. Um. I think what we could hope for is that we freeze it about where it is. And you know, you can't take the word for it. You have to have a verifying system and you have to have an independent intelligence look at

to make sure that the sticking with it. They made some progress in the last time, in fact, some substantial progress of the Six party talks, but the North Koreans violin, and that's why I fell apart. They may be in a different position there because they now have a much more um powerful nuclear capability now than they did when they walked away from the table. There may be some room here for smart negotiations, but I think we need

everybody in the game. Well, talking about that, Jack, I want to get a sense of Russia, because I don't have a clear sense of where they come down on this. Would they be willing and eager to negotiate with the other five major parties. I think there's a couple of

aspects of it, little bit like the Chinese. It's not a nearer interest to see a um, you know, an improvement of relations between North Korea, South Korean and the United States, because if it improves enough, I can actually find if there was ever unification to be unification in favor of the South. So and the fact that they're able that the North Koreans quosed so much commotion it keeps US distracted, tied up or military forces. So it's

not immediately in their interest. However, they are part of the human race and nobody can afford to think casually about having a nuclear um, a nuclear event anywhere. So and they want to be a player. I mean, they are a they wouldn't like to hear this, but they're not a major economy force in the world. They're not even they're not on the ground the force that they were years ago. So um, but they want to be taken with with more respect at the table, so through

at the table. If everyone else goes to the the table and they don't, I think they'll shrink a little bit so that you may get them to the table. Yeah, Jack, real quick, how much confidence do you have in the current team, the current US team that's negotiating this. Well, I think we haven't as well. Again, let me come back. I'm not sure what's going on. I mean, I think we have very competent diplomats and intelligence people. I just haven't seen much discussion about the negotiation aspect of it.

I haven't seen anybody putting forth, let's meet here, let's do this now. Maybe it's going on in the back rooms. I'm hoping that it is um, but UM. The emphas seems to be more how do you bring the military presence and how do you threaten each side and then leaning on people. I don't see a format being constructed for for discussion, and I said, I'm willing to admit there may be something going on, but as sure as ILL isn't grabbing headlines. Chack Devine, thank you so much

for joining us. Jack Devine is former acting director of the c i A and founding partner and president of the security firm the arcan It Group. Talking about why we need to start negotiating with other major powers right now. I want to talk about angry birds and just how valuable they are. I want to bring in Leonel Laurent. He's a calumnist for a Bloomberg gad flag covering finance and markets. And Leonel, Uh, do you think that angry

birds are worth two billion dollars? I saw this today and the Angry Birds franchise owner Rovio Entertainment UH planning in I p O probably next month two billion dollars. They rely entirely on angry birds. What's up with this two billion dollars, which would be about ten times revenue, which would be substantially above where one of its rivals,

Zinger trades. Um we shall see. I would just note that two billion was what the company reportedly rebuffed about five years ago when it was offered that for for an acquisition, So it wouldn't exactly be a be a huge victory, but it would still be a pretty toppy multiple for a company that's you know, they've they've proven people wrong. I think they've really milked a lot more money out of Angry Birds than anybody thought possible. Well this is but have they milked money out of anything else?

Or is it all angry and all birds? It's it's I mean they've they've tried, and they have some of the games, but but nothing to match it. And I think that you could and they will probably make the case that this I p O if it happens, would help them fund other things. Right. I mean, they've they've had some tough, tough couple of years. The markets change a lot. They've adapted to that. They had to cut a lot of staff, so they had to sort of

stand on their own two feet. Hold on a second, The markets changed a lot for Angry Birds or for entertainment or you know, where are they trying to branch out? So so I think mobile games, that's that's what's really changed these This is almost a decade old, right, so you have to put yourself back to what it was like when it first burst onto the scene. You sold your app for a price and that was it. Quickly

with with other big hit it's like Handy crushed. The whole market moved towards micro transactions, free to play, the kind of situation where your kid grabs your credit card and essentially spends your your hard land salary on on on a little game. These these became billion dollar companies in dollar games, billion dollar companies, and Rothio never got to that stage. And it's it's definitely adapted and it survived, but I just wonder what it can show that's new

in terms of the future outlook. So do you play Angry Birds? I used to? You know, I did. It came out. My whole vision of view is changed, really thousand and nine, two tho nine. I mean, you know, you can't read Proust all day long, right, You've got to unwind, I guess. So, I mean, do they have other games in the works or are they just basically trying to make more Birds that are that are varying

stages of anger. They have other games. They put out a new game I think called Battle Bay earlier this year, and they have a new studio in London whose whole mission is to make new title that are not Angry Birds. But they're not expected to produce a new game till which is the year, as I'm sure you know that the new Angry Birds movie comes out Angry Birds too.

We are still on this weird limbo where we are still waiting for this kind of new Rovio two to hatch, right, and it hasn't happened two billion dollars and the timing is sort of odd to me. So I'm wondering, you know, would this I p O be derailed if we see the weakness that we saw last week or the people you're talking to, I mean, is it is there are sense they're going to go ahead with this? They need

to do something. I don't know. I think that that there there have been reports right of everything from ten Cent potentially buying the company to the company floating a small part of itself. You know, I think as usual with this kind of industry. I mean, people aren't dumb. They can look at the market and see that the stock prices of mobile game companies have underperformed post i p O. This is a volatile, tough hit of an industry.

On the other hand, as we've seen from tech i p o s, that just seems to be demand even for crazy evaluations right like like Snap um and even with blue Aprons troubles. Who knows, there might just be enough happit site for this. There just might be. Of course, Snap is bouncing back after the earlier plunge, talking about uh Snap and one hit wonders. It seems like this one hit wonder is going to continue for longer, and now it shares her up more than seven percent. My god.

They were down almost five percent earlier today after it was revealed that Tamasak of Singapore had offloaded it's holdings of this particular company. Leone Lauron, thank you so much for joining us, truly, I guess you know. Look Angry Birds, it is an appealing franchise. My kids loved Angry Birds, but still two billion dollars. Leone Laurent Columnists covering finance and markets for Bloomberg gad fly coming to us from London. Well, it isn't a day in up markets if there isn't

a fear about a bubble in exchange traded funds. And I want to bring in Eric Beltunez, who spent his life basically at least for the past few years, defending e t f s against the bubble fears. Eric Valtunez is a senior e t F analyst for Bloomberg Intelligence and he joins us. Now, Eric, yet again we get another story about record e t F inflows fueling price

bubble fears. That headline was published in the Financial Times and it stemmed from a statistic that investors have already funneled three hundred and nine billion dollars into e t f s in the first seven ones of already eclipsing the full year record that was set last year. So, Eric, does this acceleration of inflows suggest to you that perhaps people are getting over their skis and putting too much

faith in these vehicles? Uh? Well, no, I mean, and when you say definite ets, I don't necessarily like to be the apologist, but there's definitely more people taking shots and just throwing out these things without using much context. I thought two better headlines for that FT article would have been investors demanding stocks fuels fears of a of a stock market bubble, or e t F record inflows fuels fears of asset managers lost revenues. I think those

are two better headlines than what they did. They kind of take, Okay, all this money is going into e t s, But all this money is going into the market anyway, like if ets didn't exist, it would buy index funds, or it would buy active mutual funds, and ultimately you would own the same stocks. So I think that's what I get getting gets annoying with me is that sometimes there's some laziness and some conflating of just because money is going into e t s means that, oh,

there's a bubble. I think all you're seeing is that money is basically transferring from closet indexing to actual indexing. So but it's ultimately owning the same stocks. But the investors deciding to buy equities and faith in Trump and all in the FED in the past, that's ultimately what

is driving out valuations. Well, I guess that one fear is that right now and you have so much money going into the stock market through index funds, and you talked about closet indexing, in other words, active managers who essentially just followed the indexes, so are essentially we're indexers but charging larger fees. And that's been a fear and

an accusation for a long time. But there's a concern that with so much money going into funds that all track the same indexes, that companies that are unworthy of their money will get them regardless of what their financial health is, but just by virtue of their being big

and in the index right now. And then we've got to use context on the fact that if you go back and you look at, uh, the amount of money or the amount of ownership of the stock market made up by mutual funds, it's about half a little less than half. So there's still again plenty of people picking stocks based on valuations. UM. I also think that, look, active managers are now out saying that like e t

s and index funds are bad for capitalism. UM. And you know, look, I mean there's some case who made that an active manager can evaluate a stock better. UM. And if that's the case, an investor should pick an active manager. I think part of the problem with this whole thing is that investors are just voting with their feet. I mean, I think what really has caused a lot of the movement is low cost one but to disappointment

in two thousand and eight. I think a lot of people thought that their active fund would have saved them some of that uh thirty five percent loss, but it didn't. In fact, two thirds of active managers underperformed in two thousand and eight, and I think that's partially the investor's fault. Active managers know that investors can't tolerate a lot of tracking error and they have to buy these stocks, so

ultimately their hands are tied. In the end, investors really want the index anyway, um, and so they're driving all of this. So you put out research recently looking at where these flows have been going, and you showed how

they're going to Van Garden black Rock overwhelmingly. And does this mean that you expect to see some of the smaller et F providers close up shop or get absorbed by the bigger by the bigger players, Yeah, you know, I have this thing I use where, like you know, the old news is active passes the new news is um high cost to low cost. The future news is three companies manage the assets UM. So yes, you're going

to see a massive consolidation. We just saw power Shares is on the verge of buying Guggenheim, which took a good, juicy smart data issue off the table for active shops who need a passive game. By the way, but ultimately, yes, you're gonna see a ton of consolidation. I think what's going to happen is the next sell off. There's gonna

be a whole Uh. This is where a lot of this is going to come to light and a lot of managers are can be forced to team up in order to compete with the vanguarden black rocks of the world. And with those low fees you need scale. Eric BLUs, thank you so much. And you know, honestly, when I say an E T F defender, I find that a lot of our conversations end up being Eric, you calling me and saying, you know, actually, let's reframe this. Let's look at what the where the money is actually going.

This is just a vehicle, uh, that people can sort of invest in the underlying assets. So it's always enlightening to speak with you and you're looking at the technical is not just blindly defending Eric beltunas, senior et F analyst for Bloomberg Intelligence. Uh. And again, those bubble fears will be ongoing, I'm sure, especially if we do not get another major downturn, you'll have people saying, well, they're untested.

With all of the news that's coming out of North Korea and Virginia, there has been less talked about one of the most important things that will happen probably this month, which is the beginning of the renegotiation of the North American Free Trade Agreement known as NAFTA. And here to give us a sense of exactly what's at stake, and

it potentially is quite a bit, is Mike McDonough. He is a global director of Economic Research and chief economist for Bloomberg Intelligence, and he joins us in our eleven three oh studios. Mike, just can you lay out what the main issues will be because we've heard a lot about agriculture, We've heard a lot about dairy. Yeah, you know, well,

it depends on who you ask. I think a little bit right if you if you look at the trade representative, they actually put out a kind of preliminary report a month or two ago on what their expectations were, and the key things were that they expected to maintain the trade free terrorists for agricultural and industrial goods. Uh and instead focusing on things like I T financial sector integration, things like this, which which all makes sense, it would

be a good thing to add to the deal. But when you listen to the Trump administration's rhetoric, it has mostly been trade deficit, trade deficit, trade deficit, be it with China, be it with Mexico, Germany, whoever. Uh. And what's interesting when you actually look at Mexico and you say, well, where, how why are we running this trade deficit with Mexico.

If you actually break it down by product and you look at transportation equipment, the deficit in transportation equipment between the US and Mexico is actually larger than the entire US trade deficit, So meaning if you strip that component out there, we would actually be running a trade surplus of Mexican. So is this basically the flip side of Ford and GM manufacturing their cars in Mexico or car parts? It's two things. It's uh, exactly what you just said.

Car companies building their cars in Mexico and bringing them back. And it's also all the parts being produced in Mexico that are being used in cars that are assembled in the US. When you when you break it out by state, the two largest states with the deficits that are Michigan and obviously cars in California, which is cars is number one,

but then computer parts is number two. But why why I went into all this is if your President Trump and your biggest concern is the trade deficit, and you're renegotiating renegotiating NAFTA with that in mind, it's hard to see how you're going to ignore this sector. But that's kind of what was indicated by the to me at least when I read the summary that the trade representatives

had put out. So I'm just trying to wrap my head around this, because we were talking before the segment that these negotiations have a pretty accelerated time frame, that there is some expectation of a renegotiated deal by the end of the year, which seems actually pretty ambitious given the fact that there are so many moving parts and there is so much political capital that President Trump has

tied up in this. Can you give us a sense of what the competing factions will be, whether you know how many people are going to be involved with this, where these negotiations are going to be held, well, I think I think there's a round being held in each country, but I think they have this end of year deadline. But I think even Lightheiser himself has said he's not

holding any commitments to necessarily meeting that deadline. So I think, you know the baseline what most people think is this is going to be some very minimal changes that actually occurred in AFT. And if you look at how strongly the Mexican pesos rallied, it's had been the strongest performing currency year to day. It may still be, and this is because a lot of the fears that people had

have alleviated a bit. Well. But this idea of the auto sector and the auto parts sector, though, raises the specter of some more damage to Mexico's economy because you were saying that this accounts for what three they're total GDP long term pending. How this if if if they were to go after that sector, you could have the Mexico's long term growth potential could come down a bit. Given how the magnetus out of this to Mexico's GDP, and it's been growing every year. It's becoming a more

important part of Mexico's economy. It just surprises me that there isn't more of an outcry from GM and Ford because you know, in in back office rooms are saying, look, we want to provide cheaper cars, we provide labor to Mexico. Mexico's economy grows, it helps us because then we could sell our cars. If we make everything in the US, it would cost us a lot more. So far, so far, there's no reason to be necessarily right. All signs are pointing to that that there's going to be relatively minor

changes to this agreement. I think the trade representatives had gone in and said the process is going to be do no harm. Uh. So you know, President Trump hasn't been that outspoken about and after renegotiations recently, so I don't He's been more centered around China. So I think that that's why you haven't heard as much about this. The baseline view is right now that this is going to go over relatively minimal changes again and pains free,

pain free talking about China. Last night, I saw the headlines have about China underperforming in July with respect expectations about how much their economy grew and how much their industrial output grew. People seem to not care at all today. Yeah, and I think that's the right thing. Actually wrote about this in my my macro musings today. And the fact is China had a much better than expected first half of the year, uh and ending that they had a

much much much better than expected June. So you saw a little bit that you saw the data come back a little bit in July. When you look at what happened in June and what happened in July, what it really is pointing to is a bit of a return to normalcy or or a moderate slowdown in growth. So you know, everyone expects China's GDP growth is going to

decelerate for the remainder of the year. The thing is it hadn't actually done that yet, So now it's finally showing signs that it will start to decelerate a bit. Although you had the Statistic Statistics Bureau coming out and

saying they're hidden risks and their problems out there. So so the Statistical Bureau basically said what we've been talking about on the show for I don't know how many years everybody everybody, everybody knows there's hidden risks, right, you have you do have a You're you're gonna have a moderate slowdown in economic growth in China. And another important thing to keep in mind is you have twice a

decade leadership transition occurring later this year. They're going to do whatever they need to do to maintain stability around that. They're going to let growth decelerate a bit, because that's what everyone expects. It's still even above the six and a half percent target, but there if it looks like it's going a bit slower than that, then you know, you could see reverse reversal of some tightening that had taken place earlier this year. Who doesn't know about the

hidden risks? Mike mcduonda, thank you so much for joining us. A pleasure as always. Mike mcdonna is Global director of Economic Research and Chief Economist for Bloomberg Intelligence based in New York. 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 Pam Fox. I'm on

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