Former CIA Acting Director Forecasts Global Risks (Correct)

It's a very uplifting forecast. I was reading it this morning and learned about things like the fact that North Korea has already over twenty nuclear weapons and its arsenal and can fairly quickly may develop a ballistic missile capability to deliver these weapons against our allies, including perhaps US in the United States. Um. Jack Divine is here with us to talk about this of lifting forecast, and you're talking about the biggest risks ahead for the US economy.

Let's start with North Korea. How big of a threat is this to the US? Well, I think you have a rare mix here. You have a um arguably mentally uh um disturbed president of a country or chairman of the country, which which country? Talking North Korea, there's several, there's several out there, but they have a nuclear weapon, which I think puts them in a special category. You know, we've been fairly successful in the West preventing the proliferation

of nuclear weapons. I remember Jack Kennedy thought we'd have a hundred and sixty countries with nuclear weapons. The Brazilians, the Argentinees, of South Africans all started nuclear programs and then we were able to work it back with two exceptions, Pakistan and Umu India. So new North Korea, unstable country by anyone's definition and largely unpredictable, now has nuclear weapons

and has ballistic missiles. And the question is will they be able to develop the range in the next few years to reach certainly the western part of the United States, And I think most experts would say certainly they'll be producing. The latest estimate I saw it was something like eight to ten nuclear weapons a year going forward. Um India, and again these are rough estimates, they're not it's not intelligence, but India probably is a hundred and sixty and Pakistan

has a hundred and sixty. But if you start adding eight year to twenty, it doesn't take long to become a significant nuclear power in the region. Well, and you were talking about Iran also heading towards a similar path, Jack, your former acting director of the c i A. And so you have a long history in being presented with severe and potentially catastrophic risks. Where we are right now

looking at the potential risks ahead. Do you feel more worried than you have in the past or is this on par with the normal risks that you saw as

the head of the CIA. I think when the Russians developed nuclear weapons in the post war period, uh, there was a great deal concerned about whether we were going to go into a confrontation, but it settled down fairly quickly, with the exception of um, the Cuban Missile crisis, where we actually had nuclear weapons in Cuba, which we didn't realize until the nineties that they had some nuclear capability

back then. The Russians did that close to us, but in the larger scheme of things, we had mutual destruction, and the Russians, whatever we may think of them, I think, behaved in irrational and fairly predictably behavior as we did. So the risks while they existed, UH, I don't think most people lived and the fear that they did temporarily and to say the early fifties. As far as a nuclear confrontation, the unpredictability of the North Korea now has a U is as a new a new situation for US.

And I think the possibility that they could use a nuclear weapon. We can't count on the mutual destruction formula to stop the North Koreans from using a nuclear weapon. So how does trade fit into this? Right? Because it does in the sense that US relationship with China and with South Korean other UH countries in the region. I mean, it wouldn't that play into how this threat is dealt with? Well, I think sanctions haven't worked. I think in terms of

stopping them. I mean, clearly they're going forward. They've tried to induce the North Koreans to be more positive at the table. You know, we withdrew nuclear weapons unilatterly from South Korea ninety one. The South Koreans, with our encouragement or support, build a industrial city if you will in North Korea. The Chinese, We've talked to them often. Countries have sanctions in place. None of it seems to be

touring the the North, the North Koreans. I know a lot of experts in Washington and government officials, and uh, I've read enough about it that many people are counting on the Chinese to fix the problem, that somehow they have you know, real access and could could muscle the North Koreans. I would encourage folks not to be overly

confident that that's going to happen. The Chinese have their own reasons why North Korea, why Korea remains should remain divided from their perspective, and uh, I think we're going to expend a lot of energy jaw boning with the Chinese, and it probably is not going to make much difference. And we'll probably be back at the the radio station talking next year about the North Koreans having greater missile capability and having the thirty to forty nuclear weapons. So

I'm not optimistic about it. Well, one thing that that you did sort of dismiss was this idea that Russia was in some way conspiring with the current leadership and could lead to something very substantial. Is this is this something that is a clear and present risk in your opinion, in any way to the United States. I'm sorry, we're talking with Russia. Yeah, with Russia with respect to it's

sort of Yeah. What I said in the forecast, and I'm standing by it, is that the allegation that Trump's campaign or he was monitored for political reasons will turn out to be a goose egge, as will the development of information that shows conlusion between the campaign, not an individual, but the Trump campaign and the Russians to defeat Hillary Clinton. I think at the end, you know, we're gonna have

a lot, a lot of smoke, little fire. Uh, there will be no prosecutions, in my opinion, there will be no actions taken against the Russians because of it. Um, it will be very difficult to understand why we're going to spend the next year doing this, and most Americans are going to scratch their head. But I do want to say the Russian hacking into the system is a big issue, but it's not the one that everyone's getting

fixated about as it relates to the election itself. Uh. You know, we used to have what they called Moscow rules, where the we had the capability of doing lots of things, uh nefarious things to them and vice versa. We could, for example, counterfeit each other's money, and we didn't do that. Jack Devine, thank you so much for joining us. It

was really a pleasure speaking with you. Jack Devine, former acting Director of the CIA CIA and founding partner and president of Security for the Arkin Group, talking about his Spring two thousand seventeen forecast of risks. Is it time to take risk or is it time to take chips off the table? Carlistet has some perspective on this, as senior portfolio manager at Western Asset Management, managing seventeen billion dollars more than that in his Western Asset Core Plus

bond fund. He joins us in our Bloomberg eleven three oh studio. Carl, thank you so much for being here. I want to start with emerging markets because this has been one area that has been surprisingly immune to any weakness or hiccups in riskier assets. This year, UH so far, dollarge denominated US UH dollargennominated marging markets debt has performed twice as much as US junk bunds. Do you think

that this is a signed to sell or or something else. Well, first of all, you have to remember that emerging markets did horribly in two thousand, fifteen and sixteen. So some of this is just frankly a catchup. I personally in Western nasset things that emerging markets still has more room to run. Uh. Certainly not priced at the huge discounts they were a year ago. But if you do your country selection correctly, we like Latin Brazil, Argentina, Indonesia, India.

We still think there's some outsized returns to come from emerging market debt. Yesterday on Bloomberg Television, Ed Hyman of ever Core Partners came on and said that China is a mess and at some point it's going to blow up. They have a ton of debt which is unsustainable. So you know, China is one of the biggest developing markets and if it were to blow up, it would be

potentially catastrophic for marging markets. How concerned are you about this? Well, you you have to nail on the head if your your view of emerging market must come m a view on China. For example, Brazil, over half their exports go to China, so you have to have a view on China first before you make your view of emerging markets. Our views that it's not a black hole. Sure, there are problems here and there, but it's still growing at

six six and a half percent. Uh, And put that in perspective, China is twice as big as it was ten years ago. So six percent today is twelve percent ten years ago. China adds the g d P of the Netherlands to the world every year, but it does that with credit. And isn't that concerning that they're sort of expanding their leverage by so much. I mean, that's sort of I guess at Hyman's point, right, Well, well, China is in a very enviable position unlike the rest

of the developed world. They have a rate structure above zero, and they have a fiscal surplus. So as they have fits and starts, they are changing their economy from a more export related to more of a Western consumption economy. That's not a straight line. You're gonna get hiccups along the road. They have these two tools that we don't have. Alright, So you think that developing markets still have room to go, that China, you know, potentially might see some growing pains,

but in general is rather benign. No. I mean, I mean, we're not without concern, but the red lights aren't flashing Okay, So moving away from developing markets, just generally, do you feel like we are in a sort of benign phase in the credit cycle in the US and that US HIG yield bonds can chug along, investment grade bonds can kind of meander in some kind of range, or do you think that we could be in for some hiccups. Well, this is the big question. Everyone wants to know. Where

are we in the credit cycle? Where are we in the business cycle. We western trying to take a step back and look at each industry specifically and look at where they fall in that circle. Take energy, for example, they just had their recession, right, everything they do is to improve the balance sheet, you know, become more credit worthy. Banking banking, big banks aren't buying back their stocks, special dividends, reckless m and A. They're just coming out of their recession.

But then you go around the circle and you get industries like telecommunications, pharma, hospitals that are releveraging the balance sheet. There are some scary signs. So we don't pigeonhole the entire corporate market at one spot on this circle, but

really try to pick individual industries. So what is a pigeon told as being a particularly bad area right now, Well, I I do think that telecommunications is in a is in a bad spot for the bondholder, releveraging the balance sheets, some m and a activity that may or not be useful. So you're talking like a T N T, even a T and T verizing we're definitely short those names, all right, and uh, what about in the real tail side? Are you sorry to do? It may finally be the point

where you may want to think about it. Um Our, our high yield analyist has a saying, uh, they are burning the furniture to save the store. So you know, you have a high yield company selling anything that has any value whatsoever, and what's left not a lot. But you have to remember that the market has figured this out. So if you look at the high yield index, it yields about five and three quarters the energy subcomponent, which gets most of the publicity for being you know, higher yielding,

six and three quarter. The high yield retail index yields almost nine. So at some point we're gonna have some value here. So we're actually starting to look at high yield retail, all right. So you're you're confident that perhaps burning the furniture will be the right way to go to create value. What about cast allocations? Have you been decreasing them and trying to deploy cash given the somewhat

benign at least economic backdround. Well, what we are what I refer to as a value manager, So you have to have a fundamental view on the company or their interest rate structure, but you also have to be cognizant of where the markets pricing that. Security retail is a good example of that. I mean, the markets figured out that it's it's risking today. Uh, corporate bonds have had an amazing run. Both hig yield investment grade spreads are much tighter than they were six months twelve months ago.

Our view of the world is relatively benign. But being a value manager, we can't like corporate bonds as much today as we like them six months and twelve months ago. So our client portfolios have been gradually de risking into this bowl marketing credit. So real quick, how much as cash increased as a as a percentage of you, Well, we don't keep cash that's been redeployed in other areas. Structured product being one of our favorites. All right, Carl

set thank you so much for joining us. Really terrific to speak with you. Carl Etet his senior portfolio management manager at Western Asset Management. He manages the more than seventeen billion dollar Western Asset Core Plus Bond Fund, and he is with us here in our Bloomberg eleven three oh studio. But right now, let's check in with former

US Congressman Rick Lazio. He's senior vice president at Alliance Group, and uh, former Congressman Lazio has had a great deal of experience with congressional note negotiations, including those over taxes. So Mr Lazio, I'd love to get your opinion just from the outset of what the biggest challenge will be for President Trump to push through any tax deal. Well, thank you, Lisa. I made. The first thing, of course, is that comprehensive tax reform at its most basic level

is extremely difficult. That's why it only happens once in a generation. The last major comprehensive tax reform was signed into law by President Reagan in six or thirty odd years ago. And and why is that? It's because comprehensive tax reform has winners and losers, and the losers tend to fight harder for the things that they already have that they risk losing than the people that have the potential to win. I wasn't I'm trying to wrap my

head around what some of those ideas could be. So, can you give us an example of something that uh, certain constituents wouldn't want to lose, that would be up for grabs, that would be something that they would fight hard for sure, The mortgage interest deduction, for example, where the realtors and home builders and where they have got sort of institutional support in every congressional district in the nation.

One of the reasons why Paul Ryan and other Republicans want to have a bill to the President before the August congressional recesses. They don't want members to go home and get their brains brains beaten out politically at town hall meetings m because of these Washington groups that have

organized well and are pushing back. They'd rather have the vote have taken place, that it's in the past, and that they may be some grumbling afterwards, but it doesn't create nervousness or weak knees on the part of members that they're going to count on for the vote. So, um, that's an example of a potential loser in this, meaning that that fewer people may be able to take advantage of the mortgage interest deduction if it is capped then

then exists right now. Okay, So that's that's That's clearly one reason. The second reason, of course, is that that, uh, that Donald Trump has a different and small smaller political base than most past presidents. And then you know, most recently, of course, the defeat of the Republican healthcare bill, um

creates even more risk now for tax reform. So expand on that, I mean, how much of a how much damage was done by the failure for the GOP to get a healthcare bill brought to the floor for a vote? Is this going to be potentially as damaging as some are making it out to be. Yeah, there's a fair

amount of damage across the board here. Uh, there's there's damage in terms of the president's credibility as somebody who has positioned himself as somebody that would take on Washington get things done that can do president and and change his status quot Number one, that's in question. So he has lost some political capital very le on in his term. Number two, the Republicans in general, both on Capitol Hill

and with respect to the President, have lost momentum. This soda sense that you build on things, UH, you build on wins, and that people members that you count on lock in UH more tightly when when you have had a past win and they expect you to win again

and you want to be part of that. And number three, on the technical part of this, UH, the fact is that the that the Republican healthcare bill would have reduced the budget baseline for tax reform by about a trillion dollars over ten years, which means that now Republicans have to find a trillion dollars more in offsets, meaning to close loopholes, reduced deductions, credits, and other preferences, um if they want to want their reduction and tax rates to

be budget neutral. So that puts all kinds of of things in play. And compounding this, of course, is that there is some question, particularly over on the seventh side about UH the border adjustment tax concept, which is another trillion dollars over ten years, that if that falls out, so all that together it creates a lot more headwind

for tax reform. There are some people and I think this is a fair comment that that the failure of the repeal of Obamacare puts more pressure on Republicans, including very conservative Republicans, to come through for tax reform. Um, but I'm not sure that all sets the negativity that I just described. Yeah, it's interesting the idea that because there wasn't a replacement for Obamacare, they're gonna have to basically budget for it or account for it in their

tax plan. Um. Is there any issue with tax reform that is that has bipartisan support that they could start with. Yeah, it's if if they, If they, you know, you definitely want to regain momentum by by building some wind taxes. Uh, this is a tough area to to build momentum within because you want to use this reconciliation process. Democrats now feel emboldened and are less likely, I think, to come across right now and help Republicans bail them out of

the whole that they've dug themselves into. There are some things like the medical device tax, for example, on healthcare, whether there was there was democratic support, there is going to be democratic support for lowering rates. Uh. My guests would be for lowering rates for uh, middle income and lower income Americans. Um, there will be some support, my guests would be for some adjustment in terms of the

the extra territorial taxes, the trapping capital overseas. I mean, even the Senate democratically to Chuck Schumer with Republicans Senter a Portman have been have been talking last year and uh and are probably in basic policy agreement about where, you know, how we address that issue. So there are component pieces, both on the individual side and corporate side. Unfortunately, I hate to do this, we have to, we have

to leave it there. Former US Congressman Rick Lazio, senior vice president at Alliance Group, talking about tax reform in Congress. Katherine Greenfield is here with us. She's healthcare reporter for Bloomberg and Katherine, you wrote a story that I thought was fascinating about the challenges that go way beyond what the government's healthcare plan will be for these hospitals. Can you give us just a sense of what some of these issues are that are plaguing these, uh, these hospitals. Sure,

so thanks for having me, um so, yeah, definitely. The general sense after the GOP bill was pulled on Friday was that hospital stodge to bullet but um, you know, issues with Obamacare are still out there for hospitals, UM, and maybe investors are realizing that. So, for example, you know, you still have the nineteen states that didn't expand Medicaid under the a C A UM who are really struggling with their uncompensated care costs. UM. You know, you still

have millions of people uninsured. And uh, most hospital chains are projecting flatt admissions growth for this year, which definitely won't help. Yeah, well, I mean zooming back. Healthcare is a fascinating area because people say, we don't want to lose our hospitals, and yet hospital beds are less and less occupied as people get more transactions done at doctor's

offices and outpatient centers. You had some amazing statistics here in your story, but more than two U S county still have uninsured rates at or above That is even with Obamacare. National bed occupancy rates that's how full the hospitals are on average any given day are about so less than half of their beds are filled on any

given day. That's kind of amazing. UM. And we're gonna be speaking later in the program with a Bloomberg intelligence analyst talking about how people think that real estate that that retail real estate is the biggest hit this year, it's actually hospital related real estate because these hospitals are at risk of going out of business, Dave. Within the hospital sector, has there been a big laggard or is there someone who people watch to get a sense of

how this entire industry is going well? I mean, clearly, if you're talking about the hospital stocks, h c A being the biggest company in the industry represents your your bell weather, and yesterday was one of the best performers in the s the best. Today it's the second worst. So you know, it goes to show you things do have a way of kind of swinging back and forth. I mean, especially after a big day like what we

saw yesterday. You know, beyond that, I mean, it really does become an issue of do you see the concerns that are facing the companies that actually are involved in this business play out in terms of the real estate investment trust that are involved as well. I mean, we've certainly seen that happening retailing, with the issues of department store chains and so on having a carry over to the retail roads. So you know, it's a matter of whether that's sort of daisy chain, you might say, gets

linked up again. Katherine, some of these anecdotes in your story, did you actually travel to Big Bend in Texas to to look around and see what was going on? Or did you did you take a tour of some of these hospitals. Yes, so my colleague John Lauerman who shared a byline with me, he was reporting on Big Bend. Um. I talked to Cure, a Health based in Tennessee, which owns three hospitals in Alabama. None of what I'm in Alabama didn't expend Medicaid, so none of those hospitals or

you know, getting those benefits. Um. And that was done over the phone. Although I did get invited Alabama and I would love to go, so so maybe maybe I'll be reporting with us from Alabama. Katherine Grayfield, thank you so much for joining us healthcare reporter for Bloomberg News, and she's joining us at our Bloomberg eleven three ohs studio. And Dave Wilson as always, thank you so much for joining us Bloomberg Stox columnist and blogger on M Live Go.

And clearly this just serves to remind everyone, I mean, including myself, that we all talk so much about the GOP's plan for healthcare and Obamacare, but the problems are vast and go far beyond a specific legislative plan and go to a structural problem within healthcare. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on

Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us World War I on Bloomberg Radio m HM