High Probability for U.S.-China Trade Tension in 2018, Miller Says

the nation has been positive. It has re upped Ji and Ping's tenure as the head of the country and seems to be showing increased unity here to sort of break all the myths that we might be depending on. As Leland Miller, president of the China Beije Book International, which is based in New York, and he joins me here from the rid Holes Wealth Management second Annual Evidence Based Investing Conference in New York. Leland, thank you so much for being with us. So what are we getting

wrong about Chinese economy right now? Well, the thing that everyone has right right now is that China's economy is doing pretty well and is doing much better than a year ago. So a year and a half ago, we're in the middle of the China crisis. Everyone wondered whether this was it. UM the Chinese government intervened. They decided they needed a really good economy UH for the Party Congress, and they got it. The problem is people don't understand what they did in order to get them to this point.

There's a belief that the Chinese government has been deleveraging. It's been the economy has been deleveraging. They've been rebalancing, UH, They've been cutting capacity on the supply side and commodities in order to get the economy on a firm or footing. None of these have actually been happening. So the belief that these things are are are You've had this great economic performance despite deleveraging, despite rebalancing, despite all these strong policies.

It's a myth. Well, I want to I want to push back on you just I mean, if I look at of headlines today out of China, China is said to weigh crackdown on high rate micro lenders. China's scrutiny of H and A leads to record refinancing costs. There has been an increase in benchmark yields a lot, in large part due to local crackdowns on some of this leverage. How does this not count for you, Well, deleveraging means

that different things to different people. Now, when we track corporates, what we're looking for is whether corporates are borrowing more or less, and whether they're paying more or less. And what we've seen over the past year is not deleveraging. So we have seen financial sector crackdowns, we've seen wealth management products been attacked, we've seen other things within the inner bank market's been been honed in on by regulators to try to keep control of what's happening between banks.

But when it comes to whether corporates are borrowing more, we have seen an unmistakable trend over the past year. And to get this performance in seen they weren't borrowing less, and they weren't and they weren't paying more. There was significant borrowing, there was credit easing, and what we've seen is not just an absence of deleveraging but going the other way, particularly in the third quarter. So there's no

deleveraging going on right now. And the third quarter was actually quite dramatic and how much the Chinese loosened the floodgates in order to get this performance going into the Party congress. So not all borrowing is the same. And one thing that you highlighted, UH in your recent uh op ed that you published with for Bloomberg View was that there is also a myth that China is moving more toward service sectors and away from industrial sectors. Can

you talk about that? Sure? I mean, I don't know how many times I have to be confronted with this, these pie charts that the Chinese government puts out showing services going up and manufacturing going down, and thus we are rebalancing. But the reality is we tracked these things sectorally, and what we've seen over the course of and even the second half of STEEN is a reversal of rebalancing. So the way they got this performance was by juicing

the old economy sectors. They said they were gonna be shutting down, that they were going to be cutting jobs in They didn't do that. So manufacturing going really well, property has been bloating, commodities has been exploding. UH, Services, retail they've been doing fine, but it's been fits and starts. So this is not a new economy lead, UH, a new economy sector led economy. This has not been something in which you are shifting to a new age for

Chinese growth. They relied on their old growth measures UH in order to get their growth, and it's going to hurt them down the road. So Leland. As part of the Beije book, you quizzed over three thousand, three hundred firms across China, both about their particular companies as well as the larger sit of the economy. Do they have a more pessimistic view of the overall Chinese economy than

say people internationally that are looking at the good growth numbers? Nodding, Well, this is going to be the most interesting quarter we've had in a while, Q one. Maybe even more interesting than that because for the past year, Chinese firms were a bulliant, and they were a bulliant because of something

we call the Party Congress. Put they knew the government would never allow um instability writing up to the Party Congress, so even though they were dealing with a number of obstacles, they were very confident going forward that nothing bad would happen. Now the Party Congress has gone, you're gonna have at least a quarter in which Si Jinping's team is getting

into place. They're not gonna allow instability there, and then it becomes very interesting because how is she going to meet these incredibly high expectations people have from He's gonna combat pollution, he's gonna combat corruption, he's going to keep jobs uh stable, he's gonna keep the growth rate stable, he's gonna be de leverage, he's gonna do rebounce. So he's supposed to be doing all these things at the

same time as as as he's solidifying the economy. Uh. People are going to be in for a surprise here. It's not possible. So he's going to write it on a unicorn and everybody's going to feel happy. Do you think that, just real quick, do you think that the economy could be in for a spectacular downturn in the near future. I don't think spectacular downturn. I don't think near future. But we are very worried about not really from the Chinese domestic side, but from the from the

US China trade tension side. So we think there's a very high probability that that the calm you've seen in the relationship for the past year goes away in ten and you start seeing some very problematic developments in the relationship and that will have a dramatic effect on not just the economy, but the currency capital outflows, and we could be seeing some of the headaches we've been seeing in past years. Leland Miller, fascinating to speak with you.

Thank you so much for joining us. Leland Miller, President of China beige Book International based in New York. Really fascinating insight into China. This week has been all tech all the time. Not only have we gotten a lot of tech earnings, but tech executives have been on Capitol Hill talking with Congress explaining what went wrong heading into the presidential election that led to so much quote fake

news and advertisements that were not properly disclosed. Here to discuss a Scott Galloway, Professor of Mark Getting at n y U Stern School of Business, also the author of a new book, The Four The Hidden DNA of Amazon, Apple, Facebook, and Google. Scott, you know you've talked about how Facebook is a young company that doesn't fully appreciate its role in media and perhaps the importance of being a media

player in the US. And I'm just wondering, from your perspective, do you what do you think they could have done well. The first thing would be to acknowledge they are a media firm. They still haven't. They still haven't acknowledged, but do you think they are well? The definit into pure definition, according to Marion Webster, as a medium that reaches and

influences people as media. So that's the definition. And then on a business level, you spent a billion dollars on original content, pay sports leagues to produce original content, and then run advertising against that content. You boom your a media company. So you know, crises, the crisis itself doesn't

hurt a firm, it's the response to the crisis. And when a company refuses to acknowledge that there are media firms for fear that they might trade at a lower multiple or that they might expect some sort of expectation of responsibility that we have on media firms as being part of the fourth the state, I think it just makes us angrier and angrier. So I would argue this is a kind of a fast moving train wreck in a textbook case study and how not to handle a crisis.

But the first thing is, you know, I am Facebook and I'm a media company, and they have refused to do that. It's absolutely ridiculous. How would that change anything for them? Well, be I don't think it changed anything for them. It would change things for us, And that is we could we could legitimately expect them to show the same type of veracity or some attempt to show some sort of supervision around this content. Bloomberg is not going to be weaponized by Russia. I'm fairly certain of that.

How do you really know? But I'm willing. I'm willing to go a lot of money that because I think you take your responsibility and your influence and your role in the fourth the state very seriously, go on, go on, nokidding, you know, I just it's up a little bit about what you mentioned with Facebook and the idea that they could be potentially worried that their multiples would go down.

Why does being a media company automatically sort of suggest that you're going to make less money, even though that's how we all view it. Yeah, So my guesses you guys are going to forget more about that than I know. Just crudely speaking, certain sectors traded higher multiples. People like

technology stocks, they like software companies. So you want to be a technology firm, You don't want to be a media company puts you in a different, multiple category, So I guess that going forward, my first question is a lot of people are looking at Facebook more as a media company. Do you expect, uh that people's valuation of the company will go down as well even though it is reporting good earnings. I don't think so. My sense is that we're sort of beyond trying to figure out

what it is. I think that them identifying themselves as a media company is more around setting the expectations of what of what they should be held responsible for or not use. Me. Having said that, what where you might see a decline in the stock if we're writing for consumers to step in here, it's not going to happen. These companies are going to continue to, in my opinion, grow their earnings and have incredibly robust businesses because consumers.

We'll talk a big game about privacy and weaponization and the supply chain ethics of a dress out of somebody coming out of Bangladesh, and then they want to they want that little black dress delivered to them within forty five minutes. So consumers talk of big game about the stuff, but they don't vote with their pocketbooks generally speaking. So you're seeing this guy, I think you're going to see these companies perform as well or better than they ever have.

What you might see is the risk of regulation might result in a lower multiple placed on those profits. But I don't see the profits going down. You know, I want to push back because Facebook is actually trying to vet some of their content more and they have been employing more people to do this. It's messy, it's imprecise.

At what point is this, you know, going against the First Amendment and violating people's right to say what they want to say, because this ultimately wasn't just about paid advertising, It was about what people were posting on their personal sites. Well complicated and expensive. That sounds like a decent description of democracy. And they used the defense and quite frankly, I think you've been co opted into their narrative that that they can shouldn't be an arbiter of truth. Well,

they're sure as hell can try. You try every day to be an arbiter of truth. You try every day to employ this fantastic and expensive thing called human discretion around your advertisers and your content. Why shouldn't they be held at the same standards as you do? You have evidence that they absolutely do not have discretion over their advertisers. Yeah, an intelligence unit of the Russian government paid in rubles to so caught chaos in our nation. I think that's

pretty decent proved. But a lot of it wasn't that much money, right, I mean it could have just been one employee that was not author I mean, how far up does this go? Well? Okay, when when the notion was first proposed, they said it was crazy. Then it ended up wait, a few million impressions, and now we've learned that it's a hundred and twenty seven million people sell you that? But how much would they have to pay for that? I don't know. I don't know what

the business model is around that. You know, because there are a lot of people. There are a lot of eyeballs on Facebook just generally, um, and advertisements could be passed around you. Just what I'm trying to get to is, you know, yes, big decisions are you know, a big like conglomerate. It's like CBS for example, it matters whether the spots for the Super Bowl or whether it's for a rerun of Law and Order. Right, So the data I'm focused on is that a hundred seven million people

saw these apps, so that's quite a bit. And in my opinion, I'm fairly certain that the New York Times and CBS in Bloomberg are going to be able to protect our elections from subterfuge. The New York Times will do with a hundred million of free cash flow. How

come Facebook camp with twelve billion? There you go, Scott Galloway, thank you so much for joining U. Scott Galloway, Professor of Marketing at n y U Stern School of Business, also the author of a new book, The Four The Hidden DNA of Amazon, Apple, Facebook, and Google, which goes biblical. This is Bloomberg, and as we've been saying today, we are broadcasting live from the rid Holts Wealth Management second

annual Evidence Based Investing Conference in New York City. And who do I have with me none other than Barry rid Holts himself. He is the founder of it Holds Wealth Management and a Bloomberg View columnist. And he also has a fantastic podcast, Masters in Finance. I highly recommended it. It's airs on Believe ten am and six pm on Saturday,

repeats all weekend Masters in Business. You can find it wherever finer podcasts are sold all right, So, Barry, evidence based investing, I mean, isn't all investing based on evidence? You would imagine that, wouldn't you. When when we were slowing around with the idea of doing this, every person we presented the idea too said the exact same thing. Isn't all investing based on evidence? And as it turns out,

not so much. Well, but what do you mean by that? Well, there's lots of myths, there's lots of theories, there's lots of behaviors, and behavioral economics is a big part of evidence based investing. So let's assume you want to put a portfolio together. How are you going to construct that portfolio? One of the first questions is should you use an index, should you use smart beta? Should you pick stocks yourself?

And when you look at the data, one of the things you find is stock picking is really really hard. Picking a manager who can pick stocks is even harder, and then picking a manager who could pick stocks consistently over time net of costs and fees is almost impossible.

It's absolutely a needle in a haystack. So that sort of data that's out there forces you to say, what am I doing, does one does what I'm doing makes sense them a probabilistic standpoint, where am I really throwing a hall marry here with a very low chance of success? What does the evidence suggest? So if what you're saying is the case, then why shouldn't everybody just go to indexing? Well, we've seen a lot of people move in general towards indexing.

It's not a coincidence that um Tim Buckley, the incoming CEO of Van Guard is gonna be speaking here next and Vanguard has swollen up from a trillion dollars around the time of the financial crisis, they're now over four point four trillion dollars. So we look at indexing as a core part of people's portfolio. It doesn't have to be straight up market cap weighted indexing. There's arguments for

things like factor models. We just heard Cliff Assness of a qu R describe ways to put together portfolios using quantitative data that shows we know things that like valuation. Lower cost stocks tend to do better over time than more expensive stocks. We looked at we discussed the five factor of Fama French model. If we want to really get into the weeds, we could look at things like what does that mean? So you just I think, spoke French. So Eugene Fama just won the Nobel Prize last year.

He's a professor at at University of Chicago. His colleague Can French as a professor at the Dartmouth Um College. And they've crunched numbers for decades looking at what characteristics of companies do better over time and just some of the factors that we know. We know higher quality stocks defined by low levels of dead and there's a whole run of things that defines what's high quality versus low quality. Not surprisingly, they tend to do better over time then

low quality stocks. The some of the surprising anomalies they've discovered has been things like small cap small cap tends over time I am and not one or two or three years, but decades that tends to do better than large cap. Some people actually Cliff talked about is the small cap premium? Is it a liquidity premium? You know big stocks trade very easily. Uh, Is it a risk premium? Are you taking on more risk? We've also another factor

that actually Cliff Fastness created was momentum. Is momentum a factor that helps people invest and and it turns out that all these things contribute to better performance. So how do these quantitative strategies deal with something like the tax

bell that we're just hearing about. Moody's just put out a in a note that said that the credit implications for investment grade companies was positive, whereas for speculative grade companies, UH, not so much because they couldn't deduct the interest as much going forward, and that would outweigh some of the benefits. How would quantitative investing kind of address something like that? So quality, as an example, if you're looking at a qual ulity screen for companies that have less debt, this

isn't going to affect them. On the other hand, lower quality companies, UH might be more negatively impacted by these changes and deductibility. So we still, by the way, we still don't know what the final tax bill looks like. This is what was introduced. What do you think is gonna happen with it? I think there's gonna be a lot of horse trading where where whoever created the bill created a bunch of anchor points corporate tax rates where

they're starting. That suggests to me, all right, if we have to go to will go to percent repatriation rate, which I which seems actually quite high to me. Well, I had originally suggested nobody listens to me about this first step, but I suggested it graduated. The first billion is five percent, and the next two billion is this. But listen, if you want to bring that, that's the carrot, isn't Is there a stick also on the tax bill? It's and if you don't bring it in, you're gonna

get wack. I haven't heard that, and that's that they don't otherwise, I mean, they already bringing it back through the corporate bond market. I'm not sure it would incentivize them to do this. You know, if you want to move some cash from overseas and bring it home to do so. It seems weird that Apple, which has more cash on its books than you know, than India has GDP. Why are they borrowing money to buy back stocks. It's well, it's that's how they're bringing the cash back because they're

paying less of an interest rate. Very Unfortunately, we have to leave it there, but we'll have to continue this conversation. Barry rid Holds, founder of rit Holt's Wealth Management and Bloomberg columnists, also he is running this conference today the rit Holt's Wealth Management second Annual Evidence Based Investing. This

is Bloomberg. Thank you so much, Greg. So, we are awaiting Republican leaders to unveil their tax reform bill, which is expected any minute, and care to tell us a little bit about what we're expecting to be in that tax legislation is Laura Davison, Bloomberg Tax Reporters. So, Laura, I do know that they released some talking points earlier today from those and other insights, What are we gleaning

about what's in this bill? Well, we're cleaning that this six too much of what House Republicans have talked about. You know, the big tax cuts down to a corporate rate that's expected to be permanent, um, you know, passed through the small businesses are getting a rate, so that does carve out, uh, you know some what they're calling professional services firms that could be investment managers or doctors,

lawyer's accountants, that sort of thing. On the individual side, a new child tax creditors, three dollars doubling of the standard deduction. H A lot of those headlines things that they were going for are in there. The question now and what what we're really passing through is what sort

of deductions and credits are taken away. You know, on the international side, there's a lot of concerns from some multinational corporations about how they're going to be taxing um profits that you're bringing back on shore profits you might be sending overseas. Uh. And this is always really tricky and gets really drawn into the details and could could cause problems for the bill moving forward. Well, one thing that we were just talking with Carla Kadana about was

the mortgage deduction. We found out that, uh that they will keep the deduction for loans that are under five hundred thousand dollars, but for over that, uh, those will be removed. Is that accurate? Yes, that's correct, that's there. So they're basically moving that it used to be a million dollars down to five hundred thousands, so basically cutting that in half. And the reason is is because it raises a lot of money that they can use to

put towards tax cuts. Mortgage interests is a very popular one. It's often called like the sacred cows of of the tax code. But it looks like they did a little bit of a goring of that cow is there going to be a lot of pushback on that front, you know, home builders and UM when realtors UM are already skeptical about this bill, so they may not have lost anyone

that they didn't have already. Uh, members are really gonna have to go through and look at this and say, Okay, in my district, in my state, what how would this affect the home values and the people and what they're earning. And that will really be the sign and we schooill start seeing in the next couple of days that people run those numbers of can they get behind this or not? So Laura, what about the local and state tax deductions? There are some talk about removing those. What does a

lot of what does the final bill look like? So UM, I would say becaus where they landed, but I'm not going to say that it's final. So they basically have a ten tho dollar cap for property taxes only, so you can't deduct your state or local income taxes or sales taxes, but you can take up to a ten thousand dollar deduction for property taxes. So that's very good for New York, New Jersey where property taxes are really high.

The problem is, though lawmakers, especially Republicans from that state, are saying, look, that isn't good enough, and they're reserving judgment on whether they're going to vote for the still or not again, you know, running the numbers, see how it works out with UH, with some of the other tax cuts there. But that's still a problem that has sort of been plaguing Republicans for several weeks now. They haven't been able to come to an agreement and they

still don't have everyone on board. So how simple is this? Is this truly a simplification where we can and write, are right file our taxes on a postcard? Well, so it's sort of a mixed bag for for individuals. There are some simplification measures, you know. The big thing there is standards doubling the standard deduction so fewer people will itemize. You'll have fewer forms. I don't know that it will be a postcard, but it might be just be a

couple of pages. Uh. Though. Really on the business side, that's where you see some complexity kick in of when you add special benefits or things that people like, you have to come up with rules to prevent companies from from abusing those are coming up with a way to to take extra advantage of those rules. All right, So, Laura, this bill was crafted with incredible secrecy. A lot of people in Congress did not see it before it was unveiled or it will be unfailed formally, uh, within the

next few minutes. Do you have any sense of just how much of a consensus GOP members have on this bill right now? Well, Republican leadership would definitely say that they've been having hearings and listening to members and and doing the consensus building. So there was definitely some frustration for members even on the Ways and Needs Committee yesterday saying, look, we don't know what's going on. We don't know what's in this bill, and it's you know, twenty four hours

we're less than that before we're set to to release it. Uh. And and that's that's what happened with healthcare, remember, right, it was crafted behind closed doors, and people saw it and their constituents and said, look, we can't vote for this. This doesn't take into the accounts of the needs to be American people, and especially when you're on a really

compressed timeline like they are. They want to pass this out of the House and the Senate by Thanksgiving, which is you know, just a matter of days really at this point. Um, that's really hard to get everyone on board in such a short time frame, you know, Laura, just some interesting market action Testlas shares extended their declines after UH. The US tax bill was introduced today. The idea here is that it would repeal credits given to

electric vehicle buyers. Can you tell us more about that in any other sort of tax deductions that would be repealed that would go towards more sustainable industries? So there I I don't know about the electric vehicle. That's one of those details that that lawmakers didn't know as they were coming out the room. But we'll be in that bill text either one way or the other. Uh. Nuclear, Uh, there's an extension of the production tax credit for nuclear energy.

So that's very good down in Georgia and so after aline on southern Corpse stan Us, they've had some projects that have been sort of meleeyed by by sort of uncertainty there. Um. There's also some other extensions for for for some wind and solar provisions to UH that that helps with uncertainty because there were has been UH, some friction among members of Congress. Republicans typically don't like these Democrats want to be them extended, but of course Republicans

are in power. Can you walk us through the process of what will happen to turn this legislation into law? So starting next week, they'll have what they call a mark up in the House, which is basically the Ways and Means Committee sitting down adding amendments, uh and basically going through this bill step by step. That's expected to be over, you know, next Friday. Uh. Then they'll take it to the floor for a House vote, and they're

they're hoping to get that done the following week. Simultaneously, in the Senate, they're looking to introduce a bill as soon as next week and do that same markup process and take the bills to the floor. The timely they lad out to get it done by Thanksgiving is highly uh ambitious. You could say even getting it done by the end of the year would be a would be a stretch, but it's technically possible. And how many votes

do they need? I mean, is it just a simple majority in each in the House and the Senate and that would pass or is it something else? Correct? Yeah, simple majority House and Senate. Um the House, that's much easier because they have a Republicans have a much larger margin. Over in the Senate is trickier. They only have fifty two Republicans. Uh, so you can lose two of them and then Mike Pence can come in and be the tidebreaker. Uh, that's very complicated. Has there been any commentary from the

GOP members. Is there a sense that there is consensus on this at this point? And also are there any Democrats who are willing to get on board? No Democrats yet saying they're they're on board, especially we're in the Senate side. President Trump has been reaching out to two members who are in states where he wants to height Camp of North Dakota Joe Donnelly of Indiana. Uh. Those

sorts of members um consensus. Uh. How they definitely got a larger coalition and really feeling the political pressure because they're all up for re election next year to get something done, anything done. And sometimes when there's pressure like that, the details don't matter as much. Over in the Senate, there's less pressure there on a six year cycle, UM and and members just typically move a little bit slower and and are the dynamics are very much different from

the House. Uh So why there could be consents in the House Senate is a different story. I just want to let you know we are awaiting Republican leaders who are planning to unveil their tax reform bill. House Speaker Paul Ryan just walked out and shaking hands, and we will bring that to you live. Laura. This is fascinating and I have to wonder from your perspective, can you put these tax this tax proposal into historical context. When was the last time that we saw this big of

a change to the way that we pay taxes? So the bill that we we we're seeing today, it's about thirty years since we've seen changes like this with this was President Ronald Reagan where they really went through and and totally read redid the tax code. It's possible that what we today get saled back just because of you know, tight deadlines or unable to build consensus, and perhaps we see something more like what we saw, Laura. I'm sorry to cut you up. Paul Ryan did just start to speak,

so Laurie's will leave it there. 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