In the End, China Will Ensure North Korea Security: Harshaw

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. President Donald Trump's saying that he's open to talks with North Korea after Kim Jong n's regime tells South Korean envoys that he is willing to consider giving up his nuclear weapons, a potential breakthrough after months of threats from both leaders. Here to help us understand the situation is Toby Harshaw, Bloomberg view editor and expert with all things strategic and

geopolitical and military. Toby, thanks for being here with our with in our eleven three oh studio. So what do you make of this, uh, this report? I mean, is this real progress or is it? And who is this problem? He's got his feed up on the desk. It's over, Yeah,

it is not over. And Pim, you actually made a very important distinction right there, which is that the North has told South Korea that is open to these things, or so the South Koreans tell us, when the North Koreans tell us they're open to these things, then maybe we'll start listening a little bit more openly. But we're playing a game a telephone right here, and we don't

know what messages coming from the other side. We know what messages coming from President Trump, which seems to be that he wants to make sure that he gets in the middle of this and gets to uh get some credit for everything being resolved, or that's what it seems anyway, for him coming out and saying, uh, you know, well, you know, we're we're open to things, things seem to be evolving. I think that you're going to get a lot of people claiming credit from both sides, at least

until this whole thing falls apart. I think that the Trump side will will claim that they're tougher sanctions, that they're hard approach has brought the the North Koreans to the table. And I think that a lot of people on uh this side of the ocean who are opposed to the Trump side will say that this shows that the way to talk to deal with the North Koreans is through talks not through threats, alright, So putting this

together though, this seems like a very positive move. I mean, whatever you can speculate about the future, it's better that we're having this kind of conversation than other kinds of Oh. Absolutely absolutely. As as Churchill is said to have said, it is better to jaw jaw than to war war. I think there is always UM a place for diplomacy, and diplomacy is the next step in this UM. But we've been here before. We've seen this movie. We saw it under President Clinton when the US was actually willing

to give similar security guarantees. UM. In writing to the North Koreans, UM, we've you know, this is sort of the game that the North has played UM back and forth, and a lot of times it's just seem that they are stalling to advance their nuclear program. Toby, one thing that I'm confused by is who's driving the bus with diplomacy efforts. Is its South Korea? Now? Uh, where is China in this, especially as uh, you know, the tariff talk and potential trade wars heat up between the US

and China. The South Koreans maybe driving the bus, but the Chinese own it. UM. There is no question that nothing is going to get done UM without the Chinese on board. They are responsible for nine of North Korea's trade UM. They insist that they have cut off about a third of that UM, although there's some speculation they they have phrased that in a monetary value, so there's some speculation that they're using exchange rates to sort of monkey this and make it seem like they're getting less

fewer exports than they actually are UM. The question is whether you can have bilateral talks between the US and the North or trilateral talks between the US and the North and the South. It doesn't matter unless the Chinese are at the table, nothing real is going to happen. And look what Kim is supposedly talking about. According to the South Koreans is some sort of security guarantee and in the end their security will be guaranteed by China. Toby to just move you slightly off what's going on

in the Korea Peninsula. North Korea has been linked to supplying Syria with the uh material and the services of producing chemical weapons. This is according to United Nations Security Council diplomat is that at all relevant to the stance that the United States has taken against North Korea. UM, not immediately, I would say, we don't actually know when

these chemical weapons may have come from from North Korea. UM. It's pretty clear that in eastern Guta, Uh, the Assad administration has used chemical weapons against civilians, chlorine gas being what we suspect or what the traces have shown. UM. Yes, we have accused the North Koreans of being responsible for chlorine and you know other nerve agents that have ended up in Syria. We know that they export them. UM. I don't think it bears an immediate connection between the two,

simply because we don't know how long it's been there. Okay. The reason I bring this up is because while we're discussing the potential for North Korea to change its stance on its nuclear weapons program, this is something that is actually happening and is a horrible situation in in Syria. What makes anybody think that if you can't solve that, that that you're going to solve this hypothetical i' do with

nuclear weapons. UM, that's a tough question. I as I said, I don't think I would I would tie them to too closely together. Syria is a situation of its own that looks hopeless at them moment. There may be some sort of international break through, UM. But in that the Russians are just as important as the Chinese are to North Korea well so. But one thing that it does raise the issue about is North Korea as a regime

and how it is viewed around the world. And one of the sort of preconditions that South Korea said that North Korea said that it wanted talking about the Game of Telephone was for security guarantees at the North Korean regime would not be attacked or that it would remain present. How amenable might the US be to that precondition to keeping two Korea's I think the US is fine with that, UM.

I think the US what wants to isolate the threat of the I, C, B M, the threat of North Korean nukes, and we'd be able to go a long way toward that. Another thing that they would like is the U S forces removed from South Korea from the d m Z. I would put that on the table if I were the US. What I would not put on the table, UM is the the inner actions and exercises between the US and South Korea, which are far more important to regional security, particularly against rising China. UM.

The sea is a very hard place. We lost to destroyers last year through accidents. That kind of stuff happens. You need to have exercises between our navy and the North Korean Navy and the Japanese navy and anyone else and in the Pacific. Who wants to do that? And that's maybe more about China than it is about North Korea, although it's important for you know, blockading North Korea. If we want to get to that point, that should be non negotiable for the US. Well, a lot going on.

We really appreciate you taking the time, Toby Harshaw. I'm sure you'll go be going off and writing about why, you know, before you pop the champagne and are convinced that there is no nuclear threat threat anymore. Hey, in our lifetime, do you think that there will be? I think so. I think the north that North Korea is is you know, UM, it has too many internal contradictions.

It's not gonna last, but it's a long term project. Well, an out of optimism on this Tuesday, Toby Harshaw, editor at Bloomberg View in New York, joining us here in our eleven three oh studios. Ray Dalio, co founder of Bridgewater, said in a LinkedIn post yesterday, that the tariff talk was just that, mostly talk and is unlikely to come

to reality. Here to discuss what the likelihood is and and sort of what we're seeing with respect to this discussion and what it indicates for the broader economy is Brendan Brown, chief economist and head of economic research at Mitsubishi UFJ Securities, joining us from our studios in Washington, d C. Brandon, can you just give us a sense how likely, given the back and forth, given Gary Cohene, given Paul Ryan, given what we're seeing today, how likely

is it that the tariffs that President Trump have been talking about will come to pass? It seems quite lightly they will come to pass. But one has to also say that it affects a very small part of the overall trade picture, and the much bigger question as regards US trade and unfair competition is to do with currency manipulation. And I think that's why you're seeing this background dollar weakness. But there is a suspicion there in the markets for all of us talk about trade ultimately is going to

percolate through two more dollar depreciation. Explain that a little bit more. When you talk about currency manipulation, what do you think the goal is. Well, the currency manipulation is being led at the moment by Japan and Europe. Japan keeping a long term interest rate pegged zero, the ECB keeping interest rates at negative levels. Those two actions keep their currencies cheap against the dollar. There's no intimation as yet fit the US administration is actually asking Japan or

Europe to abandon those policies. But for suspicion is that the new FED chair pal, who apparently gets on well or was chosen because he gets on well with the Treasury Secretary and the Treasury Secretary once dollar depreciation or a cheap dollar. But this is all going to feed back to somewhat easier and otherwise monetary policy and dollar depreciation, and that's being reflected I think in markets broadly. So, Brendan, do you think that it's possible that we're going to

see a currency war? I mean, forget, uh, forget a trade war. Are we're going to see some kind of race to the bottom here? Well, the history of the last few years since the crash of two thousand and eight has been perpetual currency war. It started off with US currency warfare, and and and then of course Japan and Europe and China have retaliated in various ways. But I do think for the trade UM conflict is going

to manifest manifest itself in continued and probably intensified currency warfare. Well, if that's the case, then what do you believe investors ought to do to protect themselves or to profit from it? Well, gold of course rises in this environment because if if everyone's racing to the bottom, as you say, keeping interest rates artificially low worth trying to keep their currencies cheap,

the beneficiary of that is clearly gold UM. So that's one aspect the the equity markets clearly like a general monetary ease story as part of this trade background UM. But the downside of that is that the the you can get mini crashes or worse, such as one had in in early February, so you foresee more of those

kinds of virtal days. Well, my focus is is really on the credit markets for the biggest and the most worrying aspect of this prolonged asset inflation due to the monetary stance is for credit markets and UM, the Italian elections at the weekend really highlight that risk. But you've got a two point eight seven percent tenure right now on the US Treasury. Where do you see that going?

If we get that kind of volatility you describe, well, a ten yuere is going to continue to reflect the some background risk aversion, so that we know that there's potential increased volatility setbacks. So, however much the bond bears talk about interest rates rising, in inflation rising, there is a long a bid in the long run markets for safety. So I I don't see these long yields rising a long way. My focus is much more on the credit

spreads and what's going to happen to those. Uh So, speaking about that, we just were talking about the CVS deal that's coming that could prices soon as today, potentially forty billion dollars of bonds. Do you think that yields on investment grade corporate debt are going to go materially

higher from here between now and the end of the year. Yes. Um. The the leverage in this cycle, um is very much in the corporate debt markets and in the emerging market debt markets and expanning corporate debts and and and those countries. So so that's where the shakeout is going to be. And given the increased volatility, um we know that in principal, corporate debt and risky debt is priced off volatility and the price of priced off options and and those are

all affected by the increased volatility. I want to thank you very much for joining us. Brendan Brown is the chief economist and the head of economic research at Mitsubishi u f J Securities, giving us his thoughts on the current economic outlook and the tight rope that Federal Reserve Charon J. Powell has to walk. Yesterday, news came out that Amazon dot Com is working with banks including JP

Morgan to provide checking like accounts to its customers. And here to sort of put this in a context, explain what this might mean and look forward to the future of these types of alliances, is from Alawalia, chief executive officer and co founder of pere i Q, based in New York. Thank you so much for joining us from what was your impression when you saw this news at Amazon dot Com was teaming up with big Wall Street banks to act more bank like Well, it's a significant announcement.

The financial services sector just had its Amazon moment, and if you look at it from Amazon's point of view, the financing and payments of retail transactions is a logical next step for their business as I sit and look for additional profit pools. There's also a strong financial motivation

for for Amazon. Today, Amazon spends about two and fifty million dollars in interchange fees about two percent per transaction to visa master card and issuing banks with an Amazon checking account, Amazon can avoid all those fees, and if Amazon converts their customers to this deposit account, that can drop fifty million dollars at the bottom line, which has a significant market kept impact. From a bank perspective, it's

it's very significant news. The banks today are struggling to differentiate. Bank branches are consolidating as you have customers prefer an online, mobile, personal experience. And if you look at the customers segment that Amazon is targeting, the younger generation on bank populations, these are segments that are notoriously low in terms of fee revenue and profitability for banks. So Amazon's targeted inappropriate

segment where it'll be difficult for banks to compete. That said, Amazon needs to partner with banks because there's no clear regulatory framework for Amazon as a commerce company to act and compete as a national bank, and so that's why they reporting has discussed the idea of a partnership potentially with JP Morgan rum. Does this have any implications for third party merchants that sell through Amazon and the fees that are typically charged by whether it's Visa, MasterCard, American Express,

those fees that card companies you know, take from the merchants. Yeah, it can be an opportunity for Amazon to um number one, avoid interchange economics to some of the companies you site in the network charges there for the merchants on their platform. You know. Today Amazon provides financing merchants that sell online and potentially Amazon longer term could could look to defray the the economic transaction costs at the merchants pay, but

that's not contemplated in this announcement. So in order to get clients to move to an Amazon dot Com sponsored checking account with the banks, are they going to offer some enticement do you think to customers? And what would be the financials between the bank and Amazon dot Com, which really loves having access to all the data that it's clients exact exactly, No, I would imagine that you

see some type of rewards value proposition. Amazon recently announced a new credit card in partnership with a bank that offers discounts when you purchase that whole foods or online or at restaurants. With the two savings on the avoidance of interchange fees, Amazon can redirect a portion of that UH to defray the costs of purchasing online or some

other type of bonus. In terms of the relationship between Amazon and a bank, usually these are co brand relationships, and co brand relationships have been around for four decades an how right. For example, Chase has a United Knowledge Plus card, where United provides the marketing, Chase provides the servicing, the legal framework, the balance sheet capacity, and the risk management.

So I think a similar type of model will take place here, where Amazon will provide the customer access access to the data for underwriting UH, and then a bank

on the back end we'll we'll service those customers. So at a certain point, I guess that this raises the big hundred million dollar question here, a hundred billion dollar questions potentially, which is UH is Amazon dot Com dipping its toe into this with the idea of always partnering with Wall Street or becoming a direct rival to Wall Street. I would say Amazon is is learning from this experience. Number one is they don't have the regulatory framework to

take on the bank's head to head. Today, there's been discussion of a fintech charter that could be awarded by the Office of the Control of the Currency that would give Amazon and other fintech companies the opportunity to compete on a national basis with the banks. Today, that regulatory swim ling doesn't exist, so Amazon really does have to partner with a bank. However, you know there are precedents

out there. If you look internationally in the China market, there are large technology companies such as and Financial Intent Scent which have banking charters, and that certainly has inspired Amazon and Amazon's competitors to go after this opportunity. So I think Amazon will learn from their experience as they develop these new products, both on how do you acquire the customers, how do you underwrite the customers, which data

is relevant? UH, and then as that regulatory framework evolves, I think you would see Amazon UH and to more deeply into lending, constumer banking more gener really and the other opportunities run asset management insurance. Well, I wanted to just quickly offer you the chance with pere i q, which is your company. Is it possible that a company like Amazon would partner with you in order to provide that conduit to the businesses that are looking for those

alternative forms of credit. So pure i q provides the data and risk management analytics for owners and providers of financing for consumer credit risk. So we're able to help Amazon and banks to understand the health of the US consumer and understand where we are in the business cycle, makes better risk and lending decisions. I want to thank

you very much for being with us. Rum Ada Walia he is the chief executive and the co founder of peer i q, giving us his thoughts on what's going on with Amazon and the possibility that maybe you'll have a checking account and it will be from Amazon, maybe with a two fee reduction for Amazon. This is such a fascinating issue because every other area that Amazon has gotten into, there's the Amazon effect where shares in that industry just plummet, and you're not necessarily seeing that in

the in the banking sector. Well, because they've got the partners the partnership with JP morgan Chase, because they've got the partnership and they don't have the charter. Yeah, indeed, and it may be too expensive and too owners to get it yourself, so just rent it from JP morgan Chase. Is a rally in stocks a time to sell? Well, let's find out from David Kats. He is the chief

investment officer from Matrix Asset Advisors. He's got more than seven million dollars of assets under management and he joins us now, David, thanks very much for being with us. Maybe just start off by doing the whole thing, you know, by the dips, sell the rally. Is there any strategy that is worth following that is along those lines, Well, we think that is going to be the watch for

two thousand and eighteen. We think that ultimately the market probably is up in the high single digits, low double digits area, And the time to get more optimistic about stock is after selloffs like we've had over the last few weeks. Uh, and the time to be less optimistic and taking proferences after you've had a significant run to the upside. It's important to point out that when the stock market is selling off, there's a lot of doom and gloom, so you've got to be prepared to buy

into that uncertainty. Uh. And the flip side is after the market has had a great run like it did in January, everything looks wonderful. Don't get caught up in that enthusiasm. How often do you end up trading? Well, basically, we were on portfolio, so we're looking at individual stocks, and on that basis, you know, we're happy to take profits if the stock has run up a lot, and by the same token, we're happy to put money to work into a decline if we've got cash on the sidelines.

So here here's the reason why I'm asking. Morning started put out a survey the week saying that last year of active managers beat their benchmarks and that was up from in but still less than half. And I'm wondering, you know, for an active manager, how do you add that alpha? How frequently does it take trading, especially at a time when there's a lot of volatility. Of volatility in other words, it's hard to predict when things are going to spike or rally. Great question. So we're long

term value investors. We have a large cap value product and a dividend product. We're pretty low turnover anywhere from the area of fifteen to twenty so we're not adding our alpha by trading the market. We're hopefully adding our alpha by buying good long term investments at attractive prices. When we talk on your show on the margin, we're talking about investors that have had cash on the sidelines that they're talking about putting to work. We'd buy into

that dip. And by the same token, we work with a lot of individual investors and they tend to get a lot more enthusiastic about throwing money into the market after a rally. To our best advices don't do that. But from our perspective, long term investing by businesses you like it, attractive prices, UH, and over time you'll do well. The last few years have been pretty tough for value investors. UH. Generally after periods like that, value comes back with a vengeance.

So while we've got a good long term record, we definitely have struggled in the last few years. We think that sets the stage for value to do a whole heck of a lot better going forward. Companies that you like tell us about Chubb, the insurance giant. So Chubb is a a great long term business. UM. They've done

very well in terms of earnings. Uh. The thing that makes us most enthusiastic about the company is on the last conference called the CEO we think is probably the best CEO in the insurance industry, said he's yes, uh that that he's seeing the firmest pricing environment UH in the insurance area that he's seen in a number of years. That generally is the precursor for very good earnings performance

and very good stock price performance. So we think you're getting some very good underlying trends at an attractive price. All right, So that's Chubb. Take us through a couple of other names that you're interested in. I want to focus you right now on Gilliad Sciences. They were very they're very big, and hepatitis and AIDS therapies. So Gilliad is a great biotechnology company. It tells it a pretty reasonable pe under twelve times earnings. They dominate the hepatitis field,

they dominate the HIV field. They've made some very good investments in cancer research and products. So we think you're getting a great long term business at a very attractive price, and you're almost getting a three percent dividend yields while we're waiting right now the stocks at about seventy nine, we think easily it can be nine and ten over the next one to two years, and you've got fairly

limited downside risk along the way. Is it relevant that they have what a little bit more than eleven and a half billion in cash on the I beg your pardon more than that billion in cash. Absolutely. You know. One of the things that attracts us to it is that've got this great cash flow generation and a great balance sheet. And that great balance sheet allows them to do a few things. It allows them to pay a very healthy dividend, and they've been raising that dividend at

a very rapid clip. And it also allows them to make some smart acquisitions that ultimately fill their pipeline and help earnings. If you look at Gillian over the left five or six years, they've been great acquirers of business. Their whole Hepatitis the franchise was made on an acquisition that worked out to be great. We think their recent acquisition and cancer research is going to work very well. So season managers deployed the cast very nicely, and you're

getting that real cheap. David, Wells Fargo, this was one of your picks which I find really interesting. Shares down nearly six percent so far this year, continuing to fall as the scandal just keeps on going. With respect to how the company has been managed, what gives you convince action that this bank is over sold and offers opportunity? Well, we think Wells has a great footprint. The problems that

they've had in the last year are astounding. We we absolutely can't believe that management allowed it to go on. We can't believe that the board didn't take harsher actions. However, we think a lot of that is in the rear view mirror. You do have an overhang from the FED this year in terms of slowing their growth, but it really is only slowing their earnings growth by about UH

ten or fifteen cents. It's one of the cheaper financial institutions out there, are paced, one of the higher dividend yields, and longer term, it's got a great footprint. People will use Wells Fargo as a bank. If you look at some corporate scandals over the years, companies that managed well can get over them. Toyota had their car problems a year ago. A few years ago, again it's considered one of the top automobile companies in the world. Johnson and

Johnson had some problems a few years ago. Again held in very high regard. Three years ago, well Spargo was thought to be the best financial institution in the country. Obviously they they've lost that, but we do think two years from now they're going to regain some of um their standing and by the time people realize that the stock will be about thirty to forty higher. So the time to buy is during this period of uncertainty while the company is still making a great deal of money.

David just quickly Johnson controls. How long are you willing to wait before you throw in the towel on a stock? Well, we've owned it for a few years, it's done well, and then in the last eighteen months it's been miserable. Are strong sense is that the new CEO is turning the business around, and we think that you're going to

see progress within the next three to nine months. Uh So, you know, we've given another twelve months, but we we absolutely feel you're going to see progress in the upcoming year, and the stocks at a great price In the meantime, David Kats, thank you so much for joining us. David Katz, chief investment Officer of Matrix Asset Advisors, which is 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 pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.