Ludicrous To Attack China For Supporting Its Own Economy: Roach

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Late yesterday, the White House said that broad tariffs on steel and ten percent on aluminum that are already in effect against China, Russia, Japan and others would not go into force for the European Union as previously planned. Instead, the European Union has another month to continue negotiating with the United States about

the new pact. In order to avoid the tariffs Canada Mexico, they were given an extension until June of first talks continuing to rewrite the North American Free Trade Agreement. Here to tell us more about trade and China is Stephen Rocchi is a senior fellow and lecture at Yale University,

also a Bloomberg View columnist. Uh Stephen Roach, give us your perspective on the trip that Stephen Manuch In, the Treasury Secretary is taken to China and whether they will actually accomplish any resolution to the trade dispute between China and the United States. Well, I worry that this is a waste of taxpayer money to send these guys over

to Beijing. There's no real strategy that they have to UH negotiate a meaningful concession with the Chinese, and they go over with a with an approach that really has nothing in the way of macro coherence, doesn't understand the role that deficits play in um UH is a symptom of America's own macro economic imbalances. So I'm not too

optimistic this trip is going to accomplish anything. Pim Stephen, you wrote a column for Bloomberg where you were saying, the US needs China more than China needs the US. Does Beijing know this? You know this is this is not you know um astrophysics. They know that they provide American consumers with a lot of low cost goods that they need to make to make ends meet. They know they buy a lot of treasuries, and they know that China is now the third largest and most rapidly growing

market for U S exports. None of these are big state secrets. China understands all of that. These are these are issues, of course, that we haven't spent a whole lot of time absorbing at the policy level in Washington. Well, the reason why I ask is because Beijing came out and said, yeah, we're happy to negotiate with the United States.

We're just not willing to discuss a mandatory when hundred billion dollar cut in America's three hundred seventy billion dollar annual trade deficit with China, or curbs on Beijing's three hundred billion dollar plan to bankroll the country's industrial upgrade into advanced technologies, which are the two main issues that the US wants to talk about. What do you make

of that? Well, Um, first of all, you know, the the idea that you know, we can make America great again by cutting a bilateral deficit with China anybody else is totally ludicrous. I mean, if we don't rebuild our national savings, and of course we're going the other way with these big Trump administrastration budget deficits, we can slash a hundred billion, two hundreds even three hundred billion off the Chinese bilateral deficit will just go to someone else.

And that someone else is a higher cost producer that will end up taxing American workers. And in terms of asking China to capitulate on its industrial policy, I mean, are we prepared to do that with our own industrial policy? Or did did Japan do it? Or as Germany on it. It's a ludicrous to accuse China of of of going after supporting innovations based initiatives when we all do it. Stephen Roach, give us your thoughts on the dispute over

intellectual property rights with China. Intellectual property is the core of any modern innovations based society. But I've looked him at the accusations that have been leveled at China in the two page document produced by the US Trade rep on March it's not a It's not a good case at all. Um. They make three main points that China

UH steals technology through joint ventures. Um, that's ludicrous. I was in a joint venture, and you know when you you're in a joint venture, you join with your partner and you build and share operating system and innovation. There's nothing forced about it. Then they go after China for UH being a predator in these going out outward bound UM. Foreign direct investment initiatives like made in China. We've just

talked about that. I think that is ludicrous. There is a case to be made for UH China using cyber espionage to um uh go after US innovation UH, and that that certainly was a compelling case that the President Obama presented to a Shijun Ping at the Sunny Land Summit in two thousand and fifteen. But now I think a fair amount of that UH type of activity is subsided. So there is a case, but you know, is it a credible case? This is a strong case, is a

compelling case, I don't think so. See, you know, I want to push back a little bit because every economist that we've talked to agrees that that the trade negotiations between the U S and China haven't been leveled for a long time, or that the trade just agreements in general. Given the fact that China really is a closed economy and they do have bands on US companies coming in too much, you know, are owning too much of their presence in China, what areas do you see room for

improvement to level the playing field here? Do you think things are just fine? Well, you know, there's so much generalization going on right now. You know, everyone feels this way, everyone feels it's unequal um. This probably, you know, is exactly the way um we dealt with the communist threat in the nineteen fifties under the inquisitions led by Senator Joseph McCarthy. It becomes something that is unpatriotic to openly debate. UH. China has certainly been tough in competing for market share

around the world. There are things that they don't do that are not fair, that are inequable, that we may not like, and they need to be held accountable for that. But but to condemn them for literally everything they're trying to do to grow a large, developing economy is ludicrous. The areas that I think we should focus on our market access, making certain that our companies have just as much access to their markets as they do to ours.

And I've been long in favor of pushing ahead negotiations on a bilateral investment treaty between the U. S and China. This is stalled out, UH, And for the the Trump administration that prides itself as being a great dealmakers, why not do a deal on this is the obvious thing to do. Thank you so much for being with us and for your insights. Stephen Roach, Senior Fellow and lecture

at Yale University, also a Bloomberg View columnist. Well, since the kickoff of earning season basically April, we've seen energy companies perform the absolute best among SMP five hundred corporations. Here to talk about the future outlook is Liab Denning, energy Mining and commodities columnist for Bloomberg gad Fly. So we have seen an outperformance in oil companies, and I'm just wondering, do you think that there is a lot of room for it to continue? I think so. Um Uh,

it's it's partly an oil price uh phenomenon. Obviously, all prices are up and that does a lot of good. But the thing we shouldn't forget is what these companies have been doing to UM to actually make themselves just better companies. We've seen this from the majors in terms of scaling back on very bloated investment budgets, trying to get more efficient in terms of which projects they do and how they build them. But we've also seen it

with the independent guys. You know, there is a lot more talk now of UM smaller exploration and production companies actually trying to live within their means generate returns rather than just grow as fast as they possibly can. We'll see whether that lasts if all prices go higher, but for now they seem to be making the right noises. The US production of oil eleven million barrels a day, Yeah, this is I mean, this is a big this historic,

it is historic. Yeah, I mean it's it's the probably the biggest thing that's happened in the old market in the last decade. Okay, And any chance that we're going to see even increased production, because what we've heard in the past is oh maybe they'll get to eleven million, we could be headed a lot higher. The issue is just getting the oil out from where it is, let's say West Texas, nor pipelines nor roots. Yeah, and we're the logistical bottlenecks in West Texas will be eased within

about eighteen months, I would say, um. As to how high it goes, um, I mean, there are all sorts of estimates out there. It certainly doesn't seem to be slowing down anytime soon. And I think the key thing to watch out for is with prices where they are that kind of sixties seventy range. A lot of producers are well able to keep growing production, to keep hedging

their production. The thing to watch out for is this this kind of geopolitical premium that is creeping back into the market, which for the guys in West Texas is just a windfall because you know, none of that stuff actually affects any of their production. It all happens very far away. And the more supply shocks you see elsewhere that the more room that creates for US barrels. You know that that I want to pick up on that

point because I think it's a really interesting one. Just how much of a geopolitical risk premium are we actually seeing baked into the market right now? Okay, so now you're asking me how long a piece of string is? So how long is a piece of string special? Okay, Sorry, I forgot to bring my piece of string to the studio,

so it's impossible to say how much exactly. Okay. What I would say is that this has become much more of a narrative over the past six months or so than it was for the proceeding three or four years. In some ways, the crash that happened which was you know, in large part driven by the shale boom, sort of inoculated the market against geopolitical shocks, or at least it seemed like it no one really seemed to care about, uh, you know, the latest intrigues in Saudi Arabia or you

know what was happening in the Middle East. People are caring more about it now, partly because inventories have come down, because demand has been pretty strong, partly in response to lower prices, and because obviously Opec, Russia and some other countries have been holding supply off the market. And if you bring inventories down, then people start to worry a bit more about supply shocks, etcetera, etcetera. It creates a

certain danger in the market. Um. Right now, we're in a position where there is a lot of speculative money that is very long crude or prices. UM demand, while strong globally, is showing signs of responding to higher prices. The US demand data for February just came out yesterday, and one of the things that struck me about it was that oil demand was up about half a million barrels a day, but none of that was actually what we tend to think of as oil demand actual refined

products like gasoline and that sort of thing. It was all natural gas liquids. Gasoline demand was actually down. And if you look back at what's happened to gasoline demand since late s which is when prices began to rise at the pump, that's kind of flattened out. Again. Are you loading up the car to take that summer trip because it's going to question more two dollars eighty one? Since is the triple a average gasoline price per gallon? Yeah, And if you look in a lot of cities it's

it's already bus People are gonna be paying more this summer. Absolutely, and I think that does begin to feed into demand. And that's the risky get with these quote unquote geo political premiums. Thanks very much for being with us as always, Liam Denning Energy Mining and Commodities columns for Bloomberg gad Play. Read all about it at Bloomberg dot com. How bad will it be? That is the question with Apple, which

is set to report earnings after the bell today. Uh. And people are worried that they are seeing slowing demand for smartphones, which have provided them with seemingly unlimited amount of cash filling their coffers. Joying us now, Stephen Milanovitch. He is managing director and technology analystic e b S, joining us from EBS headquarters in New York. Stephen, thank you so much for joining us. So what are you expecting and how much bad news is being already baked

into shares of Apple? Well, you have to assume a fair amount is baked in, just because practically every Apple supplier has projected June quarter disappointment indirectly blaming Apple. On the other hand, the stock is held up quite well, so this quarter might be a bit of a tug of war between on one hand, disappointing iPhone units and on the other hand significant buy back and positives like services growth. So there's there's some built in, but there's

still some room for disappointments. Give us your revenue estimates for what you think Apple is going to do. So we think the company is going to do a little over sixty one billion in the March quarter, and remember that they rarely have ever missed their guidance for a quarter. The real issue, though, is what's the guidance going to be for June and for June were just over fifty billion dollars. We're looking for, or about forty one million

units for the iPhone. I think the concern is that some of the lower numbers on the streets suggest it could be as low as thirty five millions, So that's going to be a number of people are looking closely at. I'm trying to understand whether we can interpret all of this hype about declining smartphone sales as a failure of the iPhone ten or is this just a natural part of the cycle. I tend to think of it more

as a market issue. Now. There is a narrative that the ten has been disappointing, that the company's overpriced it um. I'm not sure that's the case, in the sense that we find that users are moving up the Apple price curve, that is, the percentage of buyers by a phone s over seven hundred dollars. We think has doubled the cycle, and if you don't like the ten, there's plenty of

other options for you. I'm a bit more concerned that the markets mature, that geographies like China, which we thought would really bounce back for Apple, are coming back very gradually, and as we continue to see an elongation of the upgrade cycle. So I think it's as much a market

issue as it is an Apple problem. Can you speak a little bit more about China, because there are some estimates that between seventy between sixty and seventy million Chinese consumers are due to upgrade their phones over the next twelve to eighteen months. That's right. You know, Apple sold about seventy million phones in fiscal fifteen as China Mobile came on and you had a big screen phone, it's a huge year. We're nowhere close to that. Um, Hong

Kong has pretty much gone. So we're talking about mainland China, which is around forty million units a year. We and others thought that there'd be a lot of people waiting to upgrade, and therefore we'd see you some sort of double digit growth this year. We're beginning to think that's

less likely. We think that the number of people who can afford an iPhone in China is fairly flat, that Apple is pretty much splitting the hind of the market with Huawei, and that you are seeing elongation of upgrade cycles even in China. So um, we still expect to see some revenue growth for Apple in China with a higher a sp but we've kind of gotten off the idea that we're going to see a huge bounce back.

So this is such a fascinating issue to me, and just of confirmed with Sony's earnings overnight where they reported a massive decline and production of of cameras for smartphones, and I'm just wondering what can Apple do to diversify their business that there is less focus on the smartphone

supercycle and its potential death. Well, first of all, I think the smartphone is not a terrible position for Apple because their installed base has been growing, so it's a question of when, not if people are going to buy another iPhone. But to diversify, you've seen them certainly boost their services business, so services is moving towards profitability. We expect it's going to grow over this evening, so that's

very helpful. They also have a seven billion dollar wearables business, you know, with the watch, the HomePod, the arabuds, so they're you know, starting to diversify a little bit there. And as the watch, you know, really doesn't excuse me as the iPhone doesn't really grow much in the future, getting a couple points of corporate grows from wearables is

going to be noticeable. I don't think you're going to see tremendous new hardware from the company for the next day two years, but eventually you could see augmented glasses, augmented reality glasses, for example. That will help diversify revenue a bit as well augmenting the investors pocketbook. How about returning money to shareholders, Well, we expect a pretty big number. Tonight,

they have about a billion of excess cash. We expect a good bump to the dividend and discussion of you know, up to a hundred billion dollar incremental buy back um. The question is over what period would that happen. I would say three to five years. I think it's going to be a little bit more on the gradual side. Some people have a concern that maybe they'll keep more dry powder for M and A possibly, but I don't expect the company is going to be that acquisitive, at

least in the new yer term. So I think they feel the stock here is is very undervalued, particularly due to the services business, so I expect they'll be relatively aggressive on a buyback. Does anyone care about apples for a into that newspaper service and other types of subscription offerings, entertainment. Well, it helps the services side. You know. It's funny the the company has said that the vast majority of ifall,

customers pay nothing for Apple services. So if they get people starting to use services, our work fines that they actually increase their number of transactions at rate annually. So it is through new kinds of video and the newspaper and so forth that they are hoping to get people into that services ecosystem, and history suggests that once they get in, they get pretty active. Stephen Milanovitch, thank you

so much for being with as. Steven Milanovich is Managing director and technology Analysts at you b AS, coming to us from eb S headquarters. It is time to dig a little deeper into fixed income. Focus on fixed income brought to you by PIMCO for investors who demand more than the markets deliver. All investments contain risk and may

lose value. Consults your investment professional before investing. A lot of people in the fixed income markets are focused on the Federal Reserve, which is starting a two day meeting that ends tomorrow, but also a lot of focuses on the US Treasure Department that is going to announce its quarterly refunding plans at eight thirty tomorrow morning in New York. Ira I red Jersey, chief US industrate strategist for Bloomberg Intelligence,

joins us. Now, I want to start with the refunding announcement because frankly, a lot of people think that the increase in the amount of debt that the US Treasure Department is is issuing, uh, is part of the reason why we've seen yields actually rise. Steve minus In, the Treasury Secretary, of course, totally dismissing that yesterday at the Malkin conference. What's your perspective, what's your expectation for how much the Treasure Department is going to increase is debt

sales in the next quarter. Yes. So what's interesting is that the Treasury departments already said, um, how much they think that they're going to have to borrow over the course of the next two months and then the following three months. So um, they think this quarter or so the quarter that actually started a month ago, Uh, they think they're gonna borrow seventy billion dollars of new marketable debt,

which is not particularly high. The second quarter, of course, you just had taxes that were paid, so you you actually have uh. The month that just ended in April tends to be a surplus month, but then and the next couple of months tend to be pretty flat. There's not big budget deficits that really um uh, that really have to be funded over the next few months. So will Treasury Department do something with saying that they're going

to issue more debt? Yes, they have to because later this year they're going to have to issue a lot more um, but it's going to be incremental again, so it will be another billion or two of a lot of different instruments of what I'm really looking for, quite frankly, or tips. So um. They didn't do anything with with the Treasury Inflation Protected Security Program last time, and they asked their advisory committee, Hey, what should we do with this?

And there was a whole you know, forty page power point presentation that that that committee made to the Treasury Department. So the Treasury has been mulling that over over the last few months. That's really interesting. And we did, of course get the first quarter results as far as how much debt the U. S. Treasury sold four d eight billion dollars a record and exceeding the estimates that the Treasury Department previously came out with. How much credibility do

these estimates have if they have exceeded them in the past. Yeah, there's always been. There's always big, big variants in it, and and part of that is they might pivot and decide to do something a little bit different in UH in between. So so that the one thing about that four eight billion is they basically pre funded some of the borrowing that they would have to do this quarter.

So um. So, the previous estimate for this quarter, for example, was about a hundred and seventy five billion dollars of issuance during the second quarter of eighteen. Now it's only seventy five because the last quarter they issued an extra

hundred billion dollars that was unexpected. So so these estimates are are just that their estimates, they always missed them by a little um But you know, at the same time, they're they're kind of useful guides as to the magnitude of increase that they're expecting or the magnitude of of UH pay down that they're expecting in in the different markets. So when you're trying to forecast exactly how much they're going to issue for T bills all the way through

thirty year bonds. Um. You need to you need to know that, UM, and and so it is helpful information. I read Jersey. Is the market raising interest rates and therefore the Federal Reserve won't have to you know that. That's a good question him. My view is no, Uh, you know, the interest rates are somewhat higher, you know, certainly you know three percent? Is this the you know number that I know a lot of people, um, look at I think in the rates market, you know, pretty

much everyone yawned and said, oh, three percent. It's not important because three point six is an important technical level and three percent just another number. UM. But I do think that that Wait a minute, Wait a minute. You've got people who are looking at three point oh six and they're having, you know, over lunch discussions about that, and yet around number like three percent is not interesting. I mean, come on, really for real? Yeah, I'm not

getting um. The But but to go back to your question about whether or not you know the Fed doesn't have to hike because the markets doing it for them. I think one of the reasons why we're here one of the reasons why two year notes are two and a half percent, and the reason why you know ten year notes are hovering right around three is because is

because the Federal Reserve is expected to hike. If the Federal Reserve we're not expected to hike a few more times this year and three times next year, then you'd wind up with certainly front end yields. So two year notes and five year notes would probably be at somewhat lower yields than they are today. Um, you know ten year notes, and that scenario might actually move move move somewhat higher and make potentially new yield ties for this cycle.

So let's say the Treasure Department does announce some kind of new TIPS issue in what will that tell you with respect to the US is expectations regarding inflation. Yeah, not a lot for inflation. Now that the b issue with the TIPS program is that there is that it tends to have very spotty liquidity. So because they don't issue them as regularly as they issue other instruments, there there is not as much of them outstanding. Um, they only have one or two new issues every year and

then they reopen those issues. So I you know, big part of the discussion is how do they make that program more liquid, how do they get investors more interested, how do they make it a program that can be a kind of sustainable funding source and at the same time be useful from an information purpose for policymakers like the Federal Reserve as to as to where the market things inflation is going to be. So those are those are all the potential things that they that the Treasury

Department might try to address. And maybe that's a matter of maybe getting rid of one of the issues, maybe getting rid of, for example, the thirty year and only having five and ten year and then having more frequent auctions of them so you get a little bit more liquidity and better price discovery. Thank you very much. I read Jersey as our interest rate strategies for Bloomberg Intelligence. 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 wits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio.