Market Surprise Will Be A Blowup From Europe: Ezrati

earlier gains. They are going sharply lower. One speculation is, and of course everyone always tries to give a narrative and then everybody else puts it down. But one narrative is that we aren't getting any details on this possible agreement between President Trump and Chinese jusion paying over reducing tariffs or living them all together. Joining us now to talk about this and what else is going on in a global scale that could affect your investments. Milton as Ratti.

He has independent economics and investment strategy consultant and chief economists for Vested. So Milton, thank you so much for being here. Do you agree that the market has mostly priced in some sort of trade deal and that the details actually very much at or in terms of whether the market will rally or not on the heels of it. Yeah. I agree. The fact of a trade deal is there. The market uh weeks ago decided we weren't going to have a trade war, and now they're looking for details.

And I suspect that the details are because the Chinese are interested in trade and the United States is interested in protecting the integrity of its corporate structures and its technology and um. But Mr Trump of course has harped on trade, so he has to come out with some face saving and the Chinese have to come out with some face saving as well. All right, Well, it seems like we're moving along the path to some degree for you know, some trade negotiations in a trade pack with China.

Let's go to the other side of the world where it's less clear, much less clear, which is Brexit. Uh. It appears that these the two sides, the EU and UK, continue to stumble towards some type of resolution. What do you think is going to happen there? Uh? Well, I think the significant thing that happen and it's not happening between Brussels and London, and it's the Labor Party has

endorsed another referendum. Uh, you'll forgive my cynicism, but it looks like Britain is following the European model of you will vote and you will vote until you get it right. So you think there's gonna be another referendum. I think there will probably be another referendum. I don't know when it will be scheduled, but they get it right. Um

right now. I think the British public, at least, if the polls are to be believed, would vote to remain, but not under these same terms that they existed prior to the vote. So may if she's still in an office at that time, we'll be able to go to Europe after this referendum to sort of qualified referendum to remain and say let's renegotiate the arrangements. And I think that that might be enough of a bone, uh for

her to quiet the Brexit side of her party. So we've all talked herself blue in the face about Brexit with little resolution because things seem to get mess your mess here. But there's been increasing focus on the slowdown that we're seeing in the euroregion, in particular stemming from Germany, UH, the area's biggest economy. How worried should we be about that?

I think that is the great worry. I'm not suggesting that that the probability suggests a blow up in Europe, but I am seeing this is where the surprise will come for US markets and for global markets. The Brexit deal is a mess. Even if they promise another referendum in the future, uh, it will remain a weight boat on the British economy and the European economy. It's significant

Britain is a fifth of the combined EU economy. So this hiatus, if even if it's not an exit, is a wait for their position, and they're slowing down a great deal. In the meantime, you have the Italians, who are both both parts of the Car coalition, despise the EU and would like to follow Britain's example. Yeah, but what would you say that that there is the likelihood of a surprise is how much of a surprise could

there be? We already have talked a lot about how much the economy is slowing down, in the populous trends in Italy and even Spain. Well, I think the problem here is that the Italians are the Italians are defying Brussels read Berlin. They're defying Berlin on on their budget and they have threatened to leave and they have run

on a leaf platform. That doesn't mean Italy is going to leave, but it does suggest to me that, uh, there could be another round in this ongoing European financial crisis, this slow motion crisis where every few years there's a problem and that rocks global markets. It's uh, and that's where I think the surprise would be, not that Europe is going to grow fast or go into recession. I don't think either will happen um. And the problem on more fundamental level, Uh, Europe has to address the Euro.

The Euro is Europe's problem, and even the Germans, who have benefited tremendously from the Euro, have have alluded to the fact that they need to make some adjustments. But with the slowdown, the Germans cannot make any concessions. What type of adjustments you think needs to be made to

the Euro? Well, I think there's a realization in Europe that when the Euro was formed, currencies were out of whack with each other, That the deutsch Mark when the Germans entered, was cheap, the Lira, the pasada, all the currencies, particularly in the periphery with deer. That's set up a situation where the Germans exported to the periphery and the

periphery consume which was unsustainable. So I think even the Germans, and certainly the Dutch and the Fins and people who are involved who have strong economies have suggested that the Germans have to make concessions. The Germans have alluded to the fact that they would, but the time is not right. They have political problems and their economy is slowing down. They're not going to make concessions now. That means that the pressure remains. All the reasons the Italians want out

or a new deal remains. The British, who are not part of the euro it's not it's not their problem, but that comp ounds the situation for the Franco German alliance. Uh I think we could have I'm not. I don't think it's probable necessarily, but I think that would be the surprise another financial blow up in Europe, and with Italy it's a lot more significant than Greece. But you don't think necessarily that there's going to be a recession

in the near term in the Eurozone. It sounds like you're fairly sanguine on China at least given the stimulus. What about the US? Do you foresee a near term recession here? Uh No, not near term. I think the economy has no excesses. I know that recently, no excess No except in Washington, and that's perennial. UM. But UM, I don't the business community has strong balance sheets. I know people have talked about debt. A lot of that debt was getting in while the yields were low, and

they paid off of the debt. Uh. So statistic I I stick on there is that the debt growth has been about six point one percent a year. Their liabilities growth has been about two percent a year. Clearly, they're using the debt to pay down high expensive borrowing from the past, UM, and they have used it to buy back stock. It's true, UM, the consumer has a strong

balance sheet to slowdown. That we're seeing now is part of a pattern where they have shown remarkable prudence for American consumers UM, where they if they're savings rate falls a little low, they pull in their horn and re establish a stronger savings right. And that's what they're doing. So I think later this year they will actually begin to pick up. I know that there's some constraints in the labor market, but um uh that that can be resolved.

The consumers are powering this economy still, so they're as

Milton has Roddy, thank you very much. Milton is the independent economics and Investment Strategy consultant, a Chief Economists or vested Joining us here, Paul, there is a big question in the era of big data and companies getting a lot of it, the digitization of everything, what are the potential implications from a regulatory standpoint for individual investors who log onto their app or connect to some kind of advisory firm that uses an app or uses some machine

learning behind it to understand their client. What are the potential risks here? And joining us now, I'm very pleased to say. Somebody who's given a lot of thought to this Gregory LeBlanc. He has a lectured at Host School of Business at Berkeley Law School. He is uh here with us in Scottsdale, but University of California Berkeley is also I'm sure beautiful right now, So uh, as a professor, what's your sense of this? I mean, what is the potential risk here? Well, if you think about a financial

advisor is someone that you know. Usually you want, you want to trust, right, They're not somebody that you want have an arm's length relationship. If you want them to provide you with high quality service, high quality advice, then they, like your doctor, like your lawyer, right, have to get your trust, and that means you're gonna give them a ton of information. I mean, right now, robo advisors ask you things like your age and uh, maybe your planned

retirement date. Uh, and um, you know your tolerance for risk and sort of survey based Um, that's gonna change. Right, We're gonna have robo advisors that know you better than your mother, right, just like Facebook and Google now know you better than your mother based on information that they lean from other sources. Well, part of it's gonna be information that you provide. You're gonna probably opt into giving

them lots of information. So for instance, UM, if we really want to know your appetite for risk, rather than asking you questions, we should observe your behavior. Do you go to casinos? Right? Do you bungee jump? Right? That sort of thing. That's that's a much more accurate way of of of understanding you. Um, and you know we want the financial advisor to protect us from our our worst h impulses, and so we want them to know about our our worst impulses. And so we're gonna we're

gonna share this information. And so in order for them to provide us with high quality service, they need to know a lot about us. But as we've seen the casino companies also, I want to know a lot about us, and and and that they do they use the information that they get to uh, you know, make sure we leave the casino with less money, right rather than more money.

So how how have individual investors have their expectations changed in terms of how they interact with I don't know the consumer finance, whether it's a broker or a banker there we how has that change? Well, if you think about a typical financial advisor, I mean, the typical financial advisor is usually over fifty and their clients are over fifty, and most younger people don't really want to deal with this this uh, their dad's financial advisor, and so they're

beginning to put their trust into rob advisors. Right. You know, you you open up an app and and then you press a few buttons and you don't actually have to deal with the the backslapping human right and uh and so I think every financial services company realizes this and and they're starting to move in that direction. But it's not just a consumer facing app, but it's also the technology that lies behind it. So have there been any instances where a financial advisor that runs a robo advisory

outlet that judges draw in these millennials? Has there been any cases of them using the information to the dutchriment of the investors saying, you know, we're going to sell them this much riskier thing that gives us bigger fees because we know that they bungee jump and they listened to Death Metal. Well, okay, that's right, We're not there yet. But I mean we all know about Wells Fargo and um, you know which a lot of friends who work there,

and it's a perfectly fine financial institution. But you know, you know, any big financial institution is if it doesn't have proper controls. Uh, if it has incentives for people to generate revenue, then that they're going to use this data. So you know, Wells Fargo famously got in trouble because they used data for cross marketing purposes and uh, um, you know, aggressively, UM created accounts and and you know, pursued marketing campaigns for individuals based on what they knew

about their propensities to buy these different products. Are uh not noticed that these products were being obtained for them? Right? So I guess one thing that I'm just wondering is like how much is this a regulatory issue? How much is this something that should be coming from the government, and how much is this just a cultural issue in each firm, because there's there's really a fuzzy line here.

You're absolutely right. I mean, it's the same. Really, this discussions we're having right now about Facebook, we're gonna be having about all of our financial advisors. UM. You know, we have a very lazy fair attitude right now where people opt in. Uh. The problem with most Americans that they say, oh, I believe in privacy, but then if you offer a free slice of pizza in exchange for their DNA, they take it right. And and so you know, I think at some point that the law is going

to catch up. I mean, I'm not sure whether we're gonna copy something like gdp R in Europe, but UM and like the big companies are probably going to benefit from those kinds of privacy protections. But that kind of brings my next question, which is which companies or which types of financial institutions are doing this. Well, yeah, well nobody yet. OK. So, um, the you know about betterment

and uh personal capital and financial engines. These are robo advisors that have you know, made some headway, and then Schwab and Fidelity and some of the others have copied what they do. But we're at the very very primitive stage. I mean we're at the MySpace era of of you know, rob advising. I think, um, you know, there's just so much potential here that we're just beginning to scratch the surface.

So I guess just lastly, in real quick here, do you think that there is an appropriate amount of information for these rob advisors to collect or do you think it's important for them to have all this information? It's just having some sort of control as far as how they use it. Yeah, I mean, the more information they have, the better the job that can do. If you think about Facebook, I mean pretty much every ad I get

on Facebook is totally relevant. I mean I would never get rid of my what as soon as I land here in Phoenix, I start getting you know things, but oh, here are some fun things to do in Phoenix. I'm like, oh, this is great information, right because they know me well. Um, but you know you you darn well better trust them. And if they lose your trust, then they lose your business.

And and so you know, the companies that have the name brands that they have to be very very careful that they don't lose the trust of their investors because one big scandal and uh, you know Facebook and monopoly, but but financial institutions that we have a lot of competing financial institutions, and so you know, you can't just you can you can't cancel your Facebook account, but hey, I can cancel my Morgan Stanley account and you know, and and and move it over to you know, Goldman

Sacks with the click of a mouse. So so I think people have to do behave Gregory Leblan, thank you so much for joining us. Gregory is the lecturer at the Hot School of Business at Berkeley at the University of California. We are talking all things asset management, front office, back office, the whole thing. Joining us to kind of drill down deeper and some key issues is Steve Meyer.

Steve is a global wealth management services at s c I SEI has over three billion dollars under management, spased in Oaks, p A. But Steve joins us here in Lovely Scottsdale. Steve, thanks for joining us, Thank you for having me. Boy your industry. It's just tremendous here about all the change that's going on, whether it's regulatory change, competitive change, you know, just investors changing how they're investing. What is the number one issue that you and your

attendees here are trying to tackle today. Well, I don't think there's one number one. I think everything you listed is on the minds here. Um. You look, you look at asset management. There's a lot of feed compression and pressure on managers today. Regulatory changes, Um, you know, ironically we look at them as opportunities to help our clients,

but they are challenges for our clients. Uh. And then really you look at all the new technology coming out that can support a manager from how they invest and pick stocks all the way through as we started to talk about, through their back office, middle office to front office. I think that all of that is on their minds as well as how is looking forward they differentiate themselves.

So I think that's one of the key notes of this conference to get these clients together, a very diverse group of people and firms to start to look at the industry not just what's happened, but what's going on in the future and how they can kind of talk and collaborate and come up with some things that would help them in their strategy. So, Steve, let's dig into some of the changes that are happening, particularly in the processing side. It's not just settlements and and things like that.

It's also requests for redemptions and deposits in hedge funds and other issues. What are some of the big developments recently from your end um, Well, I think all of them. You know, everything is being driven and there's an understore underscore of technology and much of this um when you look at the processing side, Uh, really, you have to scale and have a very efficient process. Uh So there's a ton of enabling technologies that many firms like US

are looking to employ. But one just not from scaling efficiency standpoint, But if you think about it, the back office is where it all starts. Um. That's the core of the foundation. If you don't have a seamless, well processed back office, you're not going to have the best front office or investor and experience that you can have. The back office is obviously where a lot of the data resides too, and in these days you can't go too long without someone talking about UH. Folks are looking

to get into more data analytics, predictive analytics. All of that's going to come out of the back office. That's where it starts. So that's what's pushing what some of the trends were starting to see right now. One of the themes obviously that we've heard in the yesset management business over the over many years, and I'm certainly here I've heard it here just at this conference is UH is the pressure on fees that asset managers are dealing with. How are so, how are they responding and what are

some proper responses that you're seeing in the marketplace. Well, they a couple of things. I think they're looking at

what their core strategies are UM. You know, most managers, especially multi strap managers are looking and saying, you know, where they want to really make their bets for the future, what their core investment pisis is UM and they're shuttering products that either aren't in favor or aren't really core for their strategy to uh So, I think they're trying not to be all things to everybody and think that's

a very good strategy too. They're also focusing on what their core is, and their core is managing money and focusing on clients. So everything else from their technology infrastructure to their processing, if they're doing that in house, they're outsourcing it because they're going to firms like ours that that's our core, that we can give them a better experience and give them more scale in doing that. Do you have trouble hiring people to do what you need

them to do? Now, we've been very blessed. We have a very good location our headquarters now Oaks, Pennsylvania. We also have a number of offices across the US and globally London and Dublin, and we have a really good talent base that we can draw from. The reason why I ask that is because a lot of people say, especially when they're trying to build out their tech specialist, because this is a different skill than say processing something

by facts, especially if you're talking about data analytics. People talk about a shortage of eligible employees, but you have not found that. No, I mean we we look at we hire uh, certain subject matter experts, and you know, we bring them in from all others all over, so some of them might have to be relocated. But then we do do a very good job of training people.

So we do a balance of hiring and getting locate that talent outside as well as putting together a pretty good training program to train up the personnel we need. How about just real quickly twenty seconds US versus let's say Europe. What how's the regulatory or just the competitive environment in your versus here? Well, I'd say the regulatory Uh, it's tough across the lobe, but especially outside the US and the European UH sector is very tough. Rules are changing,

they seem to be changing daily. Uh. They seem to be getting tougher. Uh. There seems to be quite a large gate uh you know for asset managers there too to hurdle. And but again we look at this as an opportunity for us to help managers navigate that. Thank you so much for being with us and for having us here. Stiff, head of Global Wealth Management Services at SEI, which oversees more than three hundred billion dollars and also serves a variety of clients from hedge funds to big

asset managers with the intricacies of making it work. One aspect that's driving markets a bit higher today is the fact that China is apparently giving more fiscal stimulus, particularly to its manufacturing sector. Joining us now Tom or Like, chief economist for Bloomberg Economics, to discuss kind of what this tax break is that they are giving particularly to manufacturers, and whether markets are accurately reflecting the boost. So Tom, what is this VAT tax that we're talking about here

and what did China do? So we've got the National People's Congress coming up this week, Lisa. Tomorrow, we're going to get Premier Lika Chiang giving his annual work reports UM to the Chinese legislature. So the V eight T is going to be part of it. And we've got a Bloomberg News scoop suggesting a cut in the v A T rate which could be worth around nor point six percent of g D rate or what is this in practical terms? So this is the the value added tax.

So it's a tax which businesses pay on the value added component of their manufacturing UM. The bigger picture, though, Lisa, is that um China's policymakers have recognized that they've pushed all the buttons that they can push in terms of monetary policy, and so when the economy needs more support, like it does in two thousand and nineteen, it has to come from fiscal channels. So part of it is probably going to be this v A T cut, But the bigger picture is that we're expecting a larger fiscal

deficit target for two thousand and nineteen. We think if you add up the central government deficit some special bonds which they're going to ally the local governments to issue, we could be looking at a fiscal to sit target of about five pc of GDP for the year. That's including the v A T cut that we were suggesting. So China's policy makers lining up to give a pretty significant fiscal boost to growth in two thousand and nineteen.

Maybe the Chinese economy this year is going to look a bit like the US economy last year with that big turbo charge from the Trump tax cut. And I think that's why we're seeing a bit of optimism creeping into the markets. So Tom, let me let me just start off here I mean you and I known each other for a while. How many years did you live in Beijing studying the Chinese economy? Um? I was there eleven years, Paul, Like, I got it just before my lungs gave in. All right, so you know what's going

on there. So let me give you just get your opinion on these on again, off again trade talks. They seem to be back on again. My question to you is, will there be anything substantive in these trade talks number one and number two? Uh? Can we verify that China's actually will will actually you know, kind of uh do what they say they're gonna do. I think there's going to there's going to be a bunch of components to this pool, and as you suggest, verification is going to

be absolutely key for the US side. Um, So, I think we're going to get some immediate results. There's going to be a dollar amount which China agrees to buy, whether it's soybeans or natural gas or corn or whatever. But there's going to be a dollar amount for a specific amount of purchases which China commits to make to

reduce the trade deficit. And then there's going to be some immediate things right, So there'll be some immediate things around allowing businesses from the US to operate as wholly owned foreign ventures in China, not forcing them into joint ventures. The more difficult things though, can we protect intellectual property, Can we reduce subsidies to stay owned firms. Can we allow foreign firms to operate on a level playing field

in China? These are clearly things which you can't do in a week or a month or even a year. So that's why there's going to be a need for an enforcement mechanism to go into place. So meanwhile, as these trade talks continue, the reason why people are so interested in the v A T tax or sort of some of these fiscal stimulus measures is there is a question of how much the Chinese economy is slowing down in the meantime and how much ammunition they have left

frankly get it going again. I mean, it's still growing, but at that six percent target rate that they would like to see. So what's your view on that. Do you think that they have enough juice to kind of kind of get that going. Yeah, it's a slightly sort of complex and unsatisfactory answer, Lisa, But um, they've got less we're used to those they've got left. They've clearly

got less firepower than they did. Um. If you look at the economy as a whole, debt is around two and fifty of g d P. That's a lot of debt. So they've got less firepower than they did have. Even so, government debt is still relatively under control. The banking system as well funded. So if they need to stimulate this year, next year, the year after, I didn't see a huge problem with that. I still think the structure are all drag on China. The kind of the point where they're

out of ammunition. I think we're talking about in the mid twenty twenties, not the next two or three years. Hey, Tom, just real quickly, in the next twenty seconds. Um, you know the China. What have you believe that GDP is a six or six percent growth number for them? We've heard much lower potentially, what do you think that real number is? So the question I have for the datas on China's GDP data is you seem really happy to

believe that credit growth is super fast. If credit grades super fast and that's going into some kind of meaningful activity, then there has to be some growth so we think there's smoothing in the GDP numbers, but we're skeptical that they're real numbers, very far below what the official data suggests. Interesting, okay, because we've heard numbers you know, significant or maybe exactly Tom more like, thank you very much. Tom again, eleven years in China studying the economy, so he is certainly

the go to person here. Tom's chief economist for Bloombrick Economics. He joined us on the phone and from Washington, d C. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyds. I'm on Twitter at Lisa A. Bram Woyds. One. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio