Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. Along with my co host Lisa Abramowitz. Each day we bring you the most important, noteworthy, and useful interviews for you and your money, whether at the grocery store or the trading floor. Find the Bloomberg P L Podcast on iTunes, SoundCloud and at Bloomberg dot com. I am thrilled to
welcome Ambassador Michael Frohman to the show. He is a Distinguished Fellow at the Council of Foreign Relations and he was President Obama's principal advisor, negotiator, and spokesperson on international trade investment issues. He led the negotiations of the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership UH. Ambassador Frohman thrilled to have you. Right now, we're hearing a lot about how broken a lot of these trade
agreements are. Is there one aspect of NAFTA and some of the other trade agreements that could be tweaked to sort of ameliorate some of the anger? And where do you think it's the anchor is really coming from? Well? Absolutely, I think NAFTA is now twenty three years old, and under President Obama, we sought to renegotiate NAFTA through the Trans Pacific Partnership. Canada and Mexico were members of TPP.
Mexico agreed in the context of TPP to have binding and enforceable labor and environmental provisions, which they did not have in in NAFTA. They agreed to open up their energy sector to US participation. They agreed to put disciplines on their state owned companies, They agreed to a whole series of obligations around the digital economy. And similarly Canada. Canada had refused to open up its dairy and poultry markets to US exports in NAFTA, and through t PP,
we were able to open up those markets. So there certainly is improvement to be to be had in in in NAFTA. We did that in t p P, and I think the question now is what does the Trump administration seek to do beyond what we did in t p P to to address this. I've heard Secretary Ross has mentioned he wants to talk about the digital economy,
about raising UH living standards in Mexico. That's exactly what our labor chapter and our Digital Economy chapter did in TPP, and I think we're all waiting to see what else he wants to do and the administration wants to do that goes beyond that ambassador from and can you give us some details of the nitty gritty of where, when, and how these negotiations take place, and how are they prepared for some of the technical background information that would
come with the bureaucracy and the new administration. So Congress passed a law in June of fifteen called Trade Promotion Authority, which lays out a whole series of processes that the administration has to go through before negotiating any trade agreement. And that involves deep consultations with Congress, I think for at least ninety days. It involves reaching out to stakeholders and having public hearings and getting input. And this is the normal process you go through when you negotiate in
a trade agreement. So the Trumble administration seems to be beginning that process now, and I think UH Secretary Ross indicated earlier this week on an interview here on Bloomberg that it was going to take some number of months before they would get started actually in renegotiating NAFTA, primarily for that reason, and and that's uh, that's the first step that needs to be done. I think once you get beyond that, and you have a clear sense of what it is you want to put on the table,
what the parameters of the negotiation will be. It that involves consultations with with our partners Canada and Mexico to determine whether they are willing to engage on that basis. And of course, as we reopen NAFTA, they may well have their own issues that they want to put on the table. Well, I want to pick up on that point.
In particular, there was a story today about how Mexico's sugar industry, which is upset about the idea of possibly being blocked or tariffed taxed by importing sugar into the US, might block imports of American high fructose corn syrupe in retaliation. How concerned are you that relations between Mexico and the US will deteriorate before negotiations even begin and derail any potential to really come up with a beneficial plan. Well,
these are there are some longstanding outstanding issues. Sugar with Mexico is one of them. The U s sugar industry brought some actions under our trade remedy laws UH that that kept Mexican sugar out of our market. We negotiate an agreement to settle that. That agreement has been uh fraying at the edges or there's been a lot of
pressure on that agreement. And the comments you mentioned reflect the concerns the Mexican sugar producers have, and they've always threatened that if we keep sugar out of our mark their sugar out of our market, they'll keep our fructos out of out of their markets. And so they are
a substitute for each other to a certain degree. All that puts a premium on making sure that you're using all the good will that you have with your neighbors, that you're making sure that you're addressing their concerns and it doesn't deteriorate into a trade war, because any of these issues can lead to sanctions and counter sanctions and
that's not good for for for any of us. And so, whether it's trigger with Mexico or dairy issues with with Canada, we have outstanding trade issues that need to get addressed. Many of them were addressed in the context of of TPP and going forward, since the administration is determined that it doesn't want to move forward in it with its own participation in TVP. It's going to find it's going to need to find other ways of addressing these outstanding issues.
Do you believe that there's any political connection between TPP trade and the rhetoric on trade and the desire for UH commerce Secretary Ross talked about those negotiations. Is there any connection between that and the border wall proposal? Well, look, I think there will be lots of uh PhD dissertations written on this last election and what was what went into the well, just give them your headline, give you
about the fifteen seconds. So like, I think that notwithstanding the rather remarkable economic recovery of the last seven years, there are a lot of people who are angry and resentful, and they're seeing the impact on wages and jobs much now. Economists will tell us much of that impact, the vast majority of the impact comes from technology. Some of it comes from globalization. But you don't get to vote on technology,
you don't get to vote on globalization. You get to vote on trade agreements, and you get to vote on immigration, and so UH taking action against whether it's foreign governments or foreign immigrants is a bit of a scapegoat for people's understandable economic and securities. They may be the wrong target, they may not be the cause of the problems, but they are a reflection of how angry and anxious people
are about their economic well being in the country. Well, I gotta say that is a very diplomatic answer, and I wanted you're a diplomat. Ambassador Michael Frohman, Thank you very much, former US Trade Representative, currently a Distinguished Fellow at the Council on Foreign Relations. We've got the Axel Murk. He is the president and chief investment officer of Murk Investments and Axel. Maybe you could respond to this information and maybe explain how this fits into the context of
what the e CBS attempting to do. Well, Yes, him highly Well. I think Mr drag is known to pivot um. Every six months he comes up with a completely new story and and every time he holds the meeting, he gives some positive negatives, and then half a year later he says, see, I told you. I was like, I mentioned all the policies, so I mentioned all the negatives, and so this time around the glass was harful. He
said everything is working. Our apolicies are fantastic. And by the way, yep, we are attentive but not anxious about anything that's coming up. Meaning if if things do go bad with the upcoming elections, I'll bail you guys out. And so what I have been arguing, including on your program, is that we've reached the bottom of the interest rate title in Europe and that is not priced in. And we've seen it in the euro, especially last today, how
it's been moving higher. And that's exactly that that they are looking at the way how they can get out of this this massive cit they're doing. And and sure enough everything is always too what's been priced in, and the Euro has been moving higher, and even on the back of a good job report. But all I've been weakening today Axcel To that point, what would the market effect be should the ECB start raising rates sooner than
is currently being priced in. Well, that that's bound to happen because everything is pricing in that that look, and it's gonna win. That the Dutch is gonna be pulling, They're going to be out of the U or whatever it might be, and there's so much negative news price then there is a price then that that the rates are going to go forever lower, and and there's that they have been an effective not going to go lower.
And so what's going to happen in my view is that that the euro is going to strengthen over time. Um and because we we've praked been all these wonderful rate heps in the US. But I think in the US we are far more behind the curvesin in Europe. So but hold on a second, because which assets specifically will sell off the most should the ECB say raise benchmark rates. I don't know before the end of this year,
which assets. It's a good question. I mean, in the last two days the German bones have been significantly underperforming. If you're kind of on the micro level, yel freas have been narrowing partially on the backle of drug is saying everything is fine. But in the in the medium term, of course, the problem is that over years there are all all the single banks have been doing. If they've compressed with premium, that means all risk assets are EXPENSI
and that means all risk asses may come down. And that is everything from from stocks to to jump bonds and then yes, even on the on the stafer bond set. So I I've been quoted by you guys and saying that I'm negative on both bonds and equities, and that's absolutely right. I just don't see unless we have this gigantic economic growth that we're going to get and get to a normalization without a very serious correction in the nasset prices. And and stocks might be more vulnerable um
than than than some other securities are. But but I do think, yes, that both stocks and bondable up. So do you think we're in a credit bubble? Um bubble is a loaded term, but but by all means we have we have been. What what's difference on the credit bubble in two thousand seven is that if it if it were to burst, I don't see necessarily a disorderly collapse as there was a risk in two thousand seven.
But that doesn't mean we're not in the bubble. It doesn't mean we cannot have a your correction, and so basically we cannot afford to have high rates. I once talked to a FET official. He has just retired from a regional fete, and I asked him kind of why why is the FET so scared of hiking rates um of of of kind of pushing out surprises down, stock market down, and so well they the FETE is never
concerned about it unless they caused the bubble. And then then he paused, meaning that one of the reasons we can't high grade this because we've built this recovery and anceprise inflation. And so if we were to try to get ahead of the curve, we would not just tumble the stock market, but we could cause your economic calm. And that's the other problem we have. We we we we we. The set has become a slave of the market, and it's showing the market knows that. And this is
taking the set for a right, so to speak. So Accel's move from Europe and moved to the U S where we just got this job's report. Uh, they gave the market exactly what it what it wanted. And you're seeing traders piled back into risk your assets from stocks to high and some of the assets that you were saying in Europe are inflated by low rate policies. Do you think that this sort of knee jerk Pavlovian response to this goldilocks environment is just simply setting up the
market for a bigger fall. When the Fed eventually does start hiking rates faster, Well, it does every time, right, I mean the last time we have the goldilocks economy was in the mid two thousand's, right, that didn't end too well. Now again, I'm not suggesting we're gonna have
a two thousand eight sort of collapse again. But but yes, when everything's got great, you should start planning for for the period thereafter, and and and and so that means you pick chips off the table, you're bound to portfolio and then tried to take food and steps, but Alex just to accel, just to sort of take the other side of that. I mean, everyone who has tried to take chips off the table has suffered, right, I Mean it's been and that's why, and that's all the more
reasons to do it, right. I Mean, when the I'm one of the few folks who's who's cautioning, and and when when I shut up and stop being cautious about the markets, yes, then definitely sell your portfolio, right, I mean it's the anybody who has been cautious has on the perform You're, as they say, you're the last man in when you go in that's that. Then then we're done. For here. I just wanted when you stop calling me
your stocks. There you go, but no here I want I want to before you go, I want you to tell us what do you think about the forget what you want, what we want, anybody wants. Tell me what you believe interest rates will be at the end of twenty seventeen, and go ahead. I'll give you a wild guest for the for any point in two thousand eighteen. Yeah, well, I'll give you the same answer I've given you before when you asked me this question. As whoever will be
will be behind the curve. It doesn't matter when normal rightside matters where they are relative to inflation, and the set is should be two should be around two point one percent right now? Possibly possibly possibly that's what tis in but it is depending on the market. If the market is doing great, we'll get higher rates. If the market balls the fit, we're not going to get it. So the market isn't charged yet. If we're gonna have continued rallies in the stock market of bombs are going
to behave will continue hiking rates. But if we see trouble because of anything U then you can blame the Chinese, you can blame the frenchise who or Trump whoever it might be. Um, then UM, then the DST expectations will come down. And so I know then exposession is going to come. I know the next PR market is going to come. The time is of course not known. But what we do know is that they said the reason they're there so so so extremely slow and raising rates
it because they just don't want to unravel anything. And the problem is, of course in doing so, they're creating more bubbles, and at some point it's going to unravel. And we find that I tell you exactly when that will have happened, Well, we're gonna call you when it happens. Axel Merk, President, chief investment Officer Merk Investments, based in San Francisco, munis in focus with Joe my sec editor Bloomberg Brief Markets. You know, I gotta ask you, Joe.
One of the things that we're always talking about is Puerto Rico. But I was noticing that there are a lot more problems in the MUNI market than just Puerto Rico. Can you give us sort of the bird's eye view of what's going on in Illinois and whether this demonstrates something larger than just finance's Illinois absolutely like, I'm not ever going to recover from this. No, Illinois could solve all its problems tomorrow if they had the political will to do it, which is exactly one of the one
of the rating agencies brought up last week. They say, Wow, a state that goes three years without a budget, which is what we're heading into, Uh, is demonstrating lack of political will. But they could do it tomorrow. Or very wealthy state they're you know, the capital of the Midwest, right, everyone goes to Illinois. Everyone goes to Chicago. Just to
put this into perspective, Uh, Joe mysa. Illinois revenue so a steep year over year drop last month, the commission said, Uh, this is I mean, according to a monthly report issued Tuesday by the PIE part partisan Commission on Government Forecasting and Accountability, UH significant downward adjustment to its estimates coming in March. Had overall base revenues that had to a shortfall, gross personal income tax everything is down, down, down, down down.
So this is more than just simply coming up with a budget. I mean, they face pension issues, they pay, they face Uh, you know, revenue, tax revenue issues. It's really that easy. A lot of the a lot of that fall in revenue was because an income tax increased lapsed and uh you know that. So there's that um But of course there's also some people moving out of state. Yes, you're right there. Uh you know, Illinois is is a pin you brought up before, the sort of big picture.
Illinois is sort of an outlier. It's the exception that proves the rule. Uh, the rule being, you know, municipalities take care of themselves. They're well run, they don't default on their debt. In Illinois, what you have is the lawmakers sort of driving the bus off the cliff. Remember the old headlines in the New York Times bus plunge kills. This is what it's like. Bus plunge in Illinois. Happy Friday. Uh, you know, I want to I want to ask though,
about the bonds of Illinois. There was a great chart on the terminal this week by Martin Braun looking at how foreign money is flooding into municipal bonds in the United States, and I found this fascinating. I'm wondering, are they going to places like Illinois. Oh, of course they are, especially because uh, you know, by driving the bus off
the cliff. For the last you know, two and a half three years, we've seen spreads over the benchmark municipal Uh it's almost children fifties sometimes of three basis points over what triple A municipalities borrow four. So you're getting a big yield premium. But of course for foreign investors who are getting sometimes zero percent, uh, US munies look terrific. They just have to kind of there is a learning curve to them. Just to put this into more into
sharper focus. Uh. This was in January, right, the Attorney General of Illinois asked a judge to lift an order that required state workers to be paid during the state's record nineteen month as you said, the budget impass in hopes and so on, and they filed a motion in the Saint Clair County to dissolve the order that would have authorized the state controller to actually pay out the wages, so they don't have to pay out the wages. At
what point does this just not come workable? Uh? Probably June one, Okay, that's when they really should have their next budget all set and ready to go. And you know what chances are they will because I really don't know municipalities except the ones that are in extremists that
drive the bus off the cliff. So you think that somebody who goes into into Illinois bonds that are yielding three or four percentage points above where other where triple A meetings are yielding, that they're going to get their money back. That's money good. Sure, Illinois can't afford not to pay its debts, so they're not going. They're not going. You know, first of all, bankruptcy is in an option for states. But yeah, they're you know, Illinois going to
be okay. Well, one area that might not be okay. We need to talk about putter Eco because this week there were some developments. The Fiscal Control Board rejected the governor's plan for financial plan going forward. Can you give us some color around this, what this means for bond holders and what this means in general for the for
the island's financial health. Wow. We had a terrific piece on Bloomberg View today by Antonio Weiss, the ex Treasury official who helped out with the UH setting up the oversight board, and he said he advocates bankruptcy because he doesn't think the new governor is going far enough in adjusting the debt, so he is really advocating haircuts for all. You know, you still have some hedge funders out there who bought Puerto Rico geos or bought Puerto Rico sales
tax geos are general obligation bonds. Go ahead, right Who who believe that it's geos at par I? Remember that was a rallying cry. Guess what, no g knows it par for you? It looks like hair cuts for all. And with this wife piece today, that was sort of really putting it on the table, telling the governor, who, by the way, is advocating cuts for everyone, but this wife's pieces, No, no, you're not going far enough. You've got to really reduced that no par for you. Will
keep that in mind as we head towards lunchtime. Joe Mesa, thank you so much for joining us. As always, Joe Mesk, editor for Bloomberg Grief on municipal markets and expert on all things related to Muni's. Now we want to hear from Ian wish Art. He is a Bloomberg News reporter in Brussels, and he wrote a story today that I found fascinating about Theresa May who is the head of Britain and sort of the internal discussions that she's having with parliament in that country about what she may have
to face as she engages in the Brexit process. Ian, thank you so much for joining us. Can you give us a little bit of color around some of the pessimistic paintbrush that the parliament parliamentary members are trying to give to Theresa May, to give her sort of a dose of reality. That's right, Hello from Brussels, where the summit has been going on between EU leaders and basically
you're right. There's a lot of people in a lot of members of the Parliament of the UK who who aren't happy with the way that the Prime Minister Theresa May has gone about this. Some on one hand, want her to trigger what they call Article fifty, which is part of the e use Constitution which allows a country to leave the EU. They wanted to do that as
soon as possible. Others want her to wait a lot longer to make sure she knows exactly what she wants, and she's trying to balance, really balance those two extremes of opinion um to please everybody at the same time in London. Before she comes back here to Brussels to the European Union to officially start the negotiations with the
EU about Brexit. I'm wondering you if you could maybe just add to this some context regarding Northern Ireland and Scotland and what this kind of means not only for what becomes of Britain after the exit, but also what this means for the European Union itself. Yeah, there's a lot of confusion and a lot of complexity. Let's start with Scotland, where Scotland obviously part of the United Kingdom, so Scotland has to live with any decision that the
rest of the UK that England makes Scotland. Actually, the people of Scotland actually didn't support Brexit, but the the UK as a whole did, So they're talking about holding a referendum of their own again in Scotland to break away from England, to break away from the UK because they don't like what from a Prime minister to reason May is doing in pulling out of the EU. So that's one story that might develop over the next year
or so. Then you've got Northern Ireland, which again is part of the UK, but the Republic of Ireland isn't the Republic of Ireland in a separate country that belongs to the EU and will stay in the EU. So you've got a border between the Republic of Ireland and Northern Ireland. UM, and that's been subject to of violence and war over the sort of the last thirty forty years. UM.
There was peace in the last ten years. But they're really worried that if that border becomes a border not just between Ireland and Britain, but between the whole of the European Union and Britain, then those troubles might come back again. So that's obviously on the minds of negotiators, both in London and in Dublin, and they want to avoid that in whatever deal they come up with. And you're right, there's also talk about the future of the EU and what that will look like after the UK leaves.
And you said a while back that Parliament members were not happy with the approach that Theresa May has taken with respect to Brexit. What could she change that would bring them into the fold and make them more supportive
of her plans? Um. It depends which ones you ask, but most of them will say we want some reassurances that you're going to protect our interests, that you're going to protect British interest that we're not going to be worse off after we leave the European unions, so um nationals are protected in where they can travel, where they can go and work in Europe. That the the UK
is not paying into the European Union budget anymore. There's some speculation that it may have to pay sixty billion euros when it leaves of financial contributions, and they don't want that either because they say, why are we leaving the EU We still have to pay So all these reassurances need to be made. The trouble for the reason may if she can't really make those reassurances, because it's all depends on what sort of deal she gets with the EU over the next eight months or so. I
want to thank you very much for joining us. Ian wish ARTI is our European government reporter. He is reporting from Brussels. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio