P&L: Former Acting Director of the CIA Discusses Russian Hack

also a member the Council and Foreign Relations. Also the author of the book entitled Good Hunting, A Spy Master's Story, and he's a spy hunter. I was going to let him tell us my masters. Yes please, Mr Divine, thank you very much for being with us. I wanted to let you describe a little bit of your thirty two year career for the Central Intelligence Agency. No one's ever done that. Asked me to sum up my career in

a minute, but I will. At the top of my career, was responsible for all the what we would call spies around the world. People in the business never referred them as spies or agents, but I was the chief spymaster at the highest point, I've served in seven foreign countries. I wasn't in charge of the program to drive the Russians out of Afghanistan with UH famous Congressman Charlie Wilson. On the downside, I was drawn into reluctantly into the

Iran country affair. I was in Chilly when I Yendi was overthrown, and I was ahead to the counter narcotics program with escobar bit the dust. So I've spent a long time. I've written to it, and UH, I'm passionate about the intelligence business and the CIA. So you've got a strong stomach for risk and for for potential of problems. I'm wondering what you think about President elect Trump's recent stance on the c i A and on intelligence briefings. He was quoted as saying, you know, I'm like a

smart person. I don't have to be told the same thing in the same words every single day for the next eight years. Do you think this poses a problem? I think it's important to understand the really the breath

of CIA. It's not just producing analysis, it's it's collecting information around the world, and it's an instrument of the president when he wants to get things done, um below the radar, and every president has used the CIA in that capacity up Dwight Eisenhower had three hundred covert action operations and give you the sense of it. So I think, uh, I think it's a terrible mistake to disdain the CIA

as an institution and its people. It's very dangerous. Most most presidents, at least UM find a way, uh not to go head to head with the agency's people. We're not talking about the elites, the senior people. We're talking about people that grew up in institution. You have to be very careful. They're very professional, they're dedicated, and disdain is about the worst thing that they tolerate. You have to watch the people don't head for the doors. They

do in business the best ones. So I think it's ill timed. I understand why, um, the President elect Trump may be dissatisfied with the intelligence he's getting. UM, there's ways to fix that, make clear your your own your own interests and priorities. But I think to walk away from it or to disdain it, and this is really extraordinary, and I think it will turn out to be a

huge mistake, hopefully will be reset quickly. I mean, um, there are a lot of professional people that I'm sure we'll will try to make some sense of this, but this was, um, from my perspective, the biggest mistake on the national security arena, which doesn't bode well I think for the the next couple of years this needs to be straightened and quickly. Can you make sense or give us some sense of your thoughts having to do with Russia and cyber attacks in the U S election and

so on. I mean, I think the first, I think I think the verse. First of all, we should say that Putin is a product of the intelligence system, and he was a KGB officer for over fifteen years. He worked in the Eastern Germany when the great spy masters the East German Marcus Wolfe, he headed up the their version of the FBI. He has a mindset that understands intelligence and may understand some of the darker side, because

the experience with Marcus wolf is really pretty black. So the fact that Russians would be hacking in to our areas of policy and uh and of foreign and domestic interest should be of no surprise. I mean, this is what not only big powers do around the world, medium and now small and even individuals do this. So the fact that hacking is not the issue, and I I'm surprised that we spend so much time on that question. It's really whether you take that information and use it domestically.

Now that is a shocker. Uh in the business. For all the years I was in it, there were unwritten rules. If yes, someone will give you different, different variations of it's called the Moscow rules, in which we basically operated where we would not beat up their officers and they wouldn't beat up hours I put it in those youth, and we wouldn't counterfeit money, they wouldn't count there. There were rules of the game, and one of the rules of the game was not to interfere in the internal

politics of either country. And again you're not going to find a treaty, no lawyers are attached to it um

and I think this is a violation to that. If in fact it turns out that the Russians not only hacked, but more importantly use that inform trying to influence this is a change in the game and we need to We need to, I think, sit down privately in public with the Russians and decide whether we're going to have this new arrangement where we go after and try to influence internal affairs, big story, huge story, seismic shift and intelligence.

If indeed this has been done. The way that you're talking makes me think that the CIA and the KGB have direct contact and discussions about the manners with which they go about their business. Is that is that really the case? I think it evolves over over years. You don't sit down and demarcate the the issues. But in my own case, I not only random or the drive the Russians out of Afghanistan. Years later, I was the guest of the KGB in Moscow in June of ninety one.

The government fell in August of ninety one. That had to do with my presence there. But the point that I would make is, of course we've have relations to deal with them. It's part of you know, how do you have a a safety net so that you can pick up the phone and call each other and uh and back off of something that mayby misinterpreted. So I think that if there aren't communications today, they better reset just real quick. Are you optimistic about the year ahead?

Well you have to wait. I'm going to put out my forecast and I would say I'm bullish on all right. Jack Divine, founding partner and president of the Arkin Group, also UH the author of Good Hunting, a Spymasters Story. Jack is a thirty two year veteran of the Central Intelligence Agency, used to be the head of all the Spies. I want to bring in Hugh Johnson, chairman and c i O of Hugh Johnson Advisors, who oversees more than

a billions of dollars. I want to get your view, Hugh, on how exactly you're pricing in so many uncertainties that are supposed to come together with some clarity perhaps next year. Uh. Most people are expecting it to be bigger growth expectations. Are you convinced are you all in on this narrative that growth will just be on gangbusters run in the US and that it's up from here for stocks and

down from here for government bonds? Can you can you just tell that that Lisa covers the bond market very well? She does, she does, And no, I think gangbusters is the word, that's the strong word, and that's a little bit too strong. And when you take a look at the forecast for the economy, forecast for earnings, yeah, sure, we might get something from the Trump bump. You're right, there's a lot of uncertainty. There's uncertainty is to the magnitude.

There's uncertainty is to the timing. That makes it very difficult to put together a sensible forecast for what's going to happen in stock prices. But nevertheless, we're going to get something in the order of a Trump bump, and you don't see that in a lot of forecasts right now.

That consensus is something like two point three percent growth in the US economy two thousand and seventeen with a Trump bump or something I think is a reasonable expectation of what's going to happen next year in the form of obviously tax cuts and spending increases. And again the timing is important, but what I think it's going to maybe move us up towards the at best two point seven. You might get as high as two point nine. That's going to make a difference for what earnings do in

two thousand and seventeen. They might be a little bit higher than You put it all together, and you say, what's the case for stocks in the end, there is you can make the case for stocks being where they are and maybe being a little bit higher, but it's very hard to do. Valuation is really an issue, even if you include some forecast or some expectation of the Trump bump. We hold on a second, h Am, I

hearing you correctly that you're basically bearished on stocks right now. No, that's that's not correct, because that what I'm saying is that it's all within the context of an ongoing bull market. If you ask yourself, as the current stock market, economic interest rate cycle alive and well, the answer is yes. Trump has essentially postponed the end of it, is given a little bit new life to the economy. I think that we still have a ball market. It's going to

go through two thousand seventeen. The case through two thousand eighteen becomes a little more difficult, but nevertheless positive bull market environment. But within the context of that ball market environment, I'm saying we've gotten a little ahead of ourselves. I guess is the way to say it a little bit pricey. So on a short intermediate term basis, you've got to be really careful, careful because of valuation, and you've got to be really quite frankly tough on prices that you

pay to buy stocks. You're picking of entry points has got to be extraordinarily good. At this point in the second we've had a big move on the upside, we're a little bit pricey. You've got to be good at picking entry points, and you have to be patient in order to be good at entry points. Hugh Johnson SMP is up nearly eleven so far during the year. Dal Jones Industrial Average up more than fourteen percent. Tell us about financial stocks, do you think that is an area

that's going to do well in Yeah? You know him. When you take a look at all of this, it really looks really good. This has been one heck of a year, surprisingly good, much better than any of us, most of us anyway, had expected. So I think, you know, you're probably not going to get that big a year and two thousand and seventeen it might be positive, but it's not going to be in the order of ten to twelve percent that we're seeing this year. We're not

going to see anything like that. And again, I think the reason I'm saying that, are concluding that is valuation. I can't put together enough earnings growth, uh in order to make the case for a real big move up in stock prices from current levels. Another way of getting at that same thing and saying it is that you've got to be a really good stock picker, and you've got to pick good entry points when you pick, if you pick the right stock. So be a good stock picker,

be a good uh, be a good spector picker. Financials are going to do well, but you and I both know they've had a big move to the upside. So you've got to be a lot more careful now than you had to be, say, around election time. You know, one thing that I'm innterested in is industrials. Industrials have done really well since Trump's election, and um in your notes you said that that's one area that you're actually

bullish on going forward. What's the risk, especially at trade negotiations hit a heat up with China among other nations. What's the risk that perhaps the industrial rally has gotten a little bit ahead of itself, especially with companies like Caterpillar, for example, which export quite a bit of goods to China and could potentially suffer from trade a trade board there. Yeah,

it's a it's a big risk. So if there's a big risk that we're not it's very difficult to quantify that that faces us in two thousand seventeen, and I might add two thousand eighteen, is is a whole risk of trade. And anytime you're talking about a large multinational company, you're really talking about trade. You ask yourself the question, will geez you? Small and mid sized stock stocks that are not big multinationals have done really well performance wise

since the election. Large cap stocks is to some extent lagged a little bit. A lot of that is because of the concern about what the direction that trade is gonna go. So you've really got to be careful based

on a couple of things. A big move up that we've seen since the election, So we've got a couple of valuation problems, some rhetoric coming out of a Trump campaign saying that to look at the costs are too high by a lot of defense companies, for example, and so that that's a little bit of a problem, that's a policy problem, and then the trade issue is is

could be a problem to all of this. When you're looking at financials, when you're looking at healthcare, when you're looking at technology, when you're looking at industrials, especially industrial infrastructure, play be a little bit careful because we've had a big move on the upside and we've got valuation problems in my mind right now, and unless we see a big outbreak in speculation, and that could that could occur.

Uh in my judgment, you've got to be a little bit if you're gonna be sensible, you've got to be a little bit careful here and again be a good stock picker and a good entry point picker. Well, I guess if everyone could do that, everyone would have your job. You Wouldn't that be great? I'd be great if I could do it that. Well, Well, I think trying to match a ten eleven present per and a challenge for anyone. Thanks very much. Hugh Johnson. He is the chairman and

the chief investment officer of Hugh Johnson Advisers. They're based in Albany, New York, and he helps to manage over one point two billion dollars of customer assets. We've heard a lot about some big businesses that are having some direct contact President elect Donald Trump, But what about the

smaller companies out there? To get a sense of what the landscape is for smaller businesses under a Trump presidency, I want to bring in Karen Mills, Senior Fellow at Harvard Business School and former Small Business Administrator Administration Administrator. Karen Mills, thank you for joining us. So what is

your base case outlook for small businesses under a Trump president? Well, President elect Trump really has to step up his game on small businesses because, as you said, there's been a lot of big business personalities coming in and out of his um realm right now, and he is appointing a lot of folks that really have the big business sensibility. So what we want to make sure is that there's

somebody at the table to represent small business. And he has appointed a new s b A Administrator, but the real trick is going to be to make sure that that person has a voice in all the White House economic discussions. Well, you're talking about Linda McMahon, right, and Lynda McMahon, co founder former chief executive of the professional wrestling franchise w w E. I mean she doesn't seem like a lightweight. Uh is that? Well done to second? But but the s b A, right, I mean, it

has an office in just about like every state. I think it's at least in more than one. UM. Do you think that Linda McMahon and her business background will be an asset to the people that depend on the s b A. Well. The good news is that the President elect kept the s b A in the cabinet and having a seat at the table is a really important um role for the Small Business Administration. Every single new piece of legislation that's going to come up in

this administration has an impact on small business. Whether it's taxes or healthcare, or infrastructure or anything to do with trade. Those things are really part of the life blood of small business. And financial reform, you have to make sure that they still have access to loans. Karen, what's the difference? I mean, this is a very basic question, but can you give us a specific example of one area where a policy for small business would be different than a

policy that would benefit big business. Well, it's actually true all the way across the board. So let's start with healthcare. In fact, there are a bunch of things in the healthcare law that small businesses want. They actually want to provide healthcare for their employees, but the problem was that they can't really even get a quote. If you have five people and somebody gets sick, that's a big risk

for an insurance company. So they put new exchanges. You can actually go to a shop exchange and get a quote where your risk is pooled with everybody else's small business. So it's not five people, it's many thousands, millions of people, and that should give you a cheaper price. We don't want to throw that out in healthcare reform. In fact, that was put in by I think Olympius Snow was

put in by the Republicans. So we want to make sure that somebody's got that I on what small businesses need as things get done in this next congressional session. Right the Olympius know the Republican senator from from the state of Maine. It's s b A also a big lender. Right, You've got the general small business loans, Uh, you've got disaster loans, the micro loan project, and you've also got real estate and equipment loans. You've got a big package.

There is that something that the administrator directly oversees or what role would they have in some kind of program that oversees the loan program. The sp A has a portfolio of over a hundred billion dollars of loan guarantees. They're not loans. The banks make the loans. It's actually kind of the perfect public private partnership Fannie Man Freddy Mac a little bit a little bit, and the guarantees are made by the s b A in a case

where the bank can't quite make that loan. So this means lots of people have access to credit who wouldn't otherwise in the banking system. Well, this is absolutely critical for small businesses. And the gap and access to credit right now is in the smaller dollar loans under a

hundred thousand. So when they go and look at Dodd Frank, let's make sure to also keep the small business hat on and make sure that whatever is done benefits those who are going to make loans to the people who need something under a hundred thousand dollars, because that's where the credit squeeze is real quick. Do you think that the rate hike that we're expecting tomorrow is going to

have any specific effect on small businesses? Well, it's going to be more expensive tomorrow, and that's always a cost for small businesses. Um. I know they're all looking for now tax reductions coming what which might offset it? And the real important thing for small businesses is that the economy keep going. So if they're spending an infrastructure, that's good for small business and construction. But if the economy UH doesn't do well in this next administration, that people

who get or the small business owners. Thank you for being with us and coming in. Karen Mills is the former administrator of the SPA of the Small Business Administration and also a senior fellow at the Harvard Business School. Thank you very much for giving us your time. 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.