P&L: No Need For More Trade Restrictions, Paul Christopher Says

us now. Paul, thank you very much for being with us. Great to be with you again. Pim um, What has happened in your life since the conclusion of the US presidential election? Give us a little window into the world of a global strategy. You mean besides no sleep. Uh, well, you could add that to the mix as well. How

are you handling it? Well? What? What? What we're seeing is a markets really anticipating a lot, extrapolating a lot, and we're still we're still pretty cautious on whether or not those extrapolations and anticipations will be fully realized, especially in the near term. I mean people, right, I mean people are doing all the people are doings or a computer of some kind. But basically, people are are making

these decisions, these speculative bets. People are making anticipatory bets on how they think policy will work out, and some of those bets may have to be changed over the coming weeks and months as we see the how the president elect will prioritize the new policy initiatives, and how the Congress will play with the new president going forward. So, Paul, before offline, we were talking about how you're advising clients to not change their investment strategies from before the election,

to sort of stay the course. So what were you advising then as far as the proportion of cash people should be holding, the mix of bonds and stocks, our tactical views were, We're really pretty pretty cautious, pretty defensive. We're holding a little bit of cash on the sideline's looking for an opportunity, but we're really oriented towards quality.

So we've been overweight US large cap stocks, but we've been underweight US small caps as we get to a point in the cycle where things might not look so good for small caps. We've been underweight emerging market equities and that's hurt a little bit. But we do still see some problems, some real challenges in those places. We've also been underweight the long end of the yield curve

and overweight the middle part of the yield curve. Really not wanting to take chances that we'll get sudden changes and yields, and therefore we would prefer to have people position more intermediately. Let's just take a couple of those specifics. I want to ask you about small and mid cap stocks. For example, the Russell two thousand has seen a very good run since the results of the presidential election. The

dollar has also strengthened. Would that help small and mid cap companies that mainly do business, let's say in the United States, that don't have that currency risk. Historically that that has been the connection him, But but it may be not quite so so going forward, supposed the administration, for example, where to start working on a lot of trade restrictions. A lot of US companies have supply chains

that extend beyond our borders. Uh. You could have a small manufacturer, for example, that imports electric motors from Mexico. If Mexico is targeted for trade sanctions, those motors get more expensive, and all of a sudden earnings get hit or prices have to rise. So it's not necessarily the case going forward that we can rely on on some

of those old one on one relationships. Inflation. Before the election, the dominant view before the election, the dominant view was that we were in a slow growth period with some inflation, but nothing that was too too much to write home about. Now, all of a sudden, people are pricing in much higher rates of inflation. Where do you stand on that? Yeah, well you you you. The reason they're doing that is because they're seeing policy promises made on the campaign trail.

And remember the campaign trail is subject to hyperbole, so it's it's always possible that we could see some of these promises not quite work out the way they were promised. But on the campaign trail, promises of trade restrictions are themselves inflationary, as well as promises that we're going to cut taxes and increased let's say, infrastructure spending that would also tend to be uh tend to tend to work

towards inflation. So whether one looked at one side of the promises or another, inflation seemed to be the result. And that's that that also appears to be the result of the market pricing in the last week or so. Paul, if you love the US Treasury a tenure, for example, and under two percent, do you really really love them now that they're above two Well, some some increase in yields is probably inevitable. The question will be what's going

to be the timing. Do we expect to see all of those policies develop inflation all at once, or do we expect the inflation effects to develop over time, or do we expect instead that some of those inflationary effects maybe offsetting to one another. For example, if you had higher yields, that could slow growth and therefore slow inflation. Now I don't understand that, but I'm just wondering. For example, if now you were to buy the US tenure, you

would get two point to one percent. If you are long the US tenure at anything less than that, would you recommend people buy it? Well, we want, we want clients to be up to their their they're recommended long term allocations and ten years. But we are over or excuse me, we're underweight, Uh, the long term part of the yield curve again, because there's always that risk volatility out there where sudden increases and yields would damage the portfolio,

the bond portfolio. What what's the scariest spot in the market right now? Uh, good question. Scariest spot in the market might be a bet that commodity prices are going to rise here if you're if you're thinking maybe that the Trump administration would boost growth and maybe boost inflation, and therefore the commodity prices would rise in response or rise simultaneously. We think that's a bit of a bit of a stretch. After all, supply and demand in the

commodity world still really hasn't been re established convincingly. We still think those commodity prices have some years of bouncing around and ranges to go. Are there any screaming buys and no, not really. Again, we would want we would want clients to mostly be looking to take advantage. Uh. If you, for example, are underweight and treasuries, it might be a good time to start averaging into that market.

If you're underweight and equities, we would be averaging into that market right now, just to make sure that you're at the at the recommended long term levels. We'll get more clarity and we can adjust tactical positions later on, once we see again how the president's priority list looks and how the Congress plays with that list. What about corporate earnings. I thought that corporate earnings were a determinant

for long term stock performance. Long term stock performance. Yes, tactically we're we're still seeing about a six to seven percent gain and earnings for next year, but possibly some cap on valuations if inflation does surprise to the upside. Why, because you think that investors won't pay more for the same dollar of earnings. You won't get that expansion in

the multiple. That's right. Yeah, if you get some expansion, sorry, if you get some expansion and multiples, let's say at midyear, and then inflation starts to surprise on the upside later in the year, you have to start bringing the fedback into the picture, and will they accelerate their rate hikes and that would be a damaging a factor, or at least a speculative factor for bears. Paul, you came in here and you said that you haven't been sleeping very much.

What's been keeping you up? What's keeping me up really is what sort of policy mix we're going to see out of the new administration. I'm not so concerned about the fiscal policy mix. I think we'll see something there that will be stimulative, and the deregulatory aspect will be

positive for the market. But it's the trade element. How will the new administration handle the promises to be much more restrictive on trade At a point here where inflation is still benign but could get worse if if we restrict trade, and at a point here where global trade itself has has just begun to recover from a big contraction. We really don't need another big restriction in global trade.

Paul Christopher, thank you so much for being with Thank you and Paul Christopher had Global market Strategistic well Wells Fargo Investment Institute in St. Louis. And Lisa Brown always here with pim Fox. This is Bloomberg, This is Bloomberg Markets. I'm pim Fox along with Lisa A. Brahma. What's the shares of Apple have fallen about four percent since the results of the U S presidential election? So what is next for apprile? And is it losing its place as

the crown jewel of a technology company? Shira Ovid joins US now. She is a technology columnist and a Bloomberg. Gadfly are a fast commentary section of Bloomberg and you can follow her on Twitter at Shira Oda. Sure, thanks very much for being here. Thank you. So what is this about Apple losing its technology? Itch? Yeah, well, I think this has basically been a narrative for Apple really in the last five years under Tim Cook, who, of course, um was the successor to Steve Jobs, the famous co

founder and longtime CEO of Apple. And there's been a question basically since Tim Cook took over about whether Apple can sustain its long time position as basically the trendsetter in the technology industry. This is a company that for a long time took niche ideas like smartphones, like digital music players and turn them into basically world changing products and world changing ideas, and it doesn't seem to be

able to do that anymore. Okay, Sira, You know, I love it because you sit in my row and we kind of come up with doomsday scenarios and throw them against each other and are perennially perennially pessimistic. So, um, I I read your column and it was like, yes, right right in line with the perennial time exactly um So, Apple Marker and Alex web and in King of blubric Days reported that Apple is weighing an expansion into digital glasses.

Um and this you sort of take a look at what they could bring to it that Google failed to bring in two thirteen. What are some of the advancements that they could bring that could potentially be lucrative for them? Yes, so so, as our colleagues reported right at, Apple is kind of working on this idea that may never come to fruition as as all you know, design and research labs and tech companies, sometimes you work on things that

don't pan out. But they're working on those kind of digital glasses that aren't dissimilar to if people remember Google Glass, which was a product that Google kind of flopped on a couple of years ago. But this idea of kind of eyewear that combines what you see in the real world with digital images, Like you might be walking down the street and it will show you a digital map of walking directions to the coffee shop that you're going

to or things like that. So why now, I mean, is this basically a really high tech version of Pokemon Go that can be made more easy for people. Pretty much yes. I mean the thing that we don't know, of course, and maybe Apple doesn't itself know, is what what does this technology do that will really bring something you know, clever and innovative to our lives. And Google couldn't figure it out, and that's one reason why um

it pulled glass from circulation. But there is this kind of emerging technology against sort of mix digital and UH and real life in these kind of wearable gizmos are on your phone, and that's clearly kind of a trend for the future. But the question that I raise is does Apple have a clear vision about this or about anything else uh in terms of what it can do to a technology to make it mainstream and actually world changing.

And I don't know the answer to that, but the five year track record of Apple is not great in this regard. Having said that, I just want to oppose to you that this is a company that's doing two d and fifteen billion dollars worth of business a year. The net income is over forty five billion dollars a year. If they just manage that, that will be an amazing feat. And you know, when you talk about trend setting technology, yes, kind of and no, right, because you don't hear anything

about virtual reality really from Apple. You don't hear anything about drones. You don't hear anything about new TV monitors. You don't hear anything about Alexis and those home audio assistance that are directly wired to the inventory control system. At Amazon, they've been focused on watches, wearables, write phones, iPads, and mass Yes. So two things. One is you're right.

I mean, if if Apple isn't a quote crisis, most companies would love to be in the crisis condition that Apple is in with again enormous profits and enormous sales. But the Apple that that people know is a company that is growing revenue and this Apple is not doing that anymore. So that's what a crisis looks like for Apple. But it's stagnating sales and that's a problem for Apple

real quick. Do we have a sense of how much money and Apple is putting into this, No idea, But they've doubled R and D spending over the last three years. So they're cooking up a lot of things and their research labs and hopeful one of them will be a hit. Share overday of Bloomberg Gadfly always always a joy speaking with you. Thank you so much for being with us. Humans are suing Chrysler and this is not going to do wonders for Chrysler shareholders who which have suffered some

losses as a result. I want to bring in car Deke Marotra, a Bloomberg News reporter who wrote the story breaking the news about the fact that dodged truck owners, sued Chrysler on Monday, claiming that some engines were rigged to hide emissions as much as fourteen times higher than the law permits. Carter K, thank you so much for joining us. Sure so, UM, can you just give us a little bit more of a sense, a deeper sense of the suit, of what instigated it and how deep

this could go. So the allegations are, and they are only allegations right now, are that the Chrysler, before their merger with Fiat UM and their technology, their engine provider come in Sank, had created UH diesel engines to circumvent new UM regulations by the e p A. UH. The EPA had created more stringent laws for diesel based engines, and they thought we could we can beat the market to this. The deadline was two thousand ten. They were

a few years ahead and they did beat competitors. And the allegation now is that they beat competitors by creating an engine that leaks emissions and they knew about it. So this is for about half a million Dodge Ram trucks that are on US roads. And now the question that will be up to a district court in Michigan is is whether they did do it, whether they did do it intentionally, and and what damages should be rewarded

to two drivers. Carter K, Is there any evidence or any detail that you can offer about these specific engines? Have there been issues in the past for example, Uh, it's a bit up in the air. There have been issues in the past with UM defeat devices as they're

known so UM. For example of Volkswagen, right, I mean that was the Volkswagen store, And just to make mention, Volkswagen has agreed to pay what sixteen and a half billion dollars to resolve all the issues about that the two leader diesel cars right right, so far, So that's that's been the most notorious allegation. But even before that UM in the late nineties, a number of carmakers were hauled up by US regulators for UM installing these defeat devices.

And actually the Chrysler case precede the Volkswagen. Um. The allegations over their cars are for model years from two thousand seven to two thousand twelve. Well, VW has only started in two thousand nine. Um, So there the question is is this a broader behavior of the auto industry? Um is their accredibility issue when it comes to clean diesel? Um that that's sort of the questions that that these cases and recurring issues do seem to be bringing up,

which you know we'll find out over time. Well, card exactly, That's what I was going to ask. I mean, Chrysler is the first US company to be sued for these kinds of emissions rigging scandals. Are you hearing from your sources that are there are other lawsuits pending against other US automakers? It would not surprise me. Um, But we haven't heard of any definitive suits in in the works yet. UM. That said, lawyers like to keep this pretty close to

the chess until they're ready to file their suits. UM. So not yet, but that doesn't mean that they won't come. But they're not not coming. Ultimately, is the alleged cheating on this emissions would this then lead what to a discovery process to try to obtain documents or information related to the specific engines over time? Yeah, UM, I think what what we've already heard from Fiat Chrysler uncommons is

that they're going to fight the case. UM So unlike Folkswagen who who owned up to it, UM the malfie, isn't uh Fia Chrysler intent on fighting uh the allegations. Uh So, Yes, there will go through the rigorous court process, which will ultimately include going through discovery and and finding out what led to the development of these engines and installation. What did the car company know um at the time

that the cars were sold? Real quick? What kinds of legal costs or is Fia Chrysler facing at this point? That's a good question. Um. All the complaints says is that UM, the damage to the car would would be UM up to five thousand dollars, so UM components would be damaged because you had to go through the motions of of fixing the cars. UM. So multiply that by by half a million, you're you're starting to climb a ladder.

It's where near sixteen and a half billion yet, but it will cost the company quite a bit, Thank you very much. Carter k Merotra, legal reporter for Bloomberg News. You're listening to Bloomberg Markets. I'm pim Fox along with Lisa Abramowitz. This is Bloomberg. It's time now for us to take a little bit closer look into the U s economy and lots being said about potential inflation, about potential growth, but looking at the numbers, is it showing

the same optimism that we're hearing at large? Carl Ricka Donna, Chief US economists for Bloomberg Intelligence, we got some retail sales today. What clues do they give us? Well, the retail sales report was in October report, so well, you had a couple of unusual trends in that report that maybe are making it look like stronger results than what was really the case. First and foremost, that we have

an unusual pattern for gasoline prices. Normally in the second half of the year, especially in October, you see price declines. We saw modest price increases, so seasonal adjustment right off the bat throws that for a loop. That being said that when we look a little deeper into the details, don't forget Hurricane Matthew UH made a close swipe and then eventual landfall at a significant portion of the southeast

coast at the start of the month. And when we have hurricanes UH impacting the US historically, you see a big surge in grocery sales UH, demand for building supplies, garden equipment, those types of things, UH, and then you see a drop off in things like restaurants sales UH and some of those discretionary categories furniture, electronics and whatnot. And we saw exactly that profile in this report. So

it looks like a gangbusters report UH. And it looks like the fourth quarter is starting off with a full head of steam. UH. So to speak, however, we have to remember that the income trend is not justifying this dramatic acceleration. So we'll continue to see fits and starts in the retail data until we see a more pronounced and sustained acceleration and wage and salary income. Carl Kadona business inventories do they matter? Uh? Inventory is not so critical at this point. UH. You know, we saw big

liquidation that weighed on growth earlier this year. I think as economic optimism improves, H heading into your end. And also as businesses look ahead to next year UH and lick their chops at the prospect of tax cuts and potentially fiscal stimulus, that you'll see more confidence uh in the business community, leading to a modest, modest inventory restocking and that should support g d P grow. Well tomorrow, I know we're gonna get producer prices correct, plus some

mortgage applications, industrial production capacity, utization. What should we be looking for? What do you think is going to guide us to how the economy is performed? Well, I would keep an eye on the industrial production figures more so than for a two tenths of a percent increase exactly. So what again, this is just kind of middling pace

of of activity in the factory sector. However, if we look to another report that was out this morning, uh, the New York Empire Manufacturing Survey was what is it down?

A modest positive gain? Yes, Well, the I was going to say the survey the estimate was November down two point five two and a half percent, but it actually came in at plus one and a half percent, right, And the reason this is such an important report, this is the first economic data series that basically covers the post election period, So consumer sentiment out last Friday that was basically tallied before the election results were in. Uh and so Empire, which should be just a survey of

manufacturing conditions in New York State. Nonetheless, these production surveys often take on a sentiment component to them when there are significant events like hurricanes or elections or or other types of dramatic movements in the markets and whatnot. Uh and so, so you're reading this as a positive. This is a positive, and this is mimicking what we're seeing in both the stock and treasury markets, which is looking for more growth and as a result of more growth,

more inflation. Uh in, uh in and beyond. Carl. Yeah, you know, Honestly, if I were, if I were Tom Keena would say, let's rip up the script. Um. But I'm I'm looking. I'm wondering, you know, how do you give any sense uh to your to your economic models when you have this big unknown of Donald Trump's infrastructure spending plans and then you have all of the noise around whether or not they will be effective. Tyler Cowen

He's a professor at George Mason University of Economics. He wrote a column from bloom Review talking about how Trump's infrastructure plan is fundamentally flawed because it comes at a time when the economy is expanding and when employment unemployment rates are low, and this is typically not when these plans are most effective. How do you model for this right, So that the big debate is if this is a

kingsy and economics plan. So anytime you're borrowing h from the federal government's perspective to finance spending programs, whether it's infrastructure projects or tax cuts or whatnot, that's basically fiscal stimulus. And so we certainly could have used it earlier on in this economic cycle, because that's when we needed that

critical lift to growth. So it's a little bit late. Uh. Nonetheless, it is still going to move the needle on GDP growth if we are significantly expanding the budget deficit uh and using that for various projects that will lift GDP. So would the economy have been fine without this, Yes, it would continue to limp on probably two two and

a half maybe three GDP growth. With this, it will mean that the economy grows fast stir and therefore that the Fed can normalize policy a bit more aggressively as well. And so you don't think that the increase in debt that we're probably going to incur will drag on growth, UH in equal proportions. Well, there will be a hangover eventually when the bills come due. But for the you know, for the near term, interest rates are low, and the financial markets are basically giving a free pass UH to

Congress and the President to embark on fiscal stimulus. Carl, if the if interest rates can we we've got a little bit of a snap back today in the bond market. I mean, you take a look at the thirty year for example, we're under three percent right now, We're I guess, take a look up more than a full point up one and eight thirty seconds right on the on the thirty years. So people buying there. But if yields continue to for to continue to increase, right, people say that

I don't want to own these bonds. Will they have done the work of the Federal Reserve for Janet Yellen? Will will that still mean twenty five basis point increase? It depends what the other markets are doing. And so if other markets being Europe, Asia, stock markets and other aspects of the financial markets, so taken by itself. The backup and treasury yields and mortgage rates should be a

tightening of financial conditions. But if you look on the Bloomberg terminal at f con financial conditions, UH, it actually tells you that financial conditions have eased since the election. So people are just focusing on interest rates. You have to keep in mind what's happening to credit spreads, what's happening to the equity markets, etcetera. Uh, And so we're not seeing a tightening of financial conditions that would tell the Fed, oh, the markets are doing the work for us,

we can take a pass in December. It's a very very important signal for the Fed to validate the health of the economy by saying, yes, despite everything that's gone on, we still deem it appropriate to take that next step at the December meeting. And we should hear as much from Janet Yellen when she testifies to the j EC

on Thursday. She's gonna be uh probably asked a lot of questions having to do with that December rate hike and whether she maybe we'll want to stay on as a FED chair after her term expires in that's certainly become a political issue if the FED wants to be politically independent. Nothing would be more so than her to say she'll stick on regardless. Thank you very much, Carl rick O Donna is our chief US economist for Bloomberg Intelligence.

Thanks for listening to the Bloomberg pian 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