P&L: The Bloomberg Pessimist's Guide to 2017

call up our next guest, John fra Her. He is executive editor for the International Government division of Bloomberg News. He's a pest Well clearly now he is a pessimist because he is responsible for our Pessimists Guy to seventeen. John, all right, tell us, when you know, do we take cover, should we build a shelter? What what's going to happen? But part of the exercise of the pessimist guy does

not necessarily a series of predict is. What what we're trying to do is encourage readers to think outside the box. I just can I interrupt you for one second, though, last year's guide to the Pessimistic Guide pretty much entirely came true, right, I mean the base case of Trump becoming president. So this time last year, it definitely did pay to be a presimist, yes, because we we put in front of readers the idea that breggs that could

actually happen. And actually the most controversial I think that we had last year, the one that caused most internal debates and arguments as we were debating it, was should we put in front of readers the possibility of Donald Trump winning the winning the White House? And it was actually the last thing that we put in because there was so much heated debate about it. We were told, this is a joke, it's going to be over by February. It's going to make us look stupid. But sometimes outlandish

things do happen. As the last the last filve months is taught, did you make the correlation between Donald Trump being elected president and the doubt being up more than ten percent and the S and P up more than seven and a half percent. I think that bit we

sort of wed. We we didn't quite factor that in, but again it goes to show you that all of these events have have unintended consequences, and what we're encouraging people to do is keep an open mind not only about the events that can happen, but how markets will react to it as well. Okay, so John, here we have our crystal ball. You can look into it. What's going to happen next year? If you're a pessimist, if

you're if you're a pessimist. Um Well, one of the things, one of the sort of the threads that runs through at the coverage, for example, is this idea of of of America puming back from from the rest of the world. Um And one of the things that we've thought about is what if on the morning of Donald Trump's inauguration

he decides to label China a currency manipulator over Twitter. Now, it actually nearly happened last Friday night about believe it or not again, which causing another sort of range of you know, huge debate with me and my co my my sort of fellow pessimists. I got one email on Friday night saying we need to get this thing published now because this could happen. So that's one thing to

think about Trump starting a trade war with China. But then the flip side of that, and I think it really important to see that Donald Trump may well be thinking about and certainly people in Washington are thinking about it. Is this North Korea angle, right, So there are people in South Korea who say the whole notion of North Korea building a missile that could hit the West coast on which you could fit and miniaturized nuclear device is not that outlandish at all, which then raises the question

for Donald Trump. Okay, fine, you want to go hard on China on trade, but if you're really genuinely worried about North Korea, you need Beijing on board. You need Beijing to help you deal with this, with this rogue regime. So again one of the things that worked in the past. Well, it's very difficult. I mean, China is sort of access North Korea's protector, and certainly they are very reluctant to be seen to be how thin America out on the North Korea issue. But it just goes to show you

how all of these issues that are interrelated. If you do want to go hard on China trade, you also need to think the back of your mind that you might need China to help you out with North Korean's well, and talking about China if there were a trade war, I believe in this Pessimists Guide, you talked about a

potential recession and in China that could result from this. Right, that's right, And you have to remember all at the same time that this is happening, there's a big leadership reshuffle happening in China this this time next year, so that the Standing Committee, which sort of sits on the very apex of Chinese power, is all going to be reshuffled, and Ping and as Prime Minister will stay, but everyone

else will probably get rotated out. And of course Chinese politics is very opaque, but you can bet that there's going to be a lot of people in Beijing are going to be focusing on the succession to see when perhaps they should be spending more time on keeping the economy going. And they will also be dealing with the US President, who you know is going to be on orthodox at the very least. Well, we're going to speak

later on in the program with Arthur Kroeber. He is a founding partner at the Gave Call Dragon Nomics, also a fellow at the Brookings Chingao Center for Public Policy. He'll be talking about China later on in the program. Can we just go to Germany for a moment, what's what's the prognosis, what's the pessimist So the pestim scenario there, I mean Angela Merkel of course is on is on, is on the back back foot big time in Jerem and she's facing her own populist insurgency there. She's got

her own elections in September next year. So one of the scenarios we put out there is that she loses. She loses that election. Now we're not saying that the populace will come to power, but she could be so her authority could could be so heavily dented by this election that she's forced to stand down. Angel America has been the glue that's kept Europe together eatly for the last decade, whether it's Greece or whether it's the refugee crisis, So that in and of itself, her leaving would be

a hugely destabilizing event for event for Europe. And then turning back to the US, how about sort of social backdrop in the United States with Donald Trump as the president? I mean, could there be a sort of radical movement that evolves and what would the effect to be there? So we are we have looked at that we could you could see a sort of a coalition of the

left or the center left in the streets. Also, we talked about, for example, Californian billionaire liberal Californian billionaires deciding to group together to sort of form a resistance movement if you like. That's then entire group is Californian billionaires,

billionaire And then what happens in Congress? Yes, so, I mean there is I'm just curious when they found that group, are they going to be subject to the same kinds of conditions at a foreign state would be subject to if they want government contracts for any of their products or services. That's a very good question. But I mean it's called calex it, right, calex is this idea that

sort of been brewing, brewing since the election. Um. But one of the things to think about as well is if you did get if you did get broad social unrest or deep unhappiness with Trump's domestic agenda, what would that do to unity and Congress when he tries to get a fiscal fiscal stimulus through. So something it's worth connecting those dots together. And I'm not saying this this pessimist guide, will you know it is predicting the future, although it has it has a pretty good track record

at this point. But it's encouraging leaders to think about all of these differentencies and how they could link together. Putin, Vladimir Putin and President elect Donald Trump new best friends forever. What's going to happen here? I think it's pretty interesting, actually, I mean, if you look at that's certainly the narrative has been the narrative through the campaign. But who then would have thought that Donald Trump would have packed his

cabinet with with former Goldman Sachs employees. So in theory, you know, Donald Trump has had he wants a better relationship with Putin, but you know, Putin himself is a very hard to predict guy who will only act in Russia's self interest, So that romance, it could be a short lived one. But one thing to think about is that if if Trump does carry through on his pledge to sort of really question how much Europe spends on defense, he could he could he could basically give Angela Merkel

and European leads a very difficult choice to make. Do we decide to ramp up spending on defense good for defense companies um or without America support. Do we have to learn to do deals with the Vladimir Putin in Eastern Europe? Do we have to accept the fact that Vladimir Putin is serious about the fact that Ukrainis is in his of influence? Is Vladimir? Do we have to recognize the fact that history of influence doesn't he go right up to name of naval's borders. Those can be

very difficult decisions fans of Americans to make. This is the segment that I have been waiting for. This is a question that we have been talking about a lot. With all of the populist uprisings that we've seen around the world, What does this potential civil unrest and in some places actual what effect does it have on markets? With us to answer that question is Irene Finelle Hanigman, Magic, Professor of International Affairs at Columbia University, and Nick Kolas,

chief market strategist at converge x UM. Nick, I want to start with you. So far, we saw a bit of a reaction. We saw three month reaction, three week reaction at Brexit, we saw three day reaction to Trump, and we saw a three minute reaction to Italy's referendum vote.

Do markets does not care. You know, as you look at the data back to the nineteen twenties and look at the whole cadence of history from the Great Depression to now, I think the data shows us that the markets anticipates a lot of this change long before it actually occurs. So if you look at the Great Depression, the SMP five hundred and its predecessors were down seventy from night to nineteen thirty two, and then we had this very long wave of social unrest afterwards, culminating in

World War Two. If you look at the financial crisis, down thirty six percent back in two thousand and eight, and we've had this kind of rolling set of crises ever since. So I think the bottom line is markets to some degree create the conditions to this unrest and to some degree anticipate what it's going to mean. Some by the time it actually occurs, a lot of it's baked into investor expectations. Irene, give us your thoughts. I

basically agree with with Nick. I think also the situation in Europe is the markets did react very strongly and negatively uh in two thousand ten that March May period of enormous and certitude about greece potential default once it became clear in the next year or so that this was constantly ongoing, and that every crisis was awful in and of itself, and yet did not necessarily mean that the euro was failing or that Europe was failing, but

that in a way, unfortunately was constantly pushed the can down the road or muddled through. So this seems to be again the case Italy. There is built in cynicism, building skepticism. We have looked at sixty different governments, of which Tibert Lusconi was the longest in Italy since World War two. UH. The assumption was that this probably would go as a no against the constitutional changes that Rensey

wanted to impose, and we're really not understood. The thing that is to me also very interesting is, for example, in France right now, we've seen France go through all sorts of dry rations with alone deciding he will not present his candidacy again, with a new UH candidate, EMANUELA mccollon, former finance minister, creating a new party with unexpectedly coming to the forefront of his repay a center right. Yet there doesn't really seem to be an impact from that.

Everyone is sort of a weight and see and I think this weight and see mood is kind of everywhere. Um we also and again I certainly agree we have a lot of it basically baked in. Uh, there will be volatility and as long as some of the economic fundamentals don't look that dramatic, well just assume we don't really know where the political situation is going right now, Okay,

so just go sticking. In Europe, one of the biggest to wild cards that a lot of people talk about for next year is the status of the euro and the fact that a lot of anti European Union factions in Europe have been gaining power. I mean, that is not priced into the market right now. The breakup of the Eurozone. Correct, that is correct, because I don't think

it will occur. I think again, the fascinating thing about it is just like in Greece, they absolutely hated what Brussels or Europe was imposing on them, but they did not want to get out of the Eurozone. To come back to the Drachma. In Italy it seems largely to be the same thing there is in the Northern faction,

et cetera. In some of the very extreme factions more of an anti euro, anti EU sentiment, But fundamentally the Italian electorate does not want to get out of the Euro and certainly returned to the lira and its gyrations. So I think there's a very bizarre paradox between people, oddly enough not really wanting to break things apart, yet

being very unhappy with the way things are. Nicholas, Yeah, I was actually looking at the data back to say World War two, which is an interesting, much more violent analog. Obviously what's going on in Europe now, And for U S stocks it wasn't early all that bad. S and

P returned down etcent and that was it. After that defense spending and all that stimulus ended up having the equity markets up between nineteen and twenty five percent, with being up thirty six percent when the victor was actually one. So looking at a much more extreme version of unrest in Europe and you see US equities actually did pretty well. So what's the trade, Nick Cholis? Everyone seems to be pessimistic offering up all these dire scenarios. You're telling me

that the analysis says you can make some money here. Yeah, the bottom line is markets climb that clichee wall of uncertainty. And we have so any particular sector, any specific ideal or do you just do you know an SMP index. No, we're seeing, you know, among our clients, we're seeing a ton of rotation. I mean, like I haven't seen five years from tech out of tech into financials first and foremost, and then industrials and healthcare pretty much in that order.

If you look at et F flows over the past month, nine billion dollars, nine billion dollars into industrials and then between two and three into short into financials and industrials and healthcare is two to three billion dollars tech negative draws for example. Irene, and I'd love to get your perspective on at what point in history civil unrest has, if it has ever bled into markets that I think is really uh interestingly enough, often there's there's really not

a lot of correlation. I mean, yes, we we can certainly look at at even as Nick mentioned, during the Great Depression, there seemed to be a sort of a

slow revival. Uh. The issue is right now and what we have seen basically in in many decades is that the euro dollar parody has not been that we have not gone through that many disruptive moments, and at even when the crisis in Europe were occurring, we were not really going through a currency crisis, and intr stanly enough in September after there was a near no vote on the Mastrok referendum where there actually was a currency crisis and most of the currency had to drop out of

actually the parody bands within the European Union what would become the Eurozone. Uh. Interestingly enough, that did not necessarily lead to a political crisis. So the interesting issue is

that we don't really have a set correlation. The one thing that I'm still quite concerned about because I don't know how it plays out or how it will finally play at long is Brexit whether that will have longer impact on banks on the UK banks wet Irene, we gotta leave it there, but thank you very much, Professor Irene Finel Hanegmann, Adjunct Professor, International Affairs, Columbia University, and our thanks also the Nick Culis, chief market strategist at

converge x. Well. Imagine that you wanted to know everything that you could about China, you would probably call Arthur Kroeber. He is a founding partner of Gavical dragon Omics, and he joins US now. He's also the author of the new book entitled China's Economy What Everyone Needs to Know. Arthur, thank you very much for being with us. So what do we need to know about China right now? Well? I think two things. First of all, um economic growth

is reasonably stable. Isn't going to stay so for the next year because the government is heading towards a major political event Party Congress about a year from now, and they're gonna want to have very stable, calm growth between now and then to set the stage for that. But then the second thing is that I think President Trump has thrown a wild card into that by getting collected, and he has the potential to to make things a little bit more volatile by throwing some trade ancents at China.

And so it'll be interesting to see how the Chinese respond to that if if in fact occurs, Arthur. You know, there's been a lot of discussion about how a potential trade war would negatively impact the US. What about China. How much does China have to lose by this type of trade argument? Well, they have a fair amount, because it's a it's a very trade dependent economy. They have a trade surplus, it's about five percent of GDP, and

they do rely heavily on exports. But I think when you look at at this, it seems pretty clear that the US has a lot more to lose from a trade war with China than China does. Just a simple, simple example, one of the biggest exports that China since the United States is the iPhone, which is not a product that ultimately is from a Chinese company, is from an American company. So if you impose tariffs across the board, you'll be hurting American companies at least as much as

Chinese companies, and maybe more so. At this point, I mean, given the rhetoric that we've seen from President elect Trump, will what will it take for China to respond with a sort of heavy hand, because so far they've taken a pretty light approach in response. Well, I think on the economic stuff, they're just waiting to see what he actually does. Is he and he said all kinds of things, But we don't know what he will actually do in terms of economic sanctions or tariffs or whatever until he

takes office. So I think the Chinese are playing cool on that. What we saw over the weekend was this conversation between Trump and the president of Taiwan. Yeah, the Chinese are playing that very cool. Also, again, I think they're taking the calculation that what Trump Trump does as president elect when he's still really a private citizen, may be somewhat different than what he does when he's actually in office. So I think they're just going to wait

and see. Arthur, if you've got a call from the CEO of a major U. S industrial company, or indeed someone in the United States that has a product or a service that they'd like to sell into China, what would you be telling them about how to navigate the business world right now and what kind of insights can you offer to get a deal done well. First of all, I think you have to understand whether you're entering into

a market that's growing in a market that's stable. So China has a lot of different markets and they're behaving differently. The key is to have products and services that focus on the needs of what we would call upscale consumers, and these are households that have at least twenty dollars in income each year. This is the fastest growing part of the population. So if you're selling higher end products that appeal to these affluent consumers, you're doing well, you know.

And it's that in major cities, because you know, when you think about a big country, it can be very daunting to go and do business there. But if you narrow it down to specific cities, then you can maybe do a little bit better. Well. But I think it's important to understand that this this population of affluent consumers exist not just in two or three cities, but probably in about fifty or sixty cities sprinkled up and down the coast. So I think you you do need to

have a broader strategy. But the other thing is, if you're just entering China, don't go in with a grand idea. Go in with something small, something managementle that you can control, and then scale it up gradually over time. The biggest mistake that companies make when they go into China is they think it's a giant market and they're going to take it by storm and they have a grand plan,

and that usually comes to grief. Arthur, China's un has been sort of in the backdrop this year, but there still is the possibility for a very disorderly uh devaluation of the currency. There still are a lot of outflows capital outflows from China. How worried are you about this? I'm not worried in the short term. If you look at the recent capital outflow numbers, basically they're not real outflows.

They reflect the fact that China's holdings of things like the euro and the yen have gone down in value as the dollar has rallied over the last a couple of months. So we don't really see strong capital outflows now. And the other thing that we've seen is that when f flows do occur, that Chinese are very effective at imposing capital controls to keep things under wraps. So I think for the next few months, not a big worry.

The worry I do have is, let's say we have another six or eight months of the dollar rising very rapidly. That will create a lot of incentives for Chinese investors to switch from rem and b ASTs the dollar. ST's move money out. But we're not there yet. Arthur Krober,

thank you so much for being with us. Arthur Kroeber, founding partner of Gavacal dragon Omics, China focused economic research consultancy in Beijing, and joining us here in studio is Shelley Bancho, Bloomberg Gadfly columnist, to tell us all about shopping at an Amazon store. I thought that was only going to be online, but apparently eventually I'm going to be walking in and out of a store and not having to take out my wallet and somehow Amazon will

still be involved. Yeah, you just walk in, put the things in your pocket or your card or your bag, and walk out. And the way that it was build was that it's all sensor technology artificial intelligence. Basically, they have little sensors on all the on all the items, and they can tell when you're buying them, and then they credit it to your Amazon Prime account and charge you.

You know, it's just like Amazon already dominated retailers on the online space, and now just to sort of take some salt and rub it in those wounds, they're going to have a brick and mortar place that's running better than the ones that are in existence already. I mean, how much do you retailers have to fear from this sort of Amazonian invasion of their you know, bread and butter. I think a lot, because you know, Amazon has done so well at so many things. They've also not done

very well at at many things. But but this is something you know, just focusing on checkout for example. Check Out is something that all these big traditional retailers have struggled with for decades and no one's been able to kind of figure it out. And here comes Amazon basically being like, ha ha, we have solved your biggest brick and mortars big problems just like that with our first store. But so this is my other question. How is Amazon

able to do this? I mean, if you go into CVS or if you go into some of these other stores they try these self checkout counters that often are counterproductive because you end up having as many people standing by them to fix any technical glitches as you actually do just letting it to work, you know. But how is this going to work? Yeah? I think that it'll remain to be seeing what happens with Amazon. Like it could completely fail and that would probably be fine with Amazon.

Which is the difference between some of these traditional brick and mortar retailers. Um Walmart, for example, launched this thing called Scan and Go a couple of years ago where you would literally take your cell phone and scan have to scan each item of each product and for that's fine if you're going into a CBS, but when you go to Walmart, you pick up a hundred items in one big swoop. Um, it didn't work well for people, so they scraped that. And you know, people have been

struggling with this. Why does Amazon want to do this? Amazon wants grocery for sure, They need to learn grocery. It's this huge Do they really like going to the Rose three stores that I mean? They've said, okay, so they want to be able to supply both because a lot of grocery stores, for example, Kroger, you can go to the store, you can pick it up, It'll all be boxed for you. They've got an internet connection program

already in place. Yeah, I don't think it's ever going to be Amazon's gonna replicate Walmart with these two hundred thousand square foot you know, huge supercenters for grocery. They're going to do it their own way. You know, they have they might have a few hundred of these stores with um, you know, just a certain amount of items that they can actually learn about how people a shot

for groceries. Because right now Amazon is really good at a lot of things, but grocery is not one of them, and it's something they've they've been trying to do for a decade now and have not managed to crack. So how do you avoid people stealing things? I don't understand this tracking sensor? Do you have like a little tracker on you that you have to carry around that's connected to your cell phone? That I mean, I'm just trying to understand that. Yeah, I think every item has some

sort of tracker sensor thing in it. And so if you walk out of your of the store without it, you know, having you know, been linked to your smartphone, then you know, maybe that'll set off bells or whistles or something like that, if the whole place to start screaming, like all the bells and whistles coming from every corner of it. But this is supposed to be, I thought, exclusively for Amazon Prime customers, So they're gonna know exactly who you are almost before you get into the store.

When you walk in, you're supposed to turn your phone on, you know, kind of the store mode that actually a lot of retailers have already, and so that knows who you are and then it can touch and you can consents what you're putting into your car or your bag. Then as you walk out, it kind of all rings up. Where's the first store going to be? The first door is in Seattle on Amazon's kind of downtown campus there, and so it's already been it's already up and running

for employees, and employees have been using it. So they made this kind of big announcement yesterday that they're going to open it in early January to the public. So we'll see, you know, kind of what happens, and if it goes well, they'll, you know, they'll open. And they're also testing out all sorts of different concepts and so I don't think this is the end of brick and

mortar for Amazon yet. Well, when you come out of the store that can drop the products on you that you forgot to buy on the exactly, or send a little drone after you to follow you, I gotta say those stock is up. Stock up seven dollars right now, seven hundred and sixty six dollars for a share of Amazon. It's up more than three percent since they announced this. Uh this new foray. Can you imagine a drone going after you you forgot vegetables? You didn't have enough vegetables.

Sally Banjo Bloomberg gad Fly column is covering the retail sector. Thank you so much for joining us. 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. Y de Lord