Politics Are Sideshow to Stock Valuations, Lieberman Says

prolonged reaction from markets. Chuck Lieberman has perhaps some answers. He's chief investment officer and managing partner of Adviser's Capital Management, which oversees about one point three billion dollars. Also, he is a Bloomberg View columnist through the Bloomberg Profits Group. Charles, Chuck, thank you so much for joining us. You raised an interesting reality check, basically saying that all of this political noise only matters so much as it affects underlying growth.

Can you explain sure? Um, Well, obviously the news is full of politics. Um, this stuff happening seemingly almost every day, and Washington is obviously dysfunctional. But how that relates to the stock market depends on whether or not it UH actually affects corporate profits. If companies are doing well, If the economy is growing, and the economy is certainly growing, and corporate profits are actually doing quite well, then stock

valuation should rise over time to reflect that rise in profitability. Um. Yes, we pay attention to the politics. It certainly captures our attention, but it's a side show to the valuation of stocks. Well, Chuck, maybe you could talk a little bit more detail about corporate profits in light of shared buy backs and the ability to discern what is a real profit and what's not a real profit. Since company these use gap and non gap results, it's it's just increasingly difficult. Well, look,

there are different ways to measure profits. UM, we have a system in the US gap accounting. International companies use a different methodology, but our methodology is what it is, UH, and over time, what it has shown is that corporate profits rise pretty substantially over time. Uh. There were five consecutive quarters in which US corporate profits fell and bears on the market use that as a justification to argue that stocks were overvalued. But at the same time, if

you actually look at what was going on. All of the decline in profits came about because of the energy sector, where oil prices dropped from a hundred ten bucks barrel to about twenty five. That was a huge decline in the profitability of very large companies like Exxon and Chevron and others. Uh. Everyone else, however, on average, was actually growing profits and their stocks went down to uh. So stock valuations look attractive. And and now we have the

energy sector actually coming back. Oil prices are still volatile, but the underlying profitability of companies is doing fine. You know, Chuck, I'm struck by the fact that stocks rallied tremendously after the November election of President Donald Trump. Uh. And a lot of this was because people were baking in the expectation of tax cuts for corporations as well as reduced regulations that directly was baked into the prices of stock. So this is a fundamental change. Have we washed that out?

And you know, if we haven't, this goes to something more than just you know, people's feelings. This is a fundamental issue, and it is driven directly by policy. Uh. Fair enough, but keep in mind, a number of things have all other things have also happened so yes, I think the market is hoping that Trump will get some tax cuts through. But that's not the only variable involved. It's also less regulation. It's also more spending on infrastructure.

So there are a lot of ways in which policies that he advocates could in fact benefit corporate profits in the US. Well, hold on a second, how many of those policies have to get through in order to justify a current value valuations? Well, I think I would argue any at this point, people believe that Trump is going to get nothing um, and that's one of the reasons why stocks having continued to rise. Uh. In the meantime, corporate profits have We just had the strongest quarter since

two thousand and eleven. So corporate profits continue to march on. The politics is just a constant show, Chuck, when do you sell? Uh? Well, you sell if you start to think that the economy is at risks. Uh. Recessions are never good for stock valuation. Corporate profits invariably go down. You sell if you think that the government is going to somehow inhibit corporate profits. Well, when does Chuck Lieberman sell?

I guess that I mean to be more pointed about it, because all right, you know, when you see a decline, let's say in stock prices, you can make the argument that that's the time to buy, not when they are at records. Fair enough, and uh, what we do is we continue to watch what they're doing, what the government is doing, because it does matter. And when I say the government, I don't mean just the administration. I also

mean the federal Reserve and foreign governments. All of those variables matter as long as the economy continues to grow, and right now we see no reason why it shouldn't continue to grow at a at a solid clip, not a rapid clip. And because of leverage in the corporate sector as well as how lean they are, I expect corporate profits to continue to grow in the in the ballpark of per year. As long as that's happening, I don't want to sell unless the economy looks like it's

really at risk. Chuck. One thing that you pointed to in your recent column was that there is so much cash still out there that has not been invested yet. How much cash are you looking at? Where is it? Because if I look at mutual funds, for example, particularly equity mutual funds, they're pretty heavily invested, there isn't a lot of cash there. Well yeah, well that's one of the reasons why I was very vague with that statement, Uh,

because it is difficult to measure. So start off with mutual funds, the amount of cash they hold varies over time and fun to fund. On average, they look like they're a little bit heavy now. But we're not talking about a huge amount of three But then when you look at the billions that have flowed into both money funds and in the CDs and bank accounts, all because

people are nervous about the market. There are a lot of people who pulled out of equities back in two thousand and two thousand nine and still haven't gotten in. And I'm still reading about people who are hoping that the market sells off in order to give them an opportunity to get in. So I think there's a lot of money on the sidelines. And you can see that

I think from the aavior of the market. Uh, the market really has not been able to sustain any material decline of any size for any prood of time in the last several years. Um. And in fact, people look at that and comment, how that's a negative. I think of it as a reflection of a positive which is all of that cash sitting on the sidelines by people have missed the market. Chuck, They've been quick question for you.

What was the biggest mistake you've made? Look and you look at the market over the last twelve months, over the last twelve months. Thanks for throwing me a curveballpin um not being more aggressive? Um. I think this market, there's so much fear out there and there's so much caution. I think this that creates an environment in which people are looking for opportunities to get in if they can. And I think you have to be aggressive until conditions

turn less favorable. All right, I'm gonna leave it there, Thanks very much, Chuck Lieberman. He is that investment officer managing Partner Advisors, a capital management He helps manage more than a billion dollars of assets under management. But we have a massive trade deficit with Germany. Plus they pay they pay far less than they should on NATO and the military. This is according to President Donald Trump posting this message on Twitter and here to tell us. Morris

Patrick donohue. He is a government reporter for Bloomberg and he joined us from ber Lynn Patrick thanks for being with us. Maybe you could just set out for us what is the fact and what is the rhetoric when it comes to trade between the United States and Germany. Well, there's definitely a big trade UH surplus that Germany has, not just with the US, but with most European countries. It's it's sort of in the euro Zone and so UM.

And if you look, if you look back at the imbalances that were triggered through the creation of the euro and the succession the crisis, UH, these are imbalances that are sort of built in. UM. It's true that there is a pretty staggering surplus. And it's not just Trump the U. S administration who who like to talk about this, but also the European Commission, UH, the O E C D, the I m F have criticized Germany for doing too little to address the surplus. Patrick, how new is this conversation?

I mean, is this something that has been discussed in back rooms for years and now we're just seeing it in a very different light sort of aired through uh. I guess campaign speeches and Twitter. Uh. The trade issue is not new. I think even in the Obama administration there was plenty of criticism about Germany's deficit, I think a surplus sorry UM. With the tru administration, it's taken

a completely different tack. If you listen to somebody like um Trump's top trade advisor, Peter Navarro, uh the way he discussed his trade um, he lays blame to Germany for most of it and says that Germany's hiding behind its membership in the euro to take advantage of its position UM, which sounds strange to German ears because it's not something you can really undo. Patrick. The automobile industry

and automobile exports money. If you could just speak about the German role there and also about their role in manufacturing in the United States. Auto exports are the backbone of German of Germany's export economy, it's export might um. And when Donald Trump, for example, talks about all of the Mercedes and BMW's on history in New York, UM, it's true, Americans by a lot of German cars. Americans

like German cars. But at the same time, a lot of those German cars are built in the US, and so it's not simply a matter of Americans buying German cars that are shipped overseas from Germany. It's more complicated than that, You know, Patrick, I'm really struck by what Angela Merkel said over the weekend where she said, you know, we Europeans cannot rely on the US the way that we have. I was struck. Two. I was in the beer tent with her. Did not expect her to talk

about geopolitics at a campaign rally. So you were there, What was the response like, What was the mood like when she uttered those words? Um, those words were uttered at the beginning of a little long sentence that continued with this idea that well, we Europeans have to go our own way, we have to take our destiny in our own hands. That sort of rhetoric coming from America

was not entirely new. Uh. This reliability comment is rather new, and in the context of the the breakdown at the G seven summit, when the administrative US administration Trump would not commit to remaining in the Paris Climate Accord, it took a whole new meaning. And so when you when you place the reliability of your closest post World War two ally in doubt, then that's a big deal. The question here is did she mean to cause such a stir was she's delivering this to the German electorate. Um,

I don't know, we haven't. We have a Twitter response from President Trump today. Uh, clearly this is royal things across the Atlantic. Patrick. When I look at the exports as a percentage of GDP and you look at various countries, Germany comes out as a really top of the list. Forty more than fort of GDP is accounted for as exports. What does Germany do that the other countries in Europe or even in the United States, which is just around

ten percent, don't do well. One thing Germany does it manufactures um quality products and exports them, and it has done that very well for a long time. On the other side, it's a question of what Germany has not done. Um An export surplus is you know what Germany exports minus what it's what it's not importing. So the criticism for Germany, obviously it's impossible to say stop making such great cars. It's rather Germany should do more to um

boost domestic demand domestic spending to raise imports. This has been a classic criticism of German policy, and there's a back and forth about that. The Germans say they're doing plenty. Um, I mean, leave aside Trump, but as I said, the European Commission i m F have come down pretty hard on Germany for not addressing the issue and creating imbalances

within the Eurozone and globally. You know, Patrick, I'm struck by what you're saying that there are Europeans that agree with President Trump at least on with respect to Germans role in trade and their trade surplus. That might be taking it too far. Okay, Well that was what I was going to ask. Is that taking it too far? You know, because it really has been created as sort of a Trump versus Merkel kind of a kind of

situation right now. Well, I mean, when you talk about trade policy and trade arrangements, things get complicated, as with lots of other things. Trump's um view of the problem is somewhat crude compared to how, you know, the chief economist at the i m F might criticize Germany's UH surplus.

So that is just to say that when Donald Trump or Peter Navarro or somebody else I don't know, Steve benn And starts talking about the German exports, it's it's not the same thing, but it's all it's there's addressing an issue that has been on the table for a while, but there's a there's something else going on there. Patrick Donahue,

thank you so much for joining us. Patrick donahue is a Berlin reporter for a Bloomberg News and he comes to us from Berlin, Germany, very diplomatically, saying that the tone of President Trump's comments perhaps does not jibe in any way, shape or form with the Europeans, regardless of their views on Germany's policies. A collective ignorance, a mistrust of finance today, it's detrimental to our personal and national financial security. And here to help us reimagine what the

finance industry could be is me here Decide. He is the Miszooho Financial Group Professor of Finance at the Harvard Business School, and he's also a professor of Law at Harvard Law School and the author of a new book entitled The Wisdom of Finance, Discovering Humanity in the World of Risk and Return. Professor Decide, thanks very much for being here. It's a pleasure. Thanks for having me. What

what prompted you to write this book? Well, it got started by accident, which I was asked to give a talk to graduating students, and I realized that what I wanted to do was take finance and both humanize it and demystify it. I think finance is broken in some ways, and certainly it's perceived as broken, and so I think the path forward is first to make it accessible to people everywhere. Finance kind of cloaks itself in complexity, and we need to demystify it. So the book does that

by telling stories. And then the second piece is to humanize it, which is to tell the stories that make people realize that underlying ideas of finance are humanistic, they're not crass, and they actually can be used in a humanistic way. You know, when you talk about demystifying financial concepts, part of the problem is that finance can be complicated.

It's not just jargon. It's when you're talking about derivative concepts and you're talking about, you know, high theory that is based on the transfer of money that a lot of people just simply don't even understand to begin with. How do you go about doing that? Well, So there's no doubt that you know, the intricacies of the c d O are fairly complex. But the underlying ideas of

what a derivative instrument, for example, are UM. The way I try to explain it is by going back to the first person who pioneered the use of options, which is Bailey's the father of Greek philosophy. He's the first option contract writer. He put down a deposit to rent out all of presses, and so you can tell the stories that actually undergird a lot of these financial technologies UM in a way that makes it a lot more

easy to understand. Why do you think that finance has such a bad reputation, Well, I think partly because it's well learned, and I think there's been problems, and I think there are areas where finance has become somewhat extractive rather than value creating. But the larger point is that people are looking for something to blame today. They're upset with their economic prospects, and finance is an easy and

um attractive target to them. And as a consequence, we have a profession which has gotten demonized, which has really bad consequences. It's bad because people within the profession actually don't have as much to aspire to. So in the book, I wanted to say, look the underlying ideas are actually quite noble. We should make finance aspirational, as opposed to defining it downward and expecting less and less. I wonder if you could tell us what does Jane Austen have

to with risk management? Well, it turns out everything. So in the second chapter on risk management, I try to use Anthony Trollop and Jane Austin Pride and Prejudice to talk about risk management because underneath most of those novels is the problem of a young woman in the marriage market who has to manage risks. Right, So if you think about Mr Collins's proposal to Lizzie, he's playing off

her risk aversion. It's one of the worst proposals ever. Basically, you know, you're not that attractive, you're not that rich. You better take my bid before you kind of become too old and she has to kind of gamble by waiting for Mr Darcy. And the really interesting part about that risk managing problem. In Phineas Finn by Anthony Trollop, the character Violet Effingham actually divines both diversification and options.

She doesn't call it that, but she uses it. So she says, for example, you know she's bemoaning the lack of being able to unable to pick among suitors, and she says, you know, if one, I could marry ten, which is the way of saying diversification. And then she finally says, um, you know what I'm gonna do. She's not a fan of romantic love. She basically says, I'm

just gonna sort. I'm going to pile up a few different possibilities, and then when I'm ready, I'm going to get married, which is kind of acquiring a portfolio of options and then exercising one when you're ready. So she actually got risk management in a deep way before you know,

we had the equations to prove it. Mayor, you teach finance at Harvard, and I imagine that you have seen many students and you've seen, uh, perhaps a change in them and and concern, especially since the two thousand and eight financial crisis, about the reputation that finance has had. Can you explain, Yeah, No, I think it's been um, you know, really problematic. So finance has become less and

less viewed as an aspirational profession. Recently, I was speaking to about forty or fifty of them, and I asked them how many of them were going into finance. A whole bunch raised their hand, and I said, how many of you expect to be in finance in ten years? And the number was a quarter of that, which is a way of saying they kind of did it for now,

but they don't feel it's part of their identity. In other words, are doing it for the money so they can go on and do it they really believe And no, I think if they're doing it because they like it and then are ashamed of it because it's looked at in a way, that is problematic. UM, and that's terrible. Why, because you know, finance is hugely important to the economy. If we don't get finance right, we've seen what happens, and so we want really good people going into it,

who who aspire to be doing great things. And so what the book says is actually finance is central. If you think about the two big solutions to the world's problems today in finance, one is regulation and the second is outrage, you know, just occupy. I think both of those are unproductive. UM. Outrage isn't going anywhere, and regulation,

we know has counterproductive consequences. So the idea in the book is to say, let's really just get back to the nobility of the ideas, because if we get back to the nobility of the idea, is that, in the long run, is the way people start behaving better? Is the nobility Uh, your referenced nobility of ideas? Does that include personal accountability? Because it's one thing if you're playing with other people's money, and it's another one you're playing

with your own reputation and your own money. Absolutely, So there are several times in the book where I use the ideas of for example, leverage UM to talk about reputation and to talk about personal accountability. So leverage is a good example. UM. Of course, I use a variety ways to talk about it, but one of them is The Merchant of Venice, you know, which is just a way of saying people think that's a play about debt,

there's a debt contract between Antonio and and Shylock. And the answer, of course is if you look at the text, it's actually about commitments, right, It's all about commitments between people. That's what most scholars think that play is about. So I try to use that to kind of say that's what leverages it's a commitment and leverages fantastic. People in finance know that you get to do things you have no right to do. That's why people in financial get

to create money. You get to create money. And the same thing is true, um if you think about it in a variety of other ways. So the great quote from Jefferson is that you know, your reputation is the most important lever because people will allow you to do things you have no right to do, and protecting that reputation and behaving in that way is really really critical. So you started out by saying that finance used to

be thought of as a noble profession. But I can think of a lot of times during history where finance or debt was considered somewhat dirty and people wanted to have it somewhat removed from themselves. What's the golden era that you would like to see some kind of resurrection of Well, you know, that's a great question. I think there's always been problematic because debt has always been problematic, but that was born of real ignorance, right, you know,

money is barren? How can you do these things? Um? And also sometimes anti Semitism was associate with that as well. Um, so, I don't know if there really has been a golden era. What I'm trying to just suggest is let's get back to the ideas, because we are so far removed from them. And this is why the practice of finance has got to wake up. They can't just say, you know, I'm

doing God's work and I'm great. You've got to be able to say, we have problems, but we can actually do something really important, and we can get back to things that are actually really value creating. Ma Here, Decai, thank you so much for joining us. But here Desai is Missouho Financial Group, Professor of Finance at Harvard Business School as well as a professor of law at Harvard Law School, and he joins us here in our Bloomberg

eleven three oh studios. You just wrote a new book, The Wisdom of Finance, Discovering Humanity in the World of Risk and Return, really fascinating. Up until now, Intel has really been the only game in town when it comes to computer chips. It's in a league of its own. It has dominated the industry. But suddenly it finds itself fending off competition, a non stream of us and is

here with us. He is the senior semiconductor and hardware analyst for Bloomberg Intelligence, and he comes to us in our Bloomberg eleven three studios in New York City, and then you know, I'm struck by, uh, sort of the idea that somebody who is so so in the in the lead all of a sudden finding that that someone else is catching up to them. Can you explain how this is sort of the situation with Intel right now? Sure?

I mean m D has lagged from both the performance perspective and the market share perspective over time in the CPU business, in the in the computer projects being advanced micro devices, and that's the new competitor that's kind of coming up for the newly dominant competitor. It's coming on right. M D does go through some cycles. It's been around in the business for a long time, but it's market share, both on the PC side as well as in the

server chip side, has wayne pretty substantially. And over the last two years, m D has sort of reinvented itself, refocused itself, um cleaned up its act both literally from a product perspective as well as from a financial perspective. And at its Handalyst Day launched several chips over there. In the first part of the year, they launched their desktop chips uh and they will be launching UM notebook

chips and server chips now. The interesting thing is that these chips are built off of a new architecture are meant to UM compete with Intel all the way from the low end to the high end. Historically, m D has been pretty competitive at the lower end of the product spectrum, so low end notebooks, low end desktops, low end servers. It has had a product that has been competitive with Intel predominantly on price with a performance match.

Right now it's coming out with products that are suddenly performance competitive, right and they still retain their price edge, which is priced lower than Intel. So Intel finds itself in an unusual position of having to either seed UM price dominance UM or um We'll give up some share. Now, if you're a customer of Intel, you're going to definitely use this as a bargaining chip to try and lower the price for Intel's chips, for sure. But you're you're going to be looking at m D chips more closely.

Now that's the product starg am D versus Intel. What's been happening with the PC market is the PC market doesn't suck as badly as it did before, so well said, Well said down, thank you. So it is um low single digit decline. So we could have a year potentially in the minus two plus two percent range, and we could have this sort of um less badness continue for for an extended period of time. So PCs are going to be an okay place to be and in that

unit volume environment. One of the things one of the segments that has emerged is the gaming market. The gaming market is a particular breed of devices that sell for anywhere between two thousand and five thousand dollars per PC. I thought you were going to say a different breed of customer because they're willing to pay this kind of money. Absolutely, and these are you talk about these with the same sort of reverence that you talk about with autos. You

sort of use liquid cooled, you use air cooled. You use um high end CPUs from Mentel and now or m D and I almost looked like cockpits of of advanced fighter jets. Now, I mean gaming paraphernale that has emerged is much greater than just the steering wheel for let's say Xbox and you know driving you certainly wan't Hemmy or two that drives your engine for sure. Well, so this means that if you want to play games like Galactic Civilizations or you want to play Halo, right,

I just want to point out him. I somehow do not think that this is like at a personal knowledge that you're I have a feeling you looked out some of the popular games. Actually, actually, I have to have to say that I come from the generation that's put quarters into video game machines, so I've kind of lived with this. You need a lot of quarters for this kind of system. This is where I wanted to go with this, which is that what kind of price point

are we talking about? I mean, we're talking about the recent Intel chips that have been launched vary in range between the thirteen for the CPU alone at the at the high end two thous dollars just for the CPS for the CPU, and at the low end could range between the three ninety nine Torice points. So these are very very high end chips meant to do a few things really really well. Now you're not you're not convincing Lisa though, by the way, just to go out and

spend you know, five grand on a computer. Here. Look, I look, I'm the mom of two boys, right, so if one of them came to me and said, Mommy, mommy, can I have some pocket change so I can buy a two thousand dollar cpu? I would laugh at them, right, So, I mean, I'm just thinking, who is the customer here? These are high end gamers in China is a particularly interesting country in so far as from a gaming experience part of the world that they've there's a lot of

gamers there um. And also the e gaming has helped drive this gaming phenomenon where e sports where you watch other people compete and go to arenas and you actually watch other people play video games there. There there is a substantial demographic out there, and this is part of the reason why the PC market there's also a divergence between a small divergence between PC revenues and PC units. The units may still be in the minus two to plus two percent range, but the revenues could be slightly

better if the gaming segment does well. All right, so just quickly, Intel going into this market, they're going to make a big splash, is just gonna work for them, help the stock. This is going to be this. This is in part a defensive strategy against m D. They want to show that we are the best game in town at the high end and at the low end um and they want to relegate a m D as much as possible to the lower end, where's where it's always been. All Right, well, thank you very You know.

I want to know maybe Brian Crecentage, the chief executive officer, maybe he's a PC gamer and that's why they're also interested in this. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg radioh