Trump's Bi-Lat Trade Strategy Failed With China Deal

although we have not yet seen anything on paper. To get the latest, we welcome and Stevenson Yang, co founder and research director of JA Capitol Research, also a Bloomberg opinion contributor based in DC and Hong Kong, and thanks so much for joining us. What do you from your perspective, what is the latest on the China US trade negotiation? Hi? Um,

you know, to be honest, it's nonsense. So we have we have almost two years of back and forth market gyrations and you know, high expectations in order to get back to the state of quo anti like, what's special about this? All right? Well, okay, this is an argument that people say we're going back to levels that said the forty billion dollars to fifty billion dollars of extra uh goods, and that China is supposed to import from

the United States. There is a question of how feasible that is given the structure currently of their economy and the different trade routes. What's your sense of that. Do

you think that that seems very doable at this point? Yeah, this reminds me of you know, for many years, the Chinese Trade Ministry has been has been running these um these buying missions to the US where they'll send a whole lot of you know, soe presidents on a delegation with the Ministry of Commerce and they'll say they'll sign all these agreements and China is going to buy all this stuff, and John's gonna invest all this money. It

never actually happens, it's it's for the headline effects. So what China is going to do is they're going to kind of um slice away at at the commitments by uh, you know, re renaming Hong Kong imports as as mainland imports and then uh, you know, signing a deal that they don't actually implement, you know, stuff like that. So what's happened is that the all the structural demands for for Chinese economic change have just disappeared because the US

realized that they're they're not realistic. In the US really has sort of, you know, caved in order to get a deal, and instead the US says, okay, just buy more stuff please, and China says, yeah, we might do that. So and does this call into question the value of kind of this bilateral type of negotiation as opposed to you know what probably was more the norm of a multilateral maybe the transpecific partnership. From your perspective, all the history that you have with China and China trade, what

do you think is the best way to proceed with China? Yeah, yeah, Look, it's totally understandable why there's great frustration with China. But but the fact is that the real problem has been lack of use of the of the dispute resolution mechanisms that exist in the w t O, lack of accession

to the t p P and so forth. There's a lot of stuff that we could be doing in demands we could be making of China that we have not made, and we've hobbled the w t O. And yes, I agree the bilateral mechanisms are just not very satisfactory going forward. What are you looking forward to determine whether the Phase one deal is moving ahead as expected in terms of Phase one A, Phase one B, Phase one C that

actually effectuates the existing tariffs being rolled back. Well, it's it seems to me that the only real demand because all the concessions on on you know, stuff like intellectual property have already been baked into into Chinese um you know, new laws and resolutions and the currency thing kind of that was that became unimp written about ten years ago. Um So, so the only significant issue here is whether China will actually make the purchases that it says it will.

And most of those purchases are focused on soybeans and corn ethanol, right so, and that's very important obviously to Trump because they're they're they're base constituencies that rely on selling those commodities. So it's kind it becomes a question of well, China, does China really want to boost the Trump chances of reelection? Um there have been signs that it did for a long time. Now it's not so clear.

So as we look back on this process, or not even done the process yet, because yet We've not even seen anything on paper, but assume the Phase one deal turns out the way it's been reported. Looking back, well, this will this outcome, this Phase one deal will be

worth two years of all this uncertainty in the global markets. Yeah, totally not did did there need to be a reset of the US China relationship, Absolutely, But I think that a lot of that reset is about uh no longer um capitulating to unreasonable Chinese you know, actually bullying over things like you know, the name that we called Taiwan and whether Leotill boy gets a Nobel Prize and stuff like that. Um, so we need to stop being cowed

by that sort of thing. But this, you know, weaving back and forth on tariff levels is really just not a good thing for either economy. And Stevenson Yang thank you so much for being with us. And Stevenson Yang is co founder and research director at Jay Capital Research, as well as a Bloomberg opinion contributor. There are a number of ways to sort of size and scope the fang stocks, or as I call them earlier fanmag which

is Facebook, Amazon, Netflix, Microsoft, Apple, and Google. Um well, I mean that's sort of the sort of guts of the of the tech sector. I think you just is that yours and I remember discussing it with some colleagues. I don't want to take full credit about this, but I think that it's important to to look at the performance of the fanmag socks aside from the rest of the SMP to understand the rally and understand going forward how big a bet you're making on big tech in

the U S if you invest in the index. Nichols joining us here, co founder of Data Trek Research LLC uh here in our interactive broker studios, can you give us some some sense of how responsible this sector has been for the overall US equity performance. Yeah, it's been sizeable. Obviously.

If you look at the past five years, you can have a point of single names like Amazon that hasn't done all this all that well this year, but over the last five years is something like seven percent of the entire SMPS return, even though it's obviously was coming from a small base. UH and XLK, the e t F that follows it is now up thirty plus percent for the year. If you look at sector waitings, it's even more impressive for tech. If you add in Google, Facebook,

and Amazon that aren't in tech. You're talking about thirty two percent of the SMP, and that gives people pause. But I would point to two things. The first is there is no European or EFA tech sector to speak of. It's seven percent of EFA. So the waiting that you see in the SMP isn't just for the US economy. It's for US and Europe and Japan and parts of emerging market. So you're looking at a global franchise. And the second issue is, unlike a lot of other sectors,

tech is not a stranded asset. If you think about the energy sector, which I think by most accounts is virgin on stranded asset territory, it's now smaller than Apple's market cap or Microsoft's market cap and the SP five hundred and so you have a combination of things. A. It's a growth sector, be it's not a stranded asset, and it probably will never be. So we talk about the fangs in tech, you know, really dominating the market.

But that raises a concern of breath. When we think about the lack of breath of the market in this move up we've had, is that a real concern? Do you think to professional investors. It certainly is to professional investors, and certainly to our clients. We we get a lot of emails about this. The way we try to explain it is basically a permutation of what I just discussed is, Look,

this is the sector that is growing. If you want to put if you had to lock your money up for ten years, would you either it be in tech or in any other sector of the SMP. Although there's a question of which tech, right, I mean, yes, some of these big giants, particularly Amazon has had an amazing run of it. Uh, Facebook certainly as well. The new

tech might be different. It might be cybersecurity, it might be you know, cloud computing, and there will be a breakdown of the halves and the have nots within the tech sector. Netflix may be subsumed by another company based on the increasing competition and streaming. So how do you sort of understand the lasting quality of of of tech that's offered by these companies. Yeah, it's a great question.

I mean I would say two points. The first is, if you think about the Big four, the Big five or your fanmag paradigm, they don't really compete with each other very much. That's very unlike the Chinese tech sector, where you have social media companies actively pushing into e commerce and e commerce companies building social networks. We don't

have any of that in the States. The giants stick to themselves and that's kind of bad for competition in the US, but awesome for stock returns, and it probably won't change the second digit. You think about Amazon, what is Amazon right now? It's a cloud computing company. What does it want to be? It wants to be a cloud computing e tailor of AI solutions. That's what's really focused on. That's what recognition, facial recognition is about. That's what it wants to be. So if these companies do

it right, they should also be the next leg. When you say that there isn't a lot of competition, there's these like alarm bells that go off in my head. Regulatory risk, regulatory risk. I mean, that's sort of the big concern here is that there aren't major competitors for any of these tech giants. How big of a potential headwind are regulatory concerns given the fact that so far it does not seem like there is much motion on that.

While the talk not a lot of action, the most motion has been you know, California eight five, which is the Privacy rule which goes into effect on January one, and it is going to basically be the de facto US standard, but the Senate is still working on regulation. The bottom line to your answer your question is it really kind of depends on the elections, and it depends on how much traction the privacy aspects of this guy.

That's the only thing that really people care about. Otherwise, people i think are pretty happy with the way technology interfaces with their life, except for privacy that needs to get resolved. But barring that, regulations should not be that big a deal, and from a shareholder productive hopefully they're not because the system works really well for shareholders right now.

So as we think about coming off a very strong even if it would take a look at it from the peak of eighteen, still a real strong period, what do you think investors should be expecting for returns in twenty I've heard either boy load of mid single digits after the big run we've had, or I've had somebody. We've had some people come in and say, gee, the data kind of shows after a big double digit year, you're gonna get another double digit how do you how

do you thinking about it? We're very data focus on We've done the same math and it's two observations. The first day is it's very uncommon for the SMP to hover around uh zero to five percent up or down in the following year. In any year, it's like a thirteen percent out of the last ninety one years, so it's not very common. So I wouldn't put a lot of money on the idea that you're not going to

move very far. I do agree that you're probably going to get something slightly below long term average that is prefaced on some earnings growth, probably not as high as it's looking for a called three to five percent. And they said that, you know, is true to their sort of devish slanting word that they're not going to raise rates unless inflation gets really out of control and that will keep the ten year low and global growth is slow, so we shouldn't have much of a of a rally

and yields. That's the recipe for a decent but not great year. What would you say to people who argued that big tech has just taken the growth from the other sectors, like say retail that's gotten kind of covered by Amazon's rise. I mean, is that sort of what's going on here. It's a piece of it, And I'd say it's more of a feature than a bug as far as as far as stocks go, because you have sectors that competed like retail and fairly inefficient forms and

didn't really adapt in over time. Those should not receive capital because they're not innovating, and the companies that are do receive the capital and do receive the valuations that allow them to continue to grow. So I'd say it's a positive, but I get it, it's a painful positive if you happen to own retailers or other ship to sectors, or energy for that matter. Nicholas, thanks so much for joining us again. Nicholas is co founder of Data Trek Research based in New York City, joining us here in

our Bloomberg Interactive Broker studio. Nick is also a Bloomberg

Opinion Comments. We always love getting his thoughts on the market. Yeah, and this to me is such an interesting issue because people say, well, if you strip out the big tech from the SMP performance, it's really unimpressive or even a loss, and just say, you know, this is a potential problem for the market right, that there's weakness elsewhere, and is it a problem or is it, you know, one of the strengths of the market frankly, because if these companies

continue to innovate, or if they continue to make as much money, then it will be something that can drive things forward. But it is sort of one of the existential questions facing the market. Today is a great day to get an informed perspective on what is going on with the pound. We see a big drop today, the biggest, I believe since July. As we hear, Boris Johnson raised the specter essentially of a hard Brexit if there isn't some sort of trade agreement created with the European Union.

Allah what they did with Canada but in approximately six years fewer time joining us now. Marcus Ashworth, Bloomberg opinion columnist, And I'm wondering, Marcus, is your take here that markets are overreacting to something that Boris Johnson said with respect to basically raising the spectrum of hard Brexit again, or do you think that this is real uncertainty that the markets have been overly sanguine about in their post election enthusiasm. HIU high very much the former I mean, this is

a gift for next year. I mean, it's very difficult to get on board ahead of in liquid markets before the new year. But let's face it, the most stable government in the Western world now we have a very clear majority under Boris Johnson, a very undervalued, very very undervalued stock market. It's it's dramatically on the performed europe US, etcetera. This year. Um. Yes, there's some wibbly wobbily about whether

a deal is going to be done. I think no deal Brexit, which everyone in the media seems to go on and on and on about, has been clearly ruled out by the faculty, along with the rest of most of the mimeral media. But the reality is is that Boris dawn't got that sorted in very short order. He's just serving notice to both his party and indeed it's more of a domestic signal but equally to the European

negotiators that let's get on with this. Stop coming up the excuses why it should be seven years or ten years. That shows you how rubbish the EU are negotiating things. Let's do something. We both stand at one with each other. We want to diverge by X on this, and why on the other Let's just get on with it, stop coming out the excuses, and let's make everything better for everyone else. And I think that he has the backing and the confidence from from the European leaders which his

predecessor did not have. So bloody blah blah, stunning has come down to a level which is I think fairly priced, if not cheap, under pretty much every monitor. So as far as I'm concerned, do I think stuning will be higher in a year's time. Absolutely? Do I think the

stock market in the UK will be higher? Absolutely? It might have some wi wobbilis, of course, but I think it's it's one of the gifts of all Right, So Marcus asking me the time period we're uh, the UK and the EU and the US are gonna have to get down to hard work about bilateral trade deals. What do you think the market's discounting as it relates to those negotiations. Well, it's funny you'd say that, because that's exactly the way I think. I think it's a three

way deal. It's going to be done, and it needs to be done that way. If we have intelligence to link in the fact that the U, EU and the US absolutely needs a deal and vice versa to each other. Why not trying to do one big, happy deal? Now, I know that's that's a land of fantasy, but that's

where we ought to go heading towards. And I think the cently coordination much more now between the UK and the US, and it's whether you can get over itself and work out what with a massively declining manufacturing setcher in Germany and the France in on riots and riots a variety of other problems with governments across Europe that they could do with a big, nice, lovely fat trade deal to keep everyone happy in I'm going to be optimistic and think it can be done, and I think

we've seen that that whether Donald Trump caved in or the Chinese cajun I'm not getting to the semantics of that, but certainly it's the first bottle of trade deal has been done. There are is a way forward. In twenty was a very big year outside your UK equities, I think can still be okay, if not better than okay,

if the world's government's get out of themselves. So you said that you think that UK assets are dramatically undervalued heading into and that this is a gift for people who can bet on some of the stocks and bonds and housing and anything else. I'm wondering how the economy factors in because we are looking at a potential contraction in the UK economy for the fourth quarter. I think it's noise with its contract. I don't think it will contract, but let's us say it does. It doesn't mean anything.

Um there's a massive fiscal spending splurgs coming. I still think if you read what all right, that that probably the next cut, the next movement banging and should be a cut, but it will be an insurance cut like the Fed's done three already. There will be a hockey stick squish um coming when that that physical spending kicks in and a bit of a Brexit bounce and all that sort of stuff. But I think the banking will try that to resist cutting. But if they need to,

let's cut basis points doesn't really matter. The point is is that the economy is very soft, because that is why Boris Johnson won, because the economy was absolutely going into into a into a absolute channel of doom because of this extended Brexit nightmare which he is about to get us out of. Whether you agree with that or not,

it's just what's happening. It's democratically put forward. The EU itself needs to realize the fact that it's second thirdligest members leaving the fifth lige economy world is leaving it and it needs to shape shift and get over itself and make a deal. And I think that can be done politics aside by the end of the year. It may not be the full deal. I think that's where

the fudge comes. We've seen this for the US China trade deal, a nice little phase one deal by this time next year, and then we have Phase two which fills in all the gaps. That's that's the direction travel and I think the markets will will probably see through that over the course of the year, see through the politics, and all things being equal, it should be better for the europe stock markets and better for the UK and

and hopefully better for the US as well. So Marcuts just give us a just some color as to how this will actually proceed over the next days, weeks, months, the negotiations if any in terms of ratifying this Brexit deal between the UK and the EU. What are the actual steps in timing? Well, we have um the withdrawal agreement, build the web, if you want to call it, coming through first steps or second steps. Technically, um, right here, right now, in the next couple of days, that'll be

formally rapti fied um. But later in January, and then we're out of the Upean union from the by the end of Janut one. Then we're go into this period of negotiating in the transition period which the EU classic EU are trying to limit in June July. And you can't, you know, you must tell us we can extend. By this period, all this will be washed away. I'm sure of it, because it's it's just roadblocks that they're putting there to try and help their own procrastination, which which

suits their their sides. They don't really want to face up the reality of the fact. As I said, the largest colom the world is exiting um their single market. But it needs to be done in an elegant way for everyone either side. All the important stuff like aircraft flying and pharmaceutical licensing can be done in a heartbeats

already there. Um, it's it's a bit more motive on certain things, on certain tariffs, and of course financial services is something which will probably at the very end of it. It always is, but you know, there is ability to get a bare bones deal done by December twenty, which is the circled end the transition period which boris Johnson's and Dust announced today that he's going to make sure he is stuck to That is meaningless because he can

actually introduce a bill a month beforehand and extended. But it's just a signal. What's it is? Marcus, Thanks so much for joining us. I really appreciate your commentary. Marcus Ashworth Bloomberg Opinion columns covering European markets, giving us his thoughts on the ongoing Brexit issue clearly is coming to a head. Here. You can read more on this and other stories from Bloomberg Opinion at Bloomberg dot com, slash Opinion and on the Terminal by typing O p I

n GOT. One consistent theme throughout the past few years has been the incredible rush of cash into private markets

of all sites, of all sorts. Private equity, private debt, and the convergence of those two sectors in particular has led to a boom in jer's and acquisitions and buyouts within the middle market sector in particular, and Luckily for us, we have somebody who knows a lot about that, Karen Davies joining us here in our Interactive Broger studio as private equity managing director and group head at Huntington National Bank and usually in Cleveland, but today here in our

eleven three oh studios. Karen, I want to just get a sense of twenty nineteen. Deal count a little lower, valuations very high. What's your big takeaway? So, I think nineteen has been UM basically on pace with what was. If you look at the total value of deals, I think the number is we you know, we should end up in the fourth quarter very close to two trillion dollars of M and A. Again, UM, that's the same

number that was done in two thousand eighteen. The deal count, as you had mentioned, UM was a little off, a little lighter, but very large mega deals that got done. So the deal value was very high in the third quarter. And so we've seen that trend that the deal values are higher, the multiples are still elevated. UM. I kind

of think that's the new norm. I think that's the new norm with that much capital available in the market, you know, related to UM in the banks having capital available the capital markets, having capital sovereign wealth funds coming

in trillion dollars, a dry powder. On the private equity side, I think that those valuations are going to continue to hold, so one of the things at least, And I've noticed that, as you mentioned, there's just so much money coming into the private equity business over the years, and it seems like every big firm is raising just jillion dollar funds. But you, you're the one that actually has to put senior debt on these deals. You're taking a lot of risk.

Are you concerned? Are you seeing some of your private equity clients maybe doing deals in the last year or two that maybe they would not have done four or five years ago. Well, I think I think that there's still using really good discipline. I think that their investment thesis work is very solid um. I don't necessarily see them taking more risk that they wouldn't have taken before, but they're paying more for it, right, So if it's a good as set um and they've done their diligence,

they will pay up invaluation. We sort of hold study on the line in terms of how much senior leverage we're going to put out. Really it's the differential is coming from them, It's coming from the equity check that they're writing. So what used to be maybe thirty back in the day equity is now fifty six equity to

get a deal done when you're paying twelve times. And this is something that people have actually been talking about as something giving them confidence in the private debt world that there is that huge equity cushion, right or pinning that there is a concern what if the whole things the house of cards and the valuation is ridiculous to begin with, and the business model is unsound. I mean, are you seeing anything that reeks of that? I would

say not not yet. But you're as a lender, you are very selective in terms of where you put your dollars to work. And I think you're seeing the need to partner with the right private equity firms who have really good track records, who have an investment thesis that is sound, they have operating partners who know those in streets,

versus sort of being a tourist. If you will, you know, I'm gonna write a big check out of my private equity fund into a line of business that I know nothing about, and then I'm going to go ahead and line it up with a senior debt provider who maybe has no expertise or special specialization in that lending of that sector. That that is sort of a dangerous combination. So in the middle markets where you focus your team focuses, what industries are sectors? Are you seeing the most activity

right now? So we have a decent amount of healthcare related businesses, uh, not just private equity owned, but privately owned at Huntington Bank through the middle market footprint that we serve, So healthcare, um, some consumer good retail, Uh, pretty select there in terms of you better have a good e commerce platform. We're starting to see a little bit more automotive aftermarket transactions coming to market because those

would probably be cycled resilient to some extent. And then it's just pretty consistent business to business and you know, just your basic manufacturing. In the Midwest where we sit in Huntington's we see those companies, you know, trying to convert wealth right, sell the business, get ahead of a cycle and do it now. So are you seeing more buyouts, more mergers, more acquisitions. What's the goal other than just cashing out? Uh, Well, it depends where you ask right.

So the goal is private equity has way too much dry powder on their hands and they got to put it to work, and their gps are screaming, well, but but this, but this is this is not great right, That's not a great reason. That's not a good reason to do it. Um. You also have a lot of privately held businesses in terms of if you go out and look at the generational ownership who have said, when you do these surveys, we're absolutely inquisitive. We're inquisitive. We're

looking to sell. We're looking at take chips off the table. I need to transition wealth. I don't have a third gen coming in and I don't want to ride this business through the cycle. So you know, I think there's some there's a confluence of issues coming. You've got too much capital, You've got a lot of people trying to sell. It's almost like I think there was an article written that you know, everything in America was for sale. So if you read that, it's a little it's a little

scary exactly. So in your markets, like you know, when I was in the bank banking world, is a question how much of a loan would we keep on books versus syndicate out, how are the deals getting done now? Because if I were a commercial lender in these deals, I'd be concerned. Towards the end of the economic cycle, I've got buyers spending you know, big multiples, maybe a little b higher than I'm comfortable with. I'd want to sell down as much as I can. What are you

finding in the middle market in the credit side. Well, interestingly enough, the middle market syndicated UH lending UM space right now is way down in terms of where where we used to be in terms of volume because of the direct lenders doing the whole deal right there coming

in and doing the whole deal. There still are customers who really value that senior sub sort of transaction UM and I think that the syndicate market, when we agent transactions, is a very appropriate tool to use to manage risk. And and in your book or any lenders book, you should have diversity in your book. And that's what you use syndicated lending for is is to diversify. And so I think it's a tool that you we got to

continue to use. But it's certainly a competitive situation when you have one lender when them to do the whole thing exactly. Karen Daviess, thanks you so much for joining us.

Karen Davies, private equity managing director and group head at Huntington National Bank based in Cleveland, but joining us here on a Bloomberg and inactive broker studio giving us a rundown on the M and A environment, particularly for a mid market M and A uh is Karen mentioned another good year for M and A broadly speaking, maybe two trillion dollars worth of deals in Thanks for listening to

the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa bram Woyds. I'm on Twitter at Lisa A. Bram Woits one. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio