U.S. Is More Vulnerable Than Headline Numbers Suggest

at Bloomberg dot com. Right now, they let us move to the big story of the day, which is China US trade relations and the apparent breakdown of talks at the last minute that basically prompted President Trump to increase tariffs on Chinese goods. Joining us now in our Bloomberg eleven three oh studio is Patrick Shavannick. He is managing

director and chief strategist at Silver Crest Asset Management. So, Patrick, I want to start with what happened here because it seemed like markets were pricing in a deal would get done in the near term. All of a sudden, everything seemed to fall apart and it seemed kind of rapid. Is that a correct read on the situation? Yes, markets were pricing in that there would be a deal. Um

and uh. Starting on Sunday, when President Trump tweeted that tariffs were on the table for Friday, UM things start, you know, very different pictures started to get priced in UM. The The word for the administration is that the Chinese stepped back from a number of UM a number of commitments that they made. The word from China is that that was done by Chie Jim ping UM what kind of leverage they felt they had. I mean, I think both sides feel that they have the upper hand. UM.

The US. You know, it's just coming off of three GDP growth in the first quarter. I think some of the Trump administration feel that the US is fairly impervious to the damage that terrorists would do. And I think the Chinese feel that they're they've kind of got their economy back under control and UM with stimulus, and that, you know, they have the upper hand. So you've got two sides that feel that they have the upper hand and neither wants to give and they're going to test

out their assumptions. So Patrick, just looking at it from the perspective of corporate America, it seems that corporate America was could deal with tempers and tariffs on a limited number of goods but now we're talking much higher tariffs on more goods. How do you think Corporate America is

going to deal with these higher tariffs? Yes, well, the first thing, I mean, we saw that in the fourth quarter UM, where uh, you know a number of companies and their earnings projections said precisely that that ten percent was something that could handle and avoid was much more difficult UM, and it weighed down on their earnings projections, and that in turn is what helped contribute to the sell off in the fourth quarter UM. And it wasn't

really driven by trade headlines per se. It was driven by earnings calls that said, this is looking not very encouraging, and I think we're back to that UM, and that will be the mechanism through which you know, will feel the first tangible impact because these tariffs actually don't go into effect on goods and transit, so it will be about a month before we actually start to feel an

economic impact from them. One thing that I find really interesting is the more people who I speak who manage money, the more diverse views I get in terms of what's priced into the current market, with some people saying that the downside risk is limited because really the markets have rallied in response to the FED being on hold and other people saying that the markets could tank if some sort of trade agreement is not reached in these terrorists

were being in place, and I'm just wondering, where do you stand on that? So I think it's useful to stand step back a little bit from just the exclusive issue of US China trade tensions. UM, you know, where is the US economy? So, like I said, three growth in in the first quarter, UM, decent earning season, but I think that masked a number of vulnerabilities. You know, the the actual domestic drivers of the U s economy slowed to one point five percent in the first quarter.

A lot of the additional growth came from inventory build up and came from UH slow down in imports, UH in in corporate earnings. UM, yes, they're up two percent year on year, but in fact, and they rebounded a bit from a dismal fourth quarter, but that was led primarily by finance and healthcare. And UH eight out of eleven sectors in the SMP five hundred are actually we're actually declined further UM in Q one and UH eight out on different eight out of the eleven are down

year on year in terms of quarterly yearning. So there's some softness there, Um that I think that the market has focused on the headlines. Um, I'm not saying procession imminent. I'm not saying I'm saying that the slowdown and some of the vulnerabilities are um more serious than maybe some of the headline numbers suggest. So, Patrick, we earlier in the show here we had Michael McKee, Bloomberg's economics editor on and he kind of explained that, you know, tariffs

are effectively a tax on consumers to some degree. What is your view of the consumer in this scenario, in this environment that may be developing for the remainder of the year. So we are in a low inflation environment. Um. You know inflay Shan really went to a crawl in the first quarter. Um, but it started to tick up again. I think that's one of the immediate concerns of any tariff is the pass along cost. Uh. You know, so it's a fairly friendly environment for that. But um, but yes,

they are attacks on consumers. I mean the question from a strategic point of view is, you know, is it worth taking some pain now to get some gain? And and that gets them into the question of is this an effective is this effective leverage against China? I think multinational coordinated multinational UH pressure on China would be much more effective and much harder for China to retaliate effectively against than the go it alone bilateral tariffs that were imposing.

But you know, we'll find out. So whose economy stands to suffer more from the imposition of these tariffs, the US or China. So I think the US is more vulnerable than like I said, the headline numbers would suggest um and and I think we saw that in the market response now but also in the fourth quarter to some of those ranks projections and the hit that would that companies would take from tariffs China. China has economic problems. I don't think that they stem primarily from trade pressure

from the United States. I think they would exist with or without a trade war from the United States, and actually even if there was an agreement, they'd still have big problems to deal with. I do think that the trade war and trade tensions have focused attention on some of those vulnerabilities in a way that maybe the Chinese would like to avoid. So, just given the backdrop that we have over the last few days about these rising trade tensions. What is your view of the equity markets

right here? We've pulled back I guess about three percent this week roughly on this news. What are you thinking going forward here? Given this backdrop that seems to be developing. So we've seen a solid rebound this year from the sell off. UM. One of those issues, one of those issues, which was the FED raising rates, is now off the table that drove that. UM. The other, which was the prospect of a trade war, UM, is sort of back

on the table. UM. So you know, I think I think that given the vulnerabilities that I mentioned, given the fact that the economy was slowing and the corporate earnings were soft, there was, you know, the prospect and I wrote about it at the beginning of the week, UM in my monthly note of a correction in the market. UM. I don't see a recession. I I look at the recession leading indicators. Some of them maybe are yellow, UM, but most of them are green. Okay, So you got

so I'm gonna keep my eye on. Very good. Patrick Shravannic, Thank you very much. Patrick's managing director and chief strategist at Silver Crest asset management management joinings live here in our Bloomberg eleven three oh studios. We Lisa, all this talk about terrorists reminds me that despite all my years of business education, I need a refresher on actually how tariffs work. Who pays them, who gets the money? Uh? Fortunately for us, Michael McKee is with us. Michael's international

economics and policy correspondent for Bloomberg News. He joins us here in a Bloomberg Interactive broker studio. So when tariffs go on a ga jillion dollars worth of goods coming in from China, where does that money go? Michael? Do we does a treasury just all of a sudden get richer. The treasury does get richer. It's a question who pays it? Uh. In general, the tariffs are applied when goods arrive in aport.

Define that however you want airport or or seaport. And then uh, most of them are purchased by middlemen, by importers, which who handle the paperwork and deal with the transaction. And then it goes on to the end user and the importers UH pay the tariff. Then they either raise their prices to the final user or they absorb it in their margins. The big question for all companies now is you know, how much more can you keeping your

margins and what do you have to pass along? And then that money is collected by the Customs Agency Customers Bureau, and then it goes into the General Treasury revenues and you can see in the figures big spikes since we started this whole round of tear. You go back to the washing machines in February and last year. So so

this is how it works technically. And then we have the discussion of who is benefiting from this because President Trump tweeting today that it will be money that goes into the coffers of the United States that can support farmers. Can you walk us through how that actually would work. That's two different things. It goes into the coffers of the United States. Yes, it was a question who pays

for It's basically attacks on somebody along the way. It could be the middleman who imported this stuff, it could be the company, or the company can pass that along to American consumers, and as tarffs go up and up, it ends up in the consumer one on the number, one way or another. So we've paid that tax into the treasury. They have more money now we have a much bigger deficit. So is there really extra money we've got to fill this whole UH that has been created.

But even if you have it, can they spend it on farmers? That's a really open question because the President proposes, but Congress disposes as the saying goes, and they have to approve the spending. They have to appropriate the money, so the president can't just spend it as he wishes. UM to go on from there and give you probably more information than you want to know there is. There are problems with the U. S Food aid UH situation that have been there for years, and this has been

a controversy for years. First, our foreign UH money foreign aid in food. The law requires it be US grown and processed food that is then shipped overseas, and Foreign Aid Relief Agency says that doesn't help because it takes a very long time, bureaucracy, read tape, add to the cost. They'd rather we just give them cash so they can go to someplace close to Yemen and by the food that is necessary. And the other is the Jones Act.

You heard about that in connection with Puerto Rico. All food aid from the United States has to be carried on U S flag chips, which A raises the cost about thirty and b U there aren't always enough ships available and so it slows the whole process down. So there are bureaucratic impediments to making it work, even if

Congress agreed to spend the money. And we should note that the president's fiscal year twenty budget cut food aid assistance in half, so I'm not sure where why he We're not sure how the tweets kind of agree with actual with actual, So generally speaking, just stepping back, you know, putting your economics hat on, are the tariffs? What's generally the overall impact of tariffs in general? There's a short term boost to the industries that are protected by tariffs,

and we saw that with the metals tariffs. Is steel tariffs. As steel industry has has done well, uh, users down the line, especially small shops that have to pay more for their steel, have been suffering. We're also seeing now the jobs. There were jobs added in the steel industry, but that's starting to roll over and some of them are starting to to cut workers. So there isn't necessarily a long term benefit there, and there is a problem with the secondary user, the user down the line. It

also increases inflation. The New York Fed did a study of the tariffs in two thousand eighteen and found it increased the CPI by about three tenths of a percentage point. So we are seeing some inflation aspects that's really interested. Probably wants that at this point, although they might call it transitory. Well, although it could mask underlying weakness, right, I mean that that basically wouldn't be necessarily the contin inflation that they would want to see, and that would

increase consumers powers. Sort of interesting to me, And just real quick, we were speaking with Senator Rick Scotten on Bloomber Television earlier this morning, and he was saying that he would like to see the money that the Treasury Department collects from tariffs funneled back out in the term basically the form of subsidies for farmers. Is this a popular line here? Well, the President has a subsidy program which they put into place last year, twelve billion dollars.

They're trying to do. Ye. Uh, they haven't gotten it through yet, but they're they're working on it. And uh, you know, I suppose you could say it gets funneled back into it. But money is fungible. It's just more money into the treasury. As I said, we have a big deficit. They got to fund it somehow. Yeah, maybe this is this is how it's gonna gonna happen. Mike McKee, international economics and policy correspondent for Bloomberg, Thank you so much for being with us. Boos stands to lose the

most from the escalating trade ten Chin. Some investors, including Vanguard Asset Management, are pinpointing the emerging markets complex and here joining us in our BLOOMBERGINGNA actor broker Studios dr Andy Cooper. He is founder and chief executive officer of leap Frog Investments. He has based on an airplane. Luckily we actually have him on land today. Uh so, Andy, I'd love to get your sense of whether you would agree with this idea that escalating trade tensions will disproportionately

hit emerging markets debt. So we think that it's possible that there will be short term ructions, but the fundamental secular story is that these emerging markets are growing rapidly based on four billion people rising out of low income into the middle class. They've got new technologies like mobile uh, and are constantly accessing things they couldn't access before, like healthcare or financial tools for a hundreds of the cost

that they once could. So the opportunity for these folks to access what they need to really rise is huge. And busines this is that are serving them are going to do incredibly well. So in the next ten years there will be ups and downs for the markets, but fundamentally that opportunity set is going to be incredibly strong. So anyway I know it, leap rog you guys focus

on impact investing kind of describe what that is. So impact investing is where you invest to generate both a strong commercial return and a positive social outcome, so lower income people, for example, getting healthcare or getting financial tools like insurance or savings or pensions. The basic proposition is that you can have profit with purpose. You can make money and you can do good at the same time. And that's because you focus on areas where customers are

served incredibly well and helped to rise. I'm going to get existential here. What does it mean to do good? Huh? I think since I trained in philosophy, I could give you a very long answer. To that answer is that essentially, our simple view is that people who are low income have just as much agency, just as much capacity to rise over time as anyone else, as long as they

get the essential services they need. And we believe that when people get quality health care which is measurable, get quality insurance which is measurable by hard ratios like claims ratios, they are able to rise and then you're doing good. Okay. So this is more from a sort of economic and sort of income level point of view that you focus on more than say environmental or corporate governance. Yes, although we also take a very strong view on E s G and governance we think is a key element in

getting alpha in these markets. So we've found that well governed companies are actually able to extract a premium on exit. And as a result, when we've sold companies at leap Frog to the likes of Swissery or Prudential PLC, or Standard Charted or Fidelity, we believe those companies have been willing to pay a premium for well governed, high growth companies. So any what are some of the markets in which leap Frog has made investments recently. So we're very strong

on India, Kenya, Nigeria, Indonesia, Thailand, Vietnam. We think all of these markets are growing exceptionally rapidly, driven by these secular trends. Also, financial services and health care is are often growing at double the rate of the economy. So if you, as a private equity player, find a really good company that's just growing slightly above average, you can be getting to twenty or thirty percent growth rates in

your revenue per year. When we started talking, you were talking long term, and you were saying, you see the opportunity long term, there might be bumps along the way, and I have to wonder, you know how that plays into your role as a private equity investor versus public equity or public debt where a lot of money has

flowed into emerging markets. How do you view that. One of the exciting things about being a private equity investor is that you can hold assets for different lengths of time, and so when people are down on emerging markets, you can buy at lower prices, and when people are up on emerging on emerging markets, you can sell at higher prices.

So private equity gives you a distinct competitive advantage in these markets and also allows you to form a really deep relationship with the companies and their leadership so that

you can understand the dynamics in the market. And one of the things we found has been crucial in generating alpha is actually having great local and specialist talent, people who are m d, pH d s or actuaries focused on healthcare or insurance that are able to rarely see what these companies need and engage very intensively with them, real quickly, ten ten seconds. How are the returns? Well,

we think profit with purpose generates outside returns. We think we have a lot of evidence for that, and we think that we announced a seven hundred million dollar new fund for emerging markets today that had forty institutional investors in Italy, and the fact that that was achieved and that so many folks diligence the ten year history of leap Frog rarely shows that you can generate outsize returns, and we think the evidence is in that the markets

are going to shift. Larry Thinks has been saying this recently about purpose and profit, and we think the time of profit with purpose has really come. Dr Andy Cooper, thank you so much, Founder and CEO of leap Frog Investments, talking to us about impact investments investing on from a

private equity perspective. Bloomberg Markets has brought to you by common Wealth Financial Network the r I, a broker dealer that's one the JD Power Award for Highest and Independent Advisor satisfaction among financial investment firms five times in a row. Visit Commonwealth dot com. But we are still awaiting the opening of UBERT. I certainly expected this thing to be trading indications here at three versus the i p O price of forty five, So not a good indicated opening

for this highly anticipated IPO. To get more details, we welcome our good friends Shire Overday, technology calumnist for Bloomberg Opinion Sheet, joins us here in our Bloomberg Interactive Broker studio. So sure, what do you make of this? Yeah, it's obviously not good to break below the i p O price. Obviously. The thing that I wonder is if it's trades below the I p O price, does that mean something about doubts about Uber specifically or is it today as a

down market? Right? People are really anxious about this China renewed China trade uh kerfuffle and is that the thing that's really driving down Uber shares. There are a lot of questions here, right, which is, you know, how much is this market story? How much is this a ride sharing services story? Right because we have other IPO as it did better. How much is this a money losing story?

Because Uber really is a pretty late stage company to be going public and they're burning through cash faster at least in the past twelve months than any other I p O ever in history, according to at least Renaissance Capital research company. So I'm just wondering from your perspective, what do you think? Yes, so Uber is this weird?

It is basically emblematic of technology companies that started in the last ten years that it is now going public, so debuting on the stock market, but it's already very large and mature fifty billion dollars and kind of transaction value on Uber's platform in the last year, and also highly unprofitable three billion dollars of operating losses, which is a staggering number, and it's it's core business. Has just

open it change here forty two and change wow. That is compared to an I p O price of forty five dollars, which has on the low range, which has tried to, which was trying to be a concession to investors to say, hey, guys, we're gonna throw you a bone. Well they did not get thrown a bone. Yeah, and let me just point out that, um, basically everyone, every new investor who bought Uber stock in the last since December apart from soft bank, is now underwater on their investment.

Every single new shareholder, including people who bought in the IP. Yeah, it's interesting. I was just gonna go to that point. I think, you know, as people try to think about longer, what does this mean for the tech market, for the I P O market, I think one of the things we can take away is that clearly, certainly for these two ride sharing companies and maybe for some others, the valuation differential between the private market and what the public market.

It's very stark here, i e. The public market at a discount to the latest private market round. That's gotta be disconcerning for the financiers on Sandhill Road in Silicon Valley. Yeah, I would think so there's there's been some discrepancy, right lift, Even though they've traded down as a public company, it's still the share price is still higher than shares that the company sold privately in in the last private stock

sale about a year ago. So you know, that's still a gain for those venture capital investors, and people who bought early did very well and and if they held on, are still doing very well. So you know, it's a little bit of a mixed bag. But yeah, look, if you're funding trying to fund the next Uber and the next Lift, you want these newly public private companies to do well. You don't want them to seem like failures because that makes it harder to sell your investors um

on billion dollars of investments in the next companies. Although so Lift shares are currently priced still above where it was valued at its last private route of funding, not the same with Uber. Uber actually priced below that level to start with, and now shares are trading down. And I just have to wonder whether the incredible amount of money that's flooded into private capital markets has worked frankly the potential pop that we can see from these I p o s, because frankly, a lot of the value

has already been sucked out or value read you know, gains. Yeah, I think that's a that's a very fair question. And to be fair. It's a question that people have been asking for many years whether these companies, as they stay private significant longer. Again, Uber is a ten year old company.

This is not a baby company. As those tech companies stay private longer, does all of the value get sucked up by you know a small number of Silicon Valley venture firms or increasingly you know these sort of global funds like soft Bank or the Saudi Government Investment Fund. It's interesting. I bet you one group who's breathing a sigh relief this morning, or the JP Morgan bankers who lead the Lift I POC. They're probably saying, see, this isn't so easy, you know, And yes, our stock is

trading down, but look at the big brother Ubert. It's also having something absolutely Oh I absolutely know that, yes, exactly so. But it's really goes to it's it's it's interesting. I wonder if there's been a lot of press, certainly over line, but really over the last couple of weeks when you know, people are saying, gee, all these um white collar workers at Uber and and and Lift are making jillions of dollars I p O. But yet the drivers,

the people on the backs that really drive this company. No, no pun intended. They're working for essentially minimum wage. I went to the bad Press kind of weighed in on some of the you know psyche of some of these i PO investors. Yeah, it's hard to know, you know, don't have a really good sense of the investor sentiment

if there is kind of a common investor sentiment. But yeah, look, Uber and Lift they are highly reliant on the you know, maintaining a a unique economic relationship with these drivers that Uber and Lift need to pay them enough that they keep driving, but not so much that Uber and Left have to give away all of the economics from a from a ride to those drivers. So it's it's a

really difficult balance, a tight rope to walk. And you've seen UM drivers not necessarily happy with their wages, and there were some uh sort of strikes and such this week. So forty two dollars this is not the way that Uber wanted this morning on the New York Stock Exchange to go that acquiring to Eric newcomer. Definitely a disappointing day. As we watch the shares UH scroll across the New York Stock Exchange, Shira, do you expect this to dampen

the I p O calendar later in the year. Yeah, that's that is definitely something I wonder if um if now Uber and Lift, assuming they stay below their ip O price, that's not great news for Postmates, for Slack, for a peloton, for Airbnb, other companies that are at various stages of the listing pipeline. Sure, overday, Thank you

so much. It's been, I know, a busy period of time for you, and you've written some tremendous column sua ovidate technology columnists for a Bloomberg opinion, joining us here in our Bloomberg and active brokers Judios, Uber shares do to open forty two dollars below the forty five I p O price. Lift shairs are at session lows as well. Big question is is this idiosyncratic to the ridehailing service industry or is this something more significant about I p

O s today in two thousand. Thanks for listening to the Bloomberg pen 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 Abram Woyds. I'm on Twitter at Lisa abramwo wits one before the podcast. You can always catch us worldwide. I'm Bloomberg Radio