We Actually Can't Afford To Have Higher Rates: Axel Merk

at Bloomberg dot com. Well, yesterday, Scott Minor, who's the global chief investment officer of Guggenheim Partners, came out with one of the most barished notes I have ever seen yet in this cycle. He first started saying that the coronavirus is a looming economic problem, but sort of indicated that that was just one of many of them, and then wrote this, I have never in my career seen anything as crazy as what's going on right now. I have said before that we've entered the silly season, but

I stand corrected. We are in the ludicrous season. Axel Mark joining us now President and Chief Investment Officer of Merk Investments. Do you agree, Axel we ended end of the ludicrous season a long long time ago. I think the question is we still need to live and make a living and try to make sense of of some of it, right, um, and and and so and at first we we need to understand what's happening and so forth. But let in in the content of the virus. Right,

We've always had shocks. We know that usually markets were the worst when we've most talked about them. So the fact that we're talking about the virus probably means that we're not at the peak yet, because otherwise you'll talk to other even bigger experts, right. Um, But but in all seriousness, Um, the US is more isolated from a lot of what's happening here and and so that may well be one of the reasons why the US is doing comparatively well. And so we are focused on all

kinds of things. And I just might to remind people, Um, we were talking about World War three at the beginning of this year, which didn't quite materialize. So markets have a habit of moving on and with interest rates as low as they are, we quote unquote discount the short term things. And then so we live happily of after, in terms of living happily ever after that driven simply by the fact that there's so much cash slashing around the global system with uh, you know, central banks very

very accommodative. Well, one way to answer a question of interest rates were at six percent in the US, markets wouldn't be as happy. I mean, from that point of view, certainly is correct. Um. One one minor issue I have with with with that statement is that every time a crisis hits, we we lower rates. And I was arguing last year that lower rates don't exactly help the trade war right. Similarly, a rate cut doesn't cure an illness, and so I don't think that the rates is everything

that's driving it. But one thing of course that that takes place when we have money printing is we take perceived the risk out of the market. Risk premium get compressed, and ultimately what it does it it doesn't faster healthy capital location. Um. But at the same time, um, yes, I mean if we had a more serious disruption, and right now, by all means there are certain local disruptions.

Conferences get canceled and there's a fallout from that. Supply chains get disrupted, but big business is able to deal with some of that. So it's not as simple as saying, hey, um, the central banks are foaming here. The runway and therefore everything everything is fine. I do think central banks play a roland. This are a very important piece of the puzzle, but it's not everything that's going on. I want to pick up on what you said with respect misallocating capital.

People are looking at how companies are using extra cash they're generating to buy back their shares, payout dividends. They're not using it to invest in their businesses. Necessarily, we're seeing capital expenditures continue to decline. How long can this continue with an expansion versus having it bleed into the economy in a negative way. Well, the last time we talked about goldilocks was in two thousand four two five. It didn't end too well, but it lasted for several

more years. It's very difficult to to time those sort of things. And so the concern I have is that everybody talks about our economy is slowing down. I'm actually more learned about the other end. It's not the most likely scenario, But what if all this accommodative monitor policy, the fiscal stimulus we have, and presumably we're gonna get a Chinese stimulus in due course, is actually going to

get us a heart economy with inflation. Everybody says it's a good problempt to have, But how do you tighten monitor policy when we have so when corporations have gotten weaker, when they stretch the balance sheets, we cannot afford to have higher rates. It's one of the reasons we have these lower rates. But what if something goes wrong at the other end of the spectrum that things are too good, so to speak, um, then the fat needs to tighten

and everything crumbles. Right, and so a credit driven society, um is a more quote up what efficient society. Greenspan used to say that, But it's a more fragile society in some ways because when things go wrong, people fall through the crucks and and so, yes, we can sustain this for an extended period. I'm not convinced that this is the best way to move forward. But then again, I'm just an observer here, right, or humble participant in

the market. I'm not the one calling the shots. So we just have to deal with the cords were dealt with. So actually, just switching gears a little bit, looking at commodities, there's an area that has certainly felt the pain, maybe reflecting some of the global economic uncertainty. Maybe tied to the coronavirus. One commodity that is not where it seems to be gold. So we're seeing a lot of good movement in gold. What is your thoughts about gold here

given some of those uncertainties. Well, we've long looked at and invested in the gold market. The The one thing we observe is that investors want to have the cake and eat it. And what I mean with that is that usually when you have a crisis, people would run to cash, but maybe because people have had such amazing gains over the years, they rather diversified to gold or even more volatile gold mining, so that with a small

addition to the portfolio they can get diversification. I'm not suggesting everybody should do that, but we see that certainly happening. We do some of that ourselves because it's a ultimately cash isn't all that attractive, and so that's why people use those sort of things. What we see in that sector is that because the price of gold is moving, it attracts a lot of traders, and so inspective positions are at record highs and so forth. Those speculators love

it when things are moving. Those are in there the diversification folks saying that the folks who say, well, whatever it's going to happen in the medium term can't end too well. Those investors are there. So so we see that there is a really early wave of investors coming back in and on our gold mining side, companies are far more prudent um with with how they manage these minds than they had and had been in the last cycle.

Just about thirty seconds here, you're dot, you're dealt with the you deal with the cards that you're dealt What are you doing? What are you what are you allocating your money too? We have changed all that much. We we bought a little bit in China at the Chinese New Year and what we do the extent we could in US markets. But but that's really just play money and again that's not investment advice here. But but beyond that, we've really stuck to our guns and tried to look

at the Delmacom picture. And so yes we have exposure to risk outs. Yes we do have significant assets also to ads occasions to something something like gold and gold mining. Exel Mark, thank you so much for joining us. We really appreciate your thoughts and commentary. Axel Work, President and Chief investment Officer of MERK Investments based in San Francisco. Time to check in with Bloomberg Opinion. We're joined by

Bloomberg Opinion calms Tara la Chapelle. She covers entertainment, telecom deals, all that kind of fun stuff. She joins us here on O Bloomberg Interactive Broker Studio. So, Tera, it looks like this Sprint T Mobile deal is finally going to get done. But what's interesting about this deal is the delay and it's been delayed and delayed and delayed. Hasn't been so much at the federal level, but at the

state level. What's going on here? Yeah, So it's a really unique situation where this deal that I think most people for a long time thought was never possible, just because T Mobile and Sprint are such close competitors and there's only two other real national rivals in their market. So when the FCC and the Justice Department both approved the deal with kind of minimal concessions really surprised people

that the Trump administration was on board with this. And then um about you know, a couple dozen U. S States came out against it and decided to sue to try to stop the deal, and the number of states had kind of dwindled as different ones kind of struck individual concessions for their own state constituents along the way. But New York and California you were really persistent and resolved to try to stop this deal. And in the end of fourteen state attorneys general were part of this trial.

And even though they lost this week, I think it could have a little bit of a chilling effect on some deals like this. Yeah, well, you pointed out the dealmaker's face of fifty two headed monster. The idea of being that all of the different attorneys general could get together independently go after certain deals. What's the precedent for this? I mean, how active are the states typically when it

comes to walking deals. We don't really see them need to be active in the sense of going all the way to trial to try to stop a deal, because usually that would be the role of the Justice Department. Um, like we saw with a T and T time Warner, and you know, when states object to different things, what they'll do is work with the companies on their you know, individually, behind the scenes, and try to get concessions just for

their own states. So like the New York State, A G may go to T Mobile and say, well, we need you to do this for us if we're going to support the deal. And some states did do that in the end, but it was really interesting that these fourteen states didn't. And you know, even though the judges ad up siding with T Mobile and Sprint. I had been talking with John Stevens, the chief financial officer at A T and T last month, right after their their own earnings report, and you know, the trial was still

ongoing at the time. We didn't know what the ruling was going to be. But when we were talking about the impact of this case, he said, you know, it's a three headed monster now, meaning you have the FCC, the d o J, and now the states that you have to appease if you want to do a big telecom or media merger. And he said, in fact, maybe I should call it a fifty two headed monster. So

that's where that came from. And it's really interesting because I think a lot of people look at this deal and say, well, if T Mobile SPRINGT can get done, basically any mega merger can get done now, and you know that might be true, um unfortunately, but at the same time, I think that a lot of executives and dealmakers are looking at this and say, do we want to go through the process of a potentially long trial and PR fight with a bunch of really powerful state

attorneys general like Leticia James in New York, who you know, really didn't back down from this. It's interesting, but it seems like there's uneven application of kind of antitrust issues. I think back to the deal that you and I spent so much time talking about, the A T and T Time Warner deal. That deal just you know, the Justice Department just would not let go of that deal.

And um so, is there a sense is there a sense on Wall Street and among the merger lawyers of is it a good time to do a big deal or not a good time? But I think it's hard to know. I mean, I think if you aren't in sort of the um you know, one of the companies that's been targeted by Trump directly, maybe you are safer than others. You know, we saw this week the Federal Trade Commission is trying to crack down on some past deals that the big tech giants did, and you know,

that makes sense. But at the same time, It's hard not to notice that these are also companies where Trump has his own personal a grievances, So there is a little bit of a double standard there. The time warner at trial definitely stands out. You know, a case where the d o J was against it, but supporting this one. You said, thank god or unfortunately. The idea of being the that that Emerger liked mobile and spread is not good. Is that just because you expect the phone bills to

go up? Yeah? I think so. I mean, I think it's hard to look at this deal and think that it's going to be anything but that as a results that, you know, these companies that have been competing with each other so intensely for the last few years, unable to raise prices and having to keep their plans so competitive, They're not going to have to do that anymore. So why would they keep prices. The counter argument is they

have to actually build out a five G network. They don't have the capital to do it unless they have the market share and the and the pricing power or to raise more money. And so this will actually end up benefiting people by creating a more robust infrastructure. What's yours? It's a little bit of a stretch. There's a lot of caveats, and in the case of Sprint, yes they needed more funding. But at the same time, I think it was probably likely Sprint would have gotten bought by

someone else down the road. They have so many subscribers and so much valuable spectrum. And you know, it's true that T Mobile having this bigger scale means that they'll be able to kind of spread those network costs across a bigger subscriber base. But A T N T and Verizon already have that big scale, and their costs aren't any lower. Their prices aren't any lower, I should say, so,

I just really don't buy the argument. When you're going from four to three competitors, it is anti competitive, And so I thought that it was interesting that the judge disagreed with that. Tara la Chappelle always insightful, uh and wonderful columns. You can read them all at Bloomberg dot com, Slash Opinion or O P I N go on the Bloomberg Tera. L A. Chapelle as a columnist for us with Bloomberg Opinion. When we talk about the melt up or the skyrocket up, if you take a look at

a longer time series of the US equity market. Really, when you dive in, it is about the rally in a select group of shares, the fang shares, the big fanmag Actually, because we're gonna be speaking about one of them. Apple and Microsoft combine account for more than ten per cent of the S and P S value, which raises even more scrutiny of these companies because they are becoming systemically important in a way that few others have in history.

Joining us now on our a Grana senior I T and software analyst for Bloomberg Intelligence, I want to drill into Microsoft, in particular a couple of interesting developments when it comes to their cloud development. Can you give us a sense of what the latest is there in the broader context of the import of this country, of this company within the sphere of the US equity markets. Yeah. Absolutely.

See cloud has been talked about for a very long period of time, but when you look at the infrastructure piece of it, Amazon had the lead, and you know, had lead for years for for just because of the early entrant being the first, you know, person in the market. Um, Microsoft is doing a phenomenal job over the last six

seven years to scale that business up. It became the first and the most important part of satire when he came in what close to what six years ago now, and he has done a lot of good work in terms of working with the rivals, making Microsoft more open to open source software UM and now their cloud portfolio is second to Amazon and a very close second. It's not a question of before the gap was very wide.

Now if you are looking to, you know, move any of your applications to the cloud, you can choose one or the other. It didn't, it does. It's not a slam dunk that it has to go to Amazon. And the most recent win or the word big, you know, controversial contract is just around that. But you know, Microsoft is in a great position today. So give us the latest.

I saw some news out I guess yesterday federal judge temporarily blocked Microsoft from working on a ten billion dollar Pentagon cloud computing contract after Amazon, I guess, asked for delay. So give us a sense of how material that is

and what's your story. It's more of philosophical about that, you know, the second player beat the first player kind of an argument because financially, you know, with with the amount of money Microsoft generates per year, you know, billion dollars, billion dollars per year is not you know right financially that moving, but philosophically it's a very important thing. Um, we go back a few years when Amazon beat IBM

to a similar ci A contract. It was all up in there is that Amazon's now up in front running when it comes to infrastructure, and you know this is similar. There's a lot of politics involved in it because of Jeff Bezos and the president. Um, so you know there is a lot of argument over there, but both and you know, our take is both companies will do really good in cloud. They have really good products and um, you know, the market's large enough of both of them

to be there. So taking a step back, there's sort of an existential question when it comes to the US equity market about how much further tech giants can go when it comes to their share prices rallying. They've led the charge globally and I'm wondering when you surveil the landscape of the tech giants, are there any clouds? Are there really any kind of you know, harbingers of another time that's less suspicious for these or do you feel

like it's just going to keep on going. It's that's a very difficult question because a lot of propose it that way. A lot depends on the macro view. If if the global economy slows down, nothing is sacred at that point, tech spending, cloud being you know, a growth area, yes, but the degree or the rate of growth will actually

slow down for all products. So if you look at it, you know, our philosophy and going into or our thesis, what we should see a slow down in some of the you know, even the high growth areas, but it

hasn't happened so far. Now, whether it gets pushed off in the middle of the year the elections, does it if the virus like there are there are so many macro factors out there from you know, weakness in Europe, weakness, and you know, it's difficult to say because because the rate of growth is still holding up and and that's actually pretty impressive given where we are in the economic cycle. All right, So Microsoft stacks up sever the past twelve months.

Is it just the cloud? What's the story here? It is just the cloud. But actually it's a funny part is for Microsoft, it's not just the public cloud. It's actually what they call the hybrid cloud strategy, because what's happening is the you know, we we were a piece called cloud two point when talks about that, the next phase of cloud growth is not going to come from the netflix is of the world. It's going to come from the Disneys of the world that are moving their

entire business dig to a digital platform. So they are the ones who are upgrading it. And guess what, Microsoft is a dominant position in the legacy I T infrastructure. So when people move that, they buy both their on premise software and they buy their cloud programs, so they're actually having what I would call is the best of both words. Interesting stocks been it's such a nadela is. You know, he's been there six years. It's kind of an unsung maybe just in my mind, an unsung star

of Silicon value. You think about, you know, the Bezos of the world. He's being sung enough, he's being sung more now you think not. I still haven't come across the CEO going back to even you know, the days of IBM stilling around or Lei co cop. I think he's done better than any one of them because he has changed the philosophy of the company. He has changed the mindset of the company from who cared about Microsoft seven eight years ago and now the biggest player in

software is growing faster than the software industry. That's pretty impressive. Yeah, that's Valentine such an Adela. Yes, exactly round it covers all things technology for Bloomberg Intelligence. We appreciate him coming in here in our Bloomberg and Diactor broker studio giving us his thoughts on Microsoft, well investors across the globe, or trying to figure out the pact of the coronavirus will have on global economic growth. Economists are crunching their numbers.

We have our own economists with his own model. Car Rico Dona, chief US economist for Bloomberg Economics, joins us here in the Bloomberg Interactive Broker studio. So, Carl, what do you guys at Bloomberg Economics thinking about right here as it relates to the impact from the coronavirus maybe

on obviously Chinese economic growth, but also global GDP. Absolutely so, as we think about the impact and I know a lot of people immediately pull out the playbook from Stars in two thousand and three, I don't think that's the best comparison China had a much smaller role on the global economy at that time, and so I think the stars comparisons run a little thin UH and instead we can see some better parallels if we look back to the Thai the flooding in Thailand in twleven, or the

Fukushima nuclear disaster in Japan UH and how those disrupted global supply chains. And I think that gives us some more use a way of thinking about what we're seeing as we hear more and more headlines about, especially in the auto sector, production lines being slowed because they are missing parts and whatnot. Just to put some numbers around the forecast are China team has downgraded their Q one UH forecast to about four point five percent growth in China.

That compares to a running rate of about six high five type of territory for China in terms of the U S economy. We have modified our growth numbers to look for more weakness in the first half of the year. But that is not a coronavirus story. That is actually a bowing production story. The the stoppage of production of the seven thirty seven max actually holds the potential to move top line economic growth. So GD there's very few companies that can actually move the needle on GDP growth.

Uh Boeing jumbo jets are an expensive item, and so in fact, the the the volatility around production can impact growth, and that's what we're seeing in the first half fast nating. There's a question in the economists who we speak with, they say there's going to be a V shaped recovery. A lot of people say that any growth lost will be subsequently made up for when people start to go back out and and the virus fear subside or Boeing gets, you know, finished with their issues with the seven thirty

seven Max. What's your take on the on the likelihood of a V shaped recovery. So, if we're talking about Boeing production issues, if they get clearance, ramp up production and fill a bunch of orders, then absolutely you get that V shaped production V shaped rebound production. For the virus story, I'm not so sure that's the case because a lot of spending, especially in service categories, will not be replaced and so there you know, there certainly will

be some pent up demand. If you need a new phone or a new automobile and you didn't get to buy it because of transportation networks being shut down and whatnot, you're probably gonna go buy it relatively soon, So that demand does get pent up. But if you normally go to the movies five times a month, you're not going ten times next to make up for uh, the the misstime. Same with restaurant meals and a lot of stuff like that.

Also there's an income impact. So for shutting down the economy, a lot of people who are maybe earning an hourly wage as opposed to a salary, they're not getting paid and so they will have less spending power when when activity does start to bounce back. Doesn't mean again that there's not a little bit of pent up activity. You have to buy groceries and whatnot. But I think that we're looking at last income which will actually lower the

level of GDP growth. For so, Carl, we think when we think about GDP growth, certainly in the US but certainly around the world as well, we think about the consumer, of the strength of the consumer. We had some US retail sales number came out this morning. On that surface

looked pretty good. What did you take from those, Well, when you say we think about the consumer, we pretty much think only about the consumer, because the core, if not sole engine of economic growth for the last quarter, four quarters, twelve core, or sixteen quarters, I could go on,

has really been consumer spending. And so as we look at the retail sales numbers today, they're basically consistent with the same type of consumer activity we saw in Q four, which was not great, but it was not terrible either. So it's enough to prop up economic growth in the

vicinity of two percent or slightly less. So consumers are holding up and certainly, uh, you know, to kind of look at the silver lining of all of this, which is kind of a perverse thing to do with oil prices coming down as much as they did, we're seeing prices at the pump coming down, uh, and so this is giving consumers a little bit of an energy dividend, and they're spending accounts. And we saw that in things

like restaurant and bar sales being quite strong. Often that's a give or take category of gas becomes more expensive, people eat out or drink less in vice versa, and so we saw some signs of that in January. Uh, the gas price decline is going to be much more evident in February, so watch for those discretionary categories that

to perk up. Where we would be concerned that things are really falling apart is if you saw consumer sentiments start to pull back, and that is not the case, whether you look at equity markets or whether you look at the preliminary reading from University of Michigan, uh the surprised expectations to the upside this morning right coming in

at the highest level since two thousand and eighteen. Is this a leading or logging indicator, Well, it depends, but it can often be a leading indicator heading into economic downturns. If we look at past recessions, you see consumer sentiment roll over before the downturn actually occurs. Now, this could be for two reasons. Maybe households are very intuitive and they can read the trend in the economy before it

actually occurs. Or maybe the pullback and sentiment actually contributes to enough of a down draft that it pushes the economy into contraction. Whether it's chicken or egg doesn't really matter. But the important thing is it is a leading indicator of recession, and so you don't see this acceleration going

into a downturn. So again, there's lots of negative headlines out there, but we have to remember, with unemployment as low as it's been going all the way back to nineteen nine, UH, wage pressure is not great, but there is some upward trajectory. Their wage stagnation as a myth, we're seeing wage growth. Consumer spending should be able to hold in at some base level over the course of this year, which means US recession odds still remain relatively low.

I put him in the vicinity of about fifteen, down from a lot more. Well, it was temporarily a little bit higher last year, but I was never big into the notion that we were on the cusp of recession for the reasons I just highlighted low unemployment, wage pressures, and consumer spending power. Kara Kadonna, Happy Valentine's Day and likewise, thank you sporting the pink sure today he is supporting

the pink shirt the curl in his hair. Lovely Kara Kadonna, chief US economist for Bloomberg Economics, shoining us here in our interactive Broker Studios. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple podcast or whatever podcast platform you prefer Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa abram Woits. I'm on Twitter at Lisa A. Bram Wits. One before the podcast, you can always catch us worldwide. I'm Bloomberg Radio