Both Sides Benefit from Trade, Jessop Says

and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course on the Bloomberg So, you know, we've been focusing so much with respect to trade talks between the US and China that we forgot about all the other places in the world, including in Europe, where evidently, uh, they are kind of not that please. You have them trying to negotiate their own trade deal

with China. Uh. And then you also have a fact that President Trump now just throughout these potential tariffs on the of all autos that come into the US that are from outside countries. I want to bring Richard Bravo. He is a Blo and Broke news editor who has been tracking this. What's the mood there when it comes to trade discussions. Well, there's certainly a lot of confusion right now in Europe because nobody really knows what this means and what the likelihood of these tariffs actually being

instituted are. Um. But as you know, the EU is currently in negotiations with Washington over steel tariffs, and these steel aluminium tariffs are set to go into effect starting June one unless they can make some kind of side agreement. So uh, this new set of possible tariffs on automobiles really does throw a wrench into those negotiations, which which are ongoing. So I think the overriding sentiment right now

is confusion in Europe. So I'm trying to get a sense of how realistic people think it is that the US is going to impose tariffs on foreign cars coming into the US this point, do you have a sense of that, Um, it's it's hard to gauge at this point. But when the steel tariffs were imposed, those went into effect in March, but the initial threat was about a year ago. So even if these auto tariffs do you go into effect, it's not something that people expect would

happen immediately. But I mean looking at at how the Trump administration engages in these deals, UM, many times they don't come about, but it obviously because Germany has so many auto exports, it is a threat that they do need to take seriously, irrespective of whether or not they think it will eventually come to pass. All bark, no bite that it has been the mantra. Richard Robert, thank you so much for joining us. Richard Bravo is a

Bloomberg News editor coming to us from London. Volkswagen shares down almost three looking at BMW shares down also almost three percent. Jonathan knows they try to weigh what these potential tariffs could mean. You found some price action. Congratulations, because futures are doing absolutely inspect to start on any of this, I want to bring in Julian jess Up of the Institute of Economic Affairs, the chief economist joining

us from London. I'm Julian. How do you view the events and the reporting around the trade issue, the threat of global auto terrorists from the United States? Is this just a negotiaring strategy? Well, I mean to be honest, I find it a bit depressing either way. You know, whether or not you think it's good or bad politics. It's certainly bad economics. This sort of protectionist measure is

both unfair and inefficient. It's it's unfair because it forces US consumers to pay higher prices and have less choice than what otherwise have done. And it's inefficient because it's reducing the competitive pressure on domestic auto manufacturers in the US too, to improve the quality and price of the things they want to try and sell. So it may or may not score some short term political points, but but in the long run, I think it leads everybody

worse off, just in terms of political points scoring. Chancellor Murka and Premier League saying they're committed to free and fair trade representing two countries with the biggest trade surpluses on the planet, Julian distincts of hypocrisy, doesn't it well, not really, I think as far as Germany is concerned, that the reason why they run such a huge current account surplus is essentially because they hold back domestic demand.

It's not that they cheat somehow in international markets. China perhaps is a bit more guilty of that, the manipulation of the of the currency there and also sometimes dumping of things like steel on on on world markets. I think that is one of the few areas where some form of intervention and some sort of trade barrier might be justified. But I don't really see any of those arguments applying to the exports of cars from from Europe to the US, which is simply meeting a demand from

US consumers themselves. So what I'm trying to figure out is from an economics perspective, you started out saying this is depressing regardless of whether it goes through. Do you expect that the increased trade tensions, regardless of what actually happens from them, will actually reduce economic growth in the world over the next couple of years. Um, well, I think they will, and we've got a preston for that.

I mean, in the wake of the global recession in two thousands and two thousand and eight, lots of countries started to introduce new trade barriers that they didn't have before. Um. You know, it's much easier to argue for protectionism when your own economy is weak, and that I think actually prolonged the slump. It certainly led to more weakness in well trade than you you might have expected. So again there's there's this contrast. You score some sort of short

term populist points. Maybe it's good politics, but economically it holds back growth. Certainly, if we're looking at the future of growth in over the next ten twenty thirty years, a lot of it is going to come from emerging markets, and China has been leading, but others will will start to catch up, in which case you certainly want more free trade. It might be you end up importing more from these countries yourself, but you've got more opportunities to

exports too. Something has got lost over the last couple of weeks, Julian, the focus seems to be once again on the trade surplus or trade deficit with respective countries, when for a moment it was driven by Wilbur Ross, the Commerce Secretary, and it was about the theft of American genius, It was about intellectual property, it was about real issues about the future, not just headline grabbing stories

about getting trade surpluses down two billion dollars. Has this administration sort of lost its way a little bit as to what it wants out of the Chinese? Well, I think this sort of illustration in particular has always been

a bit muddled about what trade is about. So it sees a trade surplus as a as a good thing and a trade deficit as as a bad thing, whereas all those things really are is the result of decisions made by consumers and companies that you know they might choose to buy good from overseas, wether than one produced domestically, it's not not a zero sum game. You know, both sides benefit from trade, whether you're an import ural or the exporter. Um. What I'm also worried about is increasingly

spurious reasons being used to justify intervention in markets. And a good example is the ctential security concerns over over intellectual property and so on. Sometimes that's valid, but it's not obvious to me it's valid enoughy single occasion. Another is food safety standards or animal welfare standards in the

agricultural sector. I think people are finding excuses to intervene for very narrow protectionist interests rather than thinking about the broad economics and whether they're security issues, whether the auto situation is a national security issue and aid to the president. The headline just coming across the Bloomberg Julian, the trade deficits are a national security concern? Should they be? Julian,

that's absolutely ludicrous, Um, you know exactly. I mean, you know, I run a run a deficit with various high street shops in the UK because you know, try as hard as I like, there's nothing that they want to buy from me, but they've got plenty of things I want to buy from them. I'm not worse off because I run a trade deficit with my local coffee shop. Coffee shops not looking to dominate the world though, is it, Julian, Well,

some of the high street chains particularly are. But um, we have to we have to recognize that, you know, China is already the world's second biggest economy. In time it will become the become the biggest. We want free trade with them, of course, and if there are particular areas where they're cheating or we don't trust them fair enough,

we might want to intervene. But but the idea that you can measure the strength or witness of relationship purely by the bilateral trade surplus or deficit Parde is economically illiterate, Julian jessup Sellagasari really feels. I think of the Institute of Economic Affairs, the chief economist joining us from London. I want to cross over to Allison Williams of Bloomberg Intelligence,

the senior analyst for US banks here in New York. Allison, you've been following Deutsche Bank very closely, and what have we learned about the strategy this morning? So I think that I guess a little surprise in terms of you know, cuts to the equity business, cutting head count, um, you know, giving some new targets. The key for Joute bank is going to be, um you know, firstly meeting these targets.

I think that's been the disappointment with some of the prior management and um you know, in my opinion, um and and Argent Bauwer who co covers Deutsche Bank with me. You know, our view is really just that it's the revenue side of things that are that's much more difficult. Keep in mind that um, you know, trading is a significant portion of the business. Uh, the equity has really

been the the area that's trailed. We focus on fixed income mostly because it's more important to them, but equity is really where they've sort of not been able to regain market share. And then you know, looking at other businesses, the German retail business has not been one with a lot of opportunity, and as a management they've they've sold

off some of that. Um So I think, you know, delivering on costs I think is something that Sewing has made it very there that he is going to deliver on that the whole second, Allison, because this is actually really important, you say, delivering on costs, in other words, job cuts. But I want to quote the head of Hermes Eos on Bloomberg Television saying, job cuts in itself are not a new strategy and they're also not value creating. So do they actually give a strategy or do they

just look at cost savings? So from a true strategic perspective, UM the changes, and I think they're really more sort of at the at the margin. You know what what they had said with the last quarters earnings is that UM they are going to try to you know, reign in and just focus more on their core competencies, more of a focus on the European business, pull back from

the US rates business about ten percent. And then you know, similarly within the global equities unit, UM again just trying to to cut down the business and focus more on the profitability aspect of that UM and so UM, you know, to your point, job cuts in and of itself, and it sort of doesn't matter this thought eyes of the cut. That matters where you're cutting in, how effective it's going

to be. And you know, the tougher part of it is, you know you can come in and cut jobs, but can you do it in a way that you can kind of still keep your good people that you um. And that's not to say that everyone is not good, but to keep the people that are, you know, imperative to the strategy of the people that are in the

units that they want to focus on. You know, you're gonna want to keep morale up and keep those people UM And can you do that successfully when you're in this more broadly cutting mode that creates a lot of uncertainty for everyone? Now, Allison also doing it quickly enough, we all know to keep going back to this. We all know some really talented individuals at Deutsche Bank who have stayed with the bank despite the last few years

which have been terribly difficult for morale. But at the same time, Allison, this equity story has been hanging over this bank now for months and months and months. Could you imagine trying to work in the equities business over the last few months at Deutsche Bank and trying to gain any kind of business from anywhere at all when our reports that that unit is going to be demolished

over the next couple of months. And I think that is what you've seen in the equities of revenue numbers and keep in mind, you know, the prime business was one of the businesses that that really suffered with some of the legal concerns. That's not surprising, you know, versus several years ago when all of the banks were weak during the crisis. Here you had someone that people were worried about the viability of the of the franchise and

they had other people to pick from. And what we learned from the crisis is once people make those decisions, they generally tend not to go back. So even though Deutsche Mac may have retained those clients, UM, part of the wallet may have going to Peer. Peer's JP Morgan talked about some of the progress they've made an international prime over the years, and even though Deutscha said they've won back the clients, they haven't had, you know, the the upside and growth that some of the US piers had.

So I think that gives UM you know, credence to the story that it has been tough to try to UM, you know, not only win back market share but sort of keep what you have UM you know, with with with a tough environment at one company, in general, environments challenging but stronger competitors. Alison Williams of Bloomberg in Stelligence. Great to cant shop with you on the story that

keeps on giving. And the big question, you know, John, honestly, is are we watching the beginnings of an emerging markets crisis? It's a good question. And does the central bank in Turkey have any credibility with the market because quite clearly three basis points in an interest rate hike yesterday wasn't enough to to stem the bleeding of the Turkish lira. Yeah. Well, one person who says this is not a crisis is Jeff Dennis. Let's bring him in. He is the head

of Global Emerging Markets at UBS Investment Bank. We love having him on. Jeff, thank you so much for being with us. You wrote in a report this is not a crisis. In another report, this is not a crisis. So you know, at a certain point you have an increasing number of voices saying this could be the precursor of something that we saw in Why do you think it is not? I think the comparisons of n are

frankly ridiculous. Um what was Certainly there are countries like Turkey that do have very weak fundamentals that are being picked over by investors in a rising dollar environment we've got at the moment. But in the late nineties you had a number of Asian countries running six seven eight percent current account depth as they will have fixed exchange rates, they're running out of reserves um. It was just a

much less table environment than we've got today. One of the advantages for emerging markets of a floating exchange rate regime, which of course is what everybody's started to adopt instigation crisis of the late nineties, it gives you a uh an ability to take some of the pressure at the pressure cooker by actually allowing the currency to go down. I still think you have to look at Turkey as

a little bit of a one off in this environment. Think, what's very interesting about the situation of this warnings, Although there's still a lot of doubts about what's hapving in Turkey, some of the other em currencies that have been out of pressure recently, like the random like the pasto in Mexico and the Brazilian rayal are well off their loads. And so this still feels to me like an individual

country problem, not a general emerging market problem. Jeff. To that point, the price sanction of the last couple of days to suggest that Turkey is decoupled from the wider em story. So let's spend a little bit of time talking about Turkey an emergency three hundred basis point hike yesterday. But the events and how they rolled out and how they played out were really interesting. First we find out there's a Central Bank meeting, an emergency one because we

weren't expecting one until the first week of June. And then the Deputy Prime Minister of Turkey goes on Twitter and says it's time to regain the confidence of investors. Was that the government given the central bank the green light yesterday, Jeff Um, I suspect that is the case.

It was the government giving the Central bout of the green lights, and and if that was a kind of oblique signal to do that, that that's kind of helpful because of course, as you imply by your question there, Jonathan, And actually the backdrop to all of this is the clear desire of present eard One to get involved directly in monetary policy in Turkey, which is obviously what he said in the statements a few days ago, which is

what sets the thing going. So I think, to be honest, the speed with which, even though a great rise was definitely needed, and the speeder which it came through was somewhat surprising and perhaps does indicate that the government, so to speak, might have given them a you know, a behind the hand if you like green light. Um. I think the point we make here is that this is probably the minimum they had to do. It's pushed real interest rates in Turkey up to about five basis points plus.

There's still concerns about things such as the high price of oil, a very wide currenting count death that. As I've said, so it remains to be seen whether this will be enough, and certainly we're not changing our record inndations on Tokey were underweight in equities, we don't like the currency generally, so it's a wait to see here. But this probably did move through a bit quicker than

we'd anticipated. Yeah, So the answer, Jonathan Varrow is that Jeff Dennis overt Eubs is not sticking his hand in this blender. It's like trade in a blend. It's just, God, what a brutal image, Jeff. I do want to get your sense that you're saying that that Turkey is an idiosyncratic story. We have a bunch of idiosyncratic stories. We also have Argentina. We also have elections that are coming up in Mexico. We have some issues in Southeast Asia.

I'm just wondering, at what point do these idiosyncratic stories add up to something more, especially given the fact that we've seen so much money go into emerging markets through exchange traded funds, through index strategies that are indiscriminate. The point we make about all of this is, this is all of the margin being driven by the rebound of the dollar. The dollars gone against the euro to one seventeen over the last several months. That always pulls money

out of them and pushes currencies under pressure. And of course that has done as as they poked holes in some of the weaker stories. Now, Um, the house view here is the dollar goes back down again later this year towards the one thirty level. Obviously, the talent situation is a bit of a risk to that view, but that's what the house view is here. Now. If that's wrong, um, and the dollar continues to rally, well, these things will

become a more generalized crisis. I think the point we're trying to make here is on our long term view on the U. S. Dollar. There's not enough going wrong in the emerging markets overall. Even though you've got politics in Brazil and politics in Mexico and Argentina has obviously been a concern, there's not enough negative going on in them to cause a major crisis here now, especially if the dollar goes back down again. Now, your last point

is very important. We've seen massive amounts of money coming to the M fifty four billion dollars into e M equity funds so far this year, and very little that seems to have gone out so far. If some of that does start to come out, that will be a little bit of a negative. But we see this as a temporary decline in the M driven by a stronger dollar, which ultimately we think we'll roll over and we'll give

us a better environment for emergency markets later this year. Jeff, It's almost the e M equivalent of a stock pickers market at the moment. Pick your spots, take your opportunities, and make sure you've got a long time arising. If you apply that to we am right now, Jeff, what are you looking at? Well? We um we as actually not a lot of markets. Why major markets we have got big overweights, and we like Russia, we liked we like career, where we think the earnings numbers are going

to start to improve again. We actually in terms of markets that have been under pressure recently, we're taking h well, you know, we haven't overweight Indonesia, so we'd buy that back. Those are three markets that I think are worth looking at. Selective exposure in Central Europe, um more neutral in countries like India and China. But those some of the markets

that we're looking at um um in this environment. But our big call here is the dollars going back down again eventually, and that's going to bring these sentiment back. I think for m Jeff, what would have to happen to make you rethink your thesis that this is not a crisis and that everything is just fine. Two things. First all, an ongoing dollar rally, dollar continues to move up to say, US inflation goes up more than we think,

and the Fed's got to do more. Our house few here for examples, the US and placing pressure is going to fade a little bit in the second half of the year, but if inflation continues to rise, the Fed's got to get more aggressive. Bond yours get up a lot more, pushing the dollar higher. That would obviously mean more outflows from me. From a fundamental point of view, what I'm watching above all is the earnings momentum now, corporate earnings growth, and e M last year was extremely strong.

North of that, the forecast are running around fifteen this year. Our own numbers a little higher than that. If those earnings numbers start to come under pressure, that would indicate that the pressure we've had on currencies recently, on the markets generally, is starting to contaminate the corporate story, and that would make me a little bit more cautious. So from a fundamental point of view, would definitely look at the earnings numbers as well as of course monitoring the

U S currency. Just to wrap things up, just finally, Jeff, what's the response of the Federal Reserve if e M does fall out of bed? Do we have a federal reserve that is less sensitive or increasingly sensitive to what's having abroad? Because j Pal spoke about em very recently, didn't suggest to me we had a Federal Reserve chair that was sensitive to what was happening abroad. I don't think the Fed is going to remotely design policy based on what's going on abroad unless you have a fully

fledged crisis. I want to make the point EM is down ten to eleven from from the high. It is not This is not a crisis. The Chinese currency hasn't moved, countries have not moved as all this is idiosyncratic, is driven by the dollar. I think the dollar will play a role in the Fed's policy as part of their their metrics. But what's going on in EM unless you end up with a full blown prices, which you're not going to have in our view, that's not going to

make a lot of difference to them. Jeff, really strong and really reasoned, and we appreciate your time this morning. Jeff Dennis UBS, head of Global Emerging Market Strategy. Scott Mushkin joins us now he is Wolf Research Senior retail analyst. Uh joining us by phone. Scott, So, what happened here? Why are people trading down Best Buy shares so much? Right now? Yeah, thanks for thanks for having me on.

I think there's shares are down because of profitability. Um. You know they had a monster comp as you as you're talking about ten point one perceis incredible. Um, but the flow through to the bottom line I think was less than people expected given that that comp And frankly, that's exactly what happened with Target yesterday. Um. You know, strong sales, um, but the profitability wasn't wasn't there? And

I think it's concerning, uh, concerning some investors. What does this mean that they're basically slashing prices so much and offering such discounts that they don't actually make any money? Is that that the answer here? So so I don't think it's the prices that they're slashing. It's the cost of doing business. It's the omni channel cost to do business, so it's the delivery, it's the in store service. So it's just costing more now to be a retailer and

to be a relevant retailer. And again, same thing with Target yesterday. All right, So if it's the same thing with Target yesterday, is this eventually going to work out in their favor or are they going down the wrong path now? I actually think Best Buy is going down

the right path. Um. I think they are creating relevance for themselves um and Hubert, who runs the company, has done an amazing job emphasizing culture we're seeing, I think a distancing between you know, like considered surviving retailers and the ones that are probably going to be more trouble. I put you know, Home is not just a survivor, it's a thriver. Um. You know, clearly best buy last man standing in that industry, but putting a strategic plan

that that makes sense. UM and Target looks like it's it's moving into that category now too, with with with Brian Cornell is doing over there. So no, they're they're doing the right stuff. It's just costing them. It's costing them some money. Scott. You know what I'm struck by People talk about how there really hasn't been that much inflation, and yet it seems like there are these extra costs.

Prices are going up. Certainly for the retailers, they're just absorbing them, uh and it sort of is cutting into their bottom line rather than passing along, Uh, the increases with higher prices for consumers. Is that really what's going on here? Such a great question, and and to a degree, yes, And that where we're seeing it the most right now, where we're most nervous about what you're talking about is in the consumables area. Uh, price increases go right through

Bentonville Walmart's headquarters. UM. Walmart's been dragging their feet on on raising prices and getting consumables, and that's making everybody nervous. I mean, obviously we hate Campbell's report UM and talked about really no pricing power UM. So this is an issue. We do have rising costs, rehbalizing logistics costs, we have rising labor costs in some cases, rising input costs UM. And you know, right now there's a lot of friction

at retail to get that pricing through. UH. Some other people like Srwyn Williams and paint um they're they're having more success UM. But right now consumables is a focal point of you know, will we see price right now? We're not? Is the idea here that when retailers have tried to raise prices on these consumables, people just go elsewhere, that they just lose too much volume? Yes, And and

it's also business plans. You know, Walmart's plan is to take a lot of share, So they're getting a lot of volume share UM, and that's offsetting some of the rising costs that they're seeing. So there their their plan is to take share in the US, and so it's different agendas at different companies. And right now Walmart's agenda is to take share, and they haven't let price through as much as we would have thought. We'll see as time goes on, by the way, because these pressures are

our building. So it's definitely a fluid situation. Hey, Scott Muskin, what's next for these companies? I mean, is it getting their online game in order? Is it making the stores more attractive or shrinking the store footprint? What's next for them? I mean, I think it's optimizing the stores as you talk about. I think it's omni channel, and I think it's very specific to companies like Target. We were really believed they need to have a complete shop, they have

to do more with their food. UM. So it depends on you know, it's company to company um. But generally optimizing the store base, improving the store experience, and then working uh their omni channel and having a very good e commerce and website. So that's what's that, That's what's next, and they've got to keep you know, they gotta hope the economy keeps coming. Scott, who is the most vulnerable.

I mean, we continue to think the most vulnerable companies are what we call the multi regional UH supermarket chains, guys like Kroger, a'll hold, Albertson's merging into Right Aid. And the reason is this Amazon is really going after the consumables area with you know, with Whole Foods. But there's other other factors there. You have all the h you have Walmart building share, which I just talked about. Um, you have very strong regional chains like an ATB down

in Texas or Doubula is up in Boston. So those those companies are really fighting a pretty strong battle. And me we just talked about the lack of pricing power there too. So those are the ones we we worry about the most. All Right, We've got to leave it there, but I want to thank you very much. Scott Mushkin. He is a senior retail analyst and managing director for Wolf Research. Talking about the best Buy as well as the efforts on behalf of Target by Brian Cornell. Very

interesting stuff. Pere to give us more details and to explain what's going on with President Donald Trump and the it seems to be off meeting, but between the President and North Korea's leader Kim Chung. I want to bring in Craig Gordon, executive editor for Bloomberg Bloomberg Bureau chief for Washington, D C. Craig a surprise or not so much a surprise, as President Trump previously had said he

didn't know whether the meeting would take place. Yeah, I'm a little surprised that we got this letter this morning. I think there was definitely there were a lot of bearers signs if someone was going to take place. There had been a lot of verbal sniping back and forth between the two sides. Trump seemed to keep open the possibilities late as yesterday at the meeting might still go forward.

But yeah, we had dropped a letter on Kim Jong n this morning saying that based on Kim's rather bellico statements about Mike pens and a few other things that have come around lately, that there's really no reason to go forward with the summit in Singapore. Well. Having said that, this also comes at a time when North Korea said it shut its nuclear test site ahead of the planned meeting.

Could this be a situation where the President got what he wanted and then decides doesn't necessarily makes sense for the US to meet with North Korea. Sure, that's a possibility. I mean, it's interesting to me because both sides seem to be doing, you know, a little trust building steps to try to salvage the summit. They obviously shut down the nuclear faciliar destroyer, blew it up. Whatever they did.

Trump and Secretary of State Pompeo have been kind of easing back on Trump's early rhetoric that there had to be sort of immediate to nuclearization. Pompeo said in testimony yesterday that it had to be verifiable. Trump said on Fox News this morning that it had to be uh, sort of it could be phased in, they'd be okay with that. And everybody seemed to be trying to kind of dance around a little bit to try to find

ways to salve age this thing. Obviously, Trump decided there was really not much point in going forward, and so he he canceled it with this letter. Well, it's certainly showing up in markets right now. SMP five hundred, which was making a move higher in early trading, down now about four tenths of a percent. Craig, do you think this has anything to do with the president's meeting with the South Korea's leader. Um, it's possible, although you know, we know that the sub Kreen leader was ranged in

trying to have this happened. Obviously, the North and South have been having some of the I mean dramatic We also the dramatic images of Kim walking across the d m Z, the sort of warm embraced there. I think, you know, the South Korean leader is known to be somebody who wants the Moon, wants to have this meeting, wants to try to turn on the temperature on the peninsula. All those nuclear weapons and conventional weapons are pointed right at him, frankly first and foremost, so he's eager to

make this happen. Um. So it's not really clear. We didn't have a very clear signal coming out of the meeting earlier this week when Trump and Moon met, of where this was headed. But as I say, you know, it felt like there was a chance that could still come together. But there was definitely a lot of headwinds that this thing was running into. And so while I'm surprised by the timing, I'm not surprised by the outcome. All Right, Craig Gordon, Bloomberg's your chief in Washington. Thanks

for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple podcast, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio