Dollar is Fundamentally Overvalued, Dennis Says

investments in sensitive US industries under an emergency law. Prepared to hear a whole lot more about this story through the week. We can begin by heading over to Ways and catching up with and acar In, our chief Asia economics correspondent for Bloomberg News. And I'm really pleased to say he's joined with us late in the evening over in Hong Kong. So and the great to have you with us on the program this morning here in New York. Get us up to Spain and what's about to happen

this week. So it looks like Jonathan, at the very least, the US are going to step up their scrutiny of Chinese investment in the US itself. Now this matter is because it goes to the heart of the U s conterterns concerns about China's future industrial strategy. Remember, China wants to create this high tech world leading economy and technology with a little help from the state, and the US is going to please about it. But for China to do that, they of course need to source a lot

of technology from the US itself. So it seems like the US are going to block office channel of the U of Chinese companies buying big tech companies are buying their components from the US at the very least, trying to slow down at that advancement. So I think it illustrates that this trade spat is getting ever deeper by the week. So we've got the external pressures on the Chinese, we've got the internal pressures they're responding to as well.

And to what extent was the triple our cut the reserve requirement ratio cut over the weekend to address the softer on his economy. Yeah, I think benefit of the doubt in this one. I think it was more driven by domestic issues, Jonathan, rather than external per se. They have been saying for some time now that smaller companies medium sized companies are facing higher boring costs. It's not that they're explicitly easing policy are looking to juice up

growth overall. It's a fairly targeted, modest to measure. But at the same time, though, it's hard to completely ignore the broader macro backdrop of a slowing Chinese economy at the same time that the trade tensions are getting ever worse. So it's an indication that the policy makers are ready and willing to active need be. And there's a Harley

Davidson's store. You know, if you're on the Boon and you go back towards where the residential sections are in Shanghai, I'm going to butcher the pronunciation, but near put to Oh, there's one of three Harley Davidson's stores in Shanghai. So is the basic theme here They're gonna stop selling Harley Davidson's. Well. The US companies operating in China are considered the vulnerable in all of this, Tom, There's no doubt about it.

And the auto sector especially you mentioned motor bike sector especially is vulnerable because GM and Ford have expanded big plants across China. Tesla wants to Tesla wants to set up a big, big manufacturing plant in China. So if the trade tension, to read the point, reach a point where China is striking back, well, then life will be made a lot more awkward for those you has companies, including Harley and the Current. We've gotta let you run.

So thank you very much for joining the program later on in Hong Kong to get us up to speed on what is happening in China. Sonny Krasinski, I'm ready placed to say joined us in the New York studio. But Pimco's executive vice president and market strategist Tony can you imagine that Tom and a Harley, Well, I have a honder if he wants to take a ride, but it's a dirt bike, I wouldn't be really yeah like

it since my youth. It's the thing, one of my things on Staten Island at least, But there's less and less land to ride on. Very cool, very cool. Let's talk about China. I haven't really heard many people talking about a slower Chinese economy. You lays a focused on that at the moment. Yes, it matters a lot. Global nominal GDP this year will be in the low sixes.

It matters. It means double digit earnings growth for global corporations, which is supportive of the equity markets and the credit markets, and it's uh it's vitally important for those assets. I think of China's economy's thirteen trillion in size grows near seven percent, so it's near nine billions of new GDP for the world. What does the U S economy grow at low two's twenty trillion dollar economy about half a little more than half the amount of China's growth in GDP.

So the major contribution to world GDP growth is China. When you think of the various things that have happened in recent years, the stabilizing force has been China's China and its economy, So it matters a lot. What we are looking at, of course, is that these are these trade tensions small so far. Think of the fifth the tariff of put on fifty billions of goods. What is that billion dollars of price change for US consumers peanuts to a global economy that this year will grow about

ninety five trillion dollars. And to put in perspective for a long term investor, think of the next three years, three trillion dollars of world gdp uh and these tariffs are you can't even mentioning. How do you respond to the fact that China has so much of our marginal growth. It's not It is for the world, but not of course the United States. And that's Donald Trump's issue. He

wants to see China buy more from US. China purchases about one fifty billion dollars of goods from US each year, but we buy about US Americans five So we're not getting These policies are not going to lead to boosted US exports, are they? They're not likely to, but they probably actually they will, but the magnitude won't be great. There will be more of this soul than that salt. And if these trade tensions side, what are you watching

in the short term market? When you walk in the door, you've got three log in Bloomberg's, you've got twelve screens. What do you look at when you when you walk into the well? The initials? Of course, any money market trader was interested in where repo is for the day. Where it is that large investors are putting the money overnight, and that's un England. But in the well, I'm not looking because it'll the mother nation Italy is not in it,

So I'm not tough times. It's tough times, but we look more when we think about the money market more generally, we're thinking of where is it that the market thinks the path will be for the federal funds rate, the FEDS policy rate? Is it changing that would only happen glacially, meaning it we take a lot of data and new information to change the markets. For you on where the federal angry with its path? What is that data that

you're going to glee? What what do you want to see that will allow you to know what German deal is going to do? The catalyst would be a change in inflation. He essentially in the last press conference after the last f O m C meeting, the Fed's policy meeting tossed out nairu, meaning where the Fed thinks inflation

won't accelerate anymore, the job is raised three percent. Typically, an economist historically would say, well, job is rates low three point eight, but anything below x would mean higher inflation rate. That hasn't happened. So we watched John Tucker. You'll know this, Tony KRESSENDSI with his dirt bike when he when he was a kid on Staten Island. They went out pass Western Avenue to the container turn. He tried to do the Evil Kanevil, but evil Kanevil toy.

He wind him up and he jump anything. To the few places in New York City you can actually ride a dirt bike. I didn't know that. I like to do donuts and wheelies and go through over the Grant ramps like parents just said, you're not going over the Elizabeth Port as long as I stay off as Pimcock got a special insurance plan for It's funny. We don't thought too fast doing a doughnut in the dirt. So I think we'll see Sonny CHRISTENTI gray to have you with us. What's Italy need to do to get back

into the World Cup? Is it like youth organization thing they need to do? Yes, we have need to invest in human capital. Jeffrey Dennas with us would ubs out of Boston this morning. On a merging market, jeff, how do you define dollars strength? Is it through d x Y that blended trading number? Is there a certain currency pair that you're watching that was your indication of future dollar strength. We tend to follow dollar euro as being

the best indicator could have quit dollar strength. But of course technically you're right, Tom that you should be looking at the dollar trade wag. But I think the world will tends to look at as I say, dollar euros. Your your best indicators don't really mean by dollar strength, but that the dollar euro euro dollar rather doesn't have

em and it doesn't. No, no, no, But I think the point the point obviously as far as the virgin market to concern, we have our own way of looking at it because we compare the emerging market indexting dollars with the emerging index and local currency, and that gives

you a measure of EM currencies overall. But if the question was about what the generalized trend in in and then the dollar is around the world, I think the best way to read that in terms of his money coming into the U S Dollar out of the US dollar is versus the euro. How reliable is this CFTC data Just to get a broader sort of idea of what's having in the FX market in terms of positioning, Jeff, and what have we learned over the last week? Well,

I mean this is this sort of position. Data is the sort of thing that you know, it's it's as good we've got, so we probably try to use it as best as we can, even though of course it's it's not perfect. But you know, when when something is there and you don't have much alternative, you tend to use that as a as an idea. I mean, I think what we would be we were beginning to think that the dollar strength was beginning to run out of steam a little bit um, you know, around the one

level against the euro. I think probably there is a little bit of a reduction at the margin in terms of dollar longs going on over the last couple of weeks, because the dollar has started to flatten out. But the point is you're not seeing people going along the euro yet, let alone of course long emerging my occurrences which you would need to see as as you know, as the equivalent or they couldn't moved to it to a week of dollar going forward. So dollar may be peaking, I'm

not sure it's going down yet. Well, that's what I was going to last Jeff. I mean, in the initial phase, you get the unwinding of the shorts, the capitulation of the shorts, and then you start a question whether we can build fundamental longs here on the US dollar. Have we even reached that phase where people are really building long term fundamental longs in the U S. Dollar. Oh, I suspect they are. I mean, clearly, if you go back to the early part of the year when dollar

euros at one five, briefly everyone was long euro. That's now unwind itself. I think people have moved along dollar because the U. S. Economy has been so strong and Europe has been has been disappointing. So I think from a technical point of view, all this is above my pay grade. From a technical point of view, my guess is that the market is slightly long dollar. Our view is the dollar is fundamentally overvalued. Our view is the fattest broadly priced in Now. We think gradually the ECB

is going to withdraw excessive stimulus. They're going to start to raise rates probably in the third quarter of next year. And the blip of the European economies in the first quarter was probably just a blip, and we see decent growth going forward. Those are all the reasons why ultimately we would be sellers of the dollar, not buys of the dollar. But obviously, frankly the market is trying to work out which way we go from here. What about EM equities, I mean the ever run, I mean they

do what they do there, I guess there. You know, they're uh, the cyclical and they down down, down, they go up. What about now, Jeff, Well, we're we're inclined to be positive from here, even though there's a flood of negative news at the moment. The reason we're inclined to be positive is partly because of our of that dollar view. We expect to see um, you know, the dollar going lower that will start to push money back

towards the emerging markets going forward. We've made the comment to people that in fact, the fundamental damage to the after class from the sell off recently has not been that great. We've seen very little in the way of global I'm sorry, of of economic growth downgrades in EM We've cut Brazil with cut South Africa and Ansia a little bit, but you're not seeing broad downgrades. Also, earnings numbers are holding up pretty well, and that means some

valuation opportunities have opened up in them. But the key from here is are we anywhere near right as far as the dollars concerned. And now I think we've got to worry about what the impact of this trade rhetoric and the ratch ng up of this trade action will have on the Chinese economy. And I think that's all people are worrying about today. With the cutting reserve requires doesn't mean the Chinese economy is weaker than we all think.

If the Chinese is going to be a a word, a weak and significantly that was, that would would have put downward pressure on the Chinese currency. That would be a reason why people would hold off from buying a mergant markets merge market equities at this point in time. So, Jeffy, you see in the weakness in the currency, and you see a Chinese establishment are beginning to use the ex channel as a policy tool to address the softening that

we're seeing in the economy. I don't think so. I think you assume the currency move today is in reaction to the reserve requirement cuts. I think what you've got to assume is the reserve requirement cut is partly a response to the concerns over the economy slowing down at the second quarter, and of course the potential impact down the road of trade action from the US on the

Chinese economy. Although to be fair, our economists have argued all the year that you will see some liquidity injection into the economy from the Chinese authorities through lower reserve crimes. Have not been looking for a rape cut, So in some sense this is actually pretty much what what was expected.

But I think what's happening here is is causing the market to worry about Chinese growth, and it's that that's bringing the currency down, and there's no sign whatsoever of the Chinese authorities wanting to use the current directly as a weapon if you like to to find the impact of of a U S trade war. Jeff dons very quickly her Eastern Europe. It's something John and I have been remissing talking about with the focus on Pacific room

trade wards Eastern Europe. Where is the opportunity there, without any question. We we like Polish equities, we like Hungarian equities, are both very small markets, especially Hungary, But at the point there is that these economies are very closely tied to Europe, and we think what you saw in the

first quarter weak to European growth is almost certainly temporary. Also, currency that current you tend to go double wamy in both directions on the currency that when the Euro starts to go back up again against the dollar, which is all longer term view, the best metters these currencies will even appreciate again the Euro itself. The Poland for example, is growing it over four. We like the market had a tough start to the year. We think there are

opportunities they're going forward. Thank you so much, Jeff Don's greatly appreciate it. With ubs em Primer today. This is a joy. Deverora Lair with us who was with the Paulson Institute as a vice chairman, and Deborah Lair brings a really interesting and nuanced thinking to this relationship Secretary Paulson has done of America and China. Deborah, I want to go to your Twitter feed where you retweet Eric Fish with a Reuter's story, and this has been something

in my mind. It comes off Elizabeth Economies work at the Council on Foreign Relations, Does the President and does all of America understand that China is heading towards She thought that there's going to be a new almost zeitgeist that permeates Chinese politics. Well, that's really an excellent question.

I don't think probably all of America understands, but I think there's a concern within the administration and this is part of what's driving I think the use of National Security UM legislation or policies to look at economic security and seeing the two because of these concerns. For example, President she shared a very important meeting this past week on foreign policy and was outlining a very aggressive foreign

policy that has internationally and domestic implications. Secretary Paulson's heritage at Treasury and where the Posti Institute has been to speak to China to develop a dialogue. I literally was with him the day this start. I can't recall the event, but it was a Treasury event in Washington where he really tried to jump start a discussion. Has that been destroyed? Has been the Paulson initiative of eight nine years ago? Is it? Is it just gone well in its current form? Yes.

I mean that we started the Strategic Economic Dialogue as a way to fit within China's decision making process so that we could get basic agreement on some of the big issues that would be facing the United States in China, and once they had the guidance from the top, it would be much easier at the working level to sort out the details. At this stage, most of the dialogue appears to be occurring at the cabinet secretary level to the vice premiers in China, with literally at working level,

well to Richard McGregor's working the Communist Party. Is it a new Communist party? Is president she really running a not a reaffirmation of MAO. I think that's too simplistic. But is it a reaffirmation of a stronger dominant Communist Party? Whatever American elites think. Well, certainly Richard McGregor's book really was excellent and still is very relevant today. The what what She's biggest challenge in coming into office was that he did not have the tools to govern his country

on a day to day basis. He could reach down into the system to grab a dissident or something like that, but he could not ensure that mayors and um provincial governors were implementing his policies consistently. In fact, it was so bad that he continues to send out UM policy enforcement teams to go check that they're actually local officials are actually implementing and doing what they're supposed to be doing, and he viewed and this is why the anti corruption

campaign ended up being seminal to his first term. His view was, I need to get back those tools of government to to govern my country, and I'm going to do it through the Communist Party. And we see the Communist Party playing a much bigger role than it has historically since before done. And it's not only involved in party matters, but it's in the economy, it's in private business, and it's something that American companies are going to have

to face as they go forward. So, Deborah, just as a final question, what is the concentration of power in China ultimately mean for these Tride discussions, the Tride negotiations with the United States, Well, ironically, it might make it a little bit easier since the President she is very much calling the shots in terms of what can be done, and he's put some very sophisticated UM bureaucrats around him, with one she Sean and Leoho, who really understand how

markets work, who understand and have a long background with the United States, have ties with a broad range of government officials, former government officials, and business leaders. But she and the President have a very good working relationship, and ultimately I think that this deal is going to be done between the two presidents. Debora, thank you so much.

We look forward to speaking to you against soon. Debra Laver, the Paulson Institute of the story is not going to go away, and we really appreciate her international relations perspective. We go to London, now, Karen Noble heart with us is General Electric breaks up and up? How many more of these transactions, Karen are there? This is a three billion dollar bolt off, not a bolt on, a bolt off.

How many more bolt offs are there? For? G Well, I think, Um, what they've been signaling is that they're going deep down and and uh there's not a lot of big segments left to sell, but they're going within segments and looking for pieces. And this is rather small. You know, all of Powers thirty six billion and this in sales, and this has a billion in sales. So they're getting deep down and dirty to try to get pieces of of UM the company that and uh, you

know they sold the whole transportation business. That's probably the last that is the last big unit in my opinion, UM that they'll sell. Uh. They have a lighting business, very small, not going to get them much money um and then they'll do something with UM. You know, Baker used ge um at some point as well. So I think they're telling you, you know, like the g E power is a huge business. They're big problems are in the big turbines. But there's stuff that they're going to

sell around the margin. Does this really matter? It doesn't look like the investors are really twelve cents. I mean, okay, so you sell the these this business based in Austria making reciprocating engines and generator sets right diesel engines as well. Uh, why bother to do this? Well, you know when he came out with his first twenty billion dollars you know UM in asset sales and the and the stock went

down like six percent. This was this was in that And he's looking at all small things and it's not enough. We knew it wasn't enough when he announced the twenty billion. But he's methodically chipping off these little pieces. And the one good thing is everything he's sold so far he's gotten better than expected proceeds. But it's too small. This was people were talking price talk was two billion. They

got three in a quarter. Transportation people were talking said seven billion, they got ten billion UM, so they're getting better prices, but they they're not selling anything big enough to matter. Is the dividends safe? I think that that jury is still out. I mean, you know, I think that they're going to try um but you know it's going to get tight towards the latter part of the year. So I think the investors still expect there's a chance of that happening with all that's going on politically. Is

ge Powers salvation China? I mean, if the power business is flat on its back, does does China need g E Power? Well, you know g E that's a very consolidated business, so it's g E, it's Semens, it's miss A Bishi. So yeah, I mean China's you know, gonna have to buy something, you know, power from g E for sure. The problem is most of these emerging markets, including China, aren't buying the mega stuff that that is the core of their product line, the big the big

turbines and both gas and steam. So they've got to redirect the product line, as does everybody in the business. So bottom line is they've got to shut a lot of capacity. We say, is it is it all fixed? Costs or they're actually variable costs which variable out the door. Well, they're doing that already. They've taken a billion out. Their goal is for another billion of calling, you know, laying off people, UM, trying to um cut call loss. But

eventually it's got to be bricks and mortar. There's too much capacity globally, you know, at ge and across the industry. And you know they bought Alstum and you know, it's hard to close things in France. So that's one that they're kind of stuck with for a while. So they've got to do something with the part of the business. What do you think Nelson Pelts wants him to do? He's got a little bit under one percent of the stock. Uh, you know, I think that he's gonna want a bigger

break up. Um, I'm not sure that the whole thing is going to be broken up. I'm not in that camp. I think that they've got two of their three big businesses are good, good businesses. UM. I think you know, he certainly would want them to get out of as much as they can. But um, he's got two of the three businesses are good businesses that he'll remain margin cents in the dollar. What do you model that, folks?

This is from the revenue statement. You come down off sales and somewhere in the vicinity of net income as a thing called they're making thirteen cents in the dollar. Can they get back to a you know, fifteen sixteen cents in the dollar. I think they can if they can stabilize power. But it's got that's a multi year problem. I mean, they're making twenty you know, uh on on EBI dat basis six cents in in on the dollar in UH in aerospace, and they're making you know, almost

twenty in in healthcare. So their way over that in a couple of okay, but now they don't have multi y What do you do with g E power with the urgency to thirty one that they have. I think what they're gonna do is try to monetize other assets. Um. Frankly, like I think that they'll sell some of the They've got a twenty five billion dollar investment in Baker Hues. Yeah, but you know, well, how much what's the employee counting gepower? Any idea? Let's see they did they're they're doing, Um,

I'm not exactly sure it's big. The answers they got they have more employees than JP Morgan. I mean, they're not Walmart. But the answer is they got a zillion bodies in ge Power, right, yeah, I mean yeah, I mean, uh, they were selling They laying off twelve thousand people and that was about six eight percent. So it's it's a big number. It's a big number, and that's where they have to work. Are they ready to make those tough decisions? I think in Power they know that they have to

do big things. I think They're trying to figure out what to do. He's a methodical guy and that's part of the thing that's frustrating people. Are you Are you in England just to watch Belgium, England and football? Now I'm here for a conference that there was a lot of talk about that. Trying to get up to speech. You'll know more than me. Karen Lauren, thank you with Bloomberg Intelligence on ge. Thanks for listening to the Bloomberg

Surveillance podcast. Subs gribe and listen to interviews on Apple Podcasts, 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,