Facebook and Google Aren't Free, Windsor Says

and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot com, and of course on the Bloomberg You know, John, I'm looking at Uber today, Uh, in part because they're raising more money because they're burning through cash very quickly, and of course, uh, mainly because they announced that they are going to halt their self driving test after a fatality.

And here to talk with us about that and some of the implications is Richard Windsor Radio Free Mobile founder. So Richard tell us why there was a fat fatality? Uh, when autonomous driving was supposed to be safer. Now, yeah, I mean, let's let's get I mean, the the important

stuff out of the way. Is I mean, the first thing I think to bear in mind is that the circumstance of this incident were so it was that if that had just been a regular driver exactly the same circumstances, there is almost no doubt whatsoever that the pedestrian probably would have also have been killed. So it doesn't look like it was a fault of the autonomous driving system.

But the main point I think the bear in mind here is that you know, with four over forty deaths on US roads every year, one of the major aims of autonomous driving is to make it much safer. So arguably, in this case than she needs to be much better than the human. I love that self driving cars they're just like us. So what's the road ahead? I mean, honestly, this has been a very controversial path and a lot of people were sort of counting on this experiment to

save Uber. Meanwhile, it is leading through cash and is raising one and a half billion dollars in the loan market right now. Um, is this a huge setback for them? Or is it just a little bit of bad PR among a stream of bad PR that just seems never ending for Uber? Okay? I think, firstly, again to be fair to Uber, I think if this had been a way Moo vehicle, I think the outcome would have been exactly the same. Um, you know, Weymo being you know,

the best company at autonomous driving. When it comes to Uber itself, you need to separate it into long term and short term. The long term, yeah, this is this is a major problem because in the long term, Uber's future is probably going to be dominated by autonomous driving, which means the company needs to be very good at it to survive. At the moment, they're not. This is

another setback that's a problem. The short term is something completely different, which is that what Uber represents today as a marketplace where people come to buy and sell things e g. Drivers selling their services and passengers buying the services of the drives. It's a marketplace, and the marketplaces dominance is incredibly important for profitability. And this is the

key problem that Uber had last year. It lost a lot of market share to lift last year, and it's right at the point where it may lose its dominance position in the United States, which would have substantial implications for its ability to generate cash. Richard, speaking of dominant positions, let's talk about Facebook. Where's Mark Zuckerberg? You got me? I'm afraid I have no idea? Apologies, what is it? Day four? Day four, and we haven't heard executives at Facebook.

It is remarkable how how bad they are at addressing this situation. Yeah, it is a problem, and don't don't forget, you know, think about you know, think about how they grew up. Think about how Silicon Valley operates. They are you know, they've always had this mindset of move very quickly and allow things to break. Unfortunately, every now and again, when you break something, it's far worse than you could have anticipated. And I think, to be honest with you,

the bigger question is is where is Cheryl Sandberg? Because Cheryl is much more the operation level head person inside this organization. So I would have expected, you know, Cheryl, who have started to move to contain this problem, and they make him matters worse At the moment, Richard Um, may I think a little bit, yes, Um, But at the end of the day, I think it. I think

this highlights a much wire problem. And this problem is that in general, consumers seem to have the impression that the likes of Google and Facebook are free, and actually they're not, and they never have been. The issue is, when it comes down to it, in reality, the consumer either pays for Facebook and Google services with personal data

or you pay with cash. That is the way it is, and so I think when it comes to privacy, there is going to come a point when these companies to have to turn around to their consumers and say be clear, is you're paying for this service with personal data, you need to allow us to track you or we're gonna have to charge you a certain amount of money per month. Yeah, but Richard, is that going to be in a half moment that causes Facebook and other tech companies to lose clients? Um?

Well yeah, Again, the question is is that you know again the real question who are the clients of these companies, because it certainly isn't the users. The way I think about it is sadly the users, you and me with a product that customers are the advertisers because these are the guys who generate the money. Now I think my I think this is going to work is particularly I think gdp R in Europe is a good catalyst for this.

Is it increased his massive increasing regulatory pressure will put them put these companies in the position where they have up front about something they've kept quite quiet for a long time, which is, look, if you want this service to be free, we need to have access to your personal data. If you don't like that, yeah, fine, but you need to pay us and why you Professor Scott Galloway. Richard has been very outspoken on all of this and he wrote an Esquire earlier this year, and I'm going

to quote him. If you're a country club with a beach or repall, it's more profitable in the short run not to have lifeguards. There are risks to that business model, as there are to Facebook's dependence on mainly algorithmic moderation. But it saves a lot of money, and they've saved a lot of money. They've made a lot of money. Are we now at an inflection point where they're going to have to start spending a whole lot more money

on people and headcount at Facebook? In fact, we're already there. Um. In the research that Radio Free Mobile has done, we actually highlighted the fact that Facebook, when it comes to artificial intelligence and algorithmic moderation, they are the worst pretty much out there today. And this is why they have

such a significant fake news problem. Um. And they've already signaled this, you know, the company said, I think Q three last year they were going to recruit ten thousand more people, which basically means by the middle of this year, Facebook is going to have more moderators than it has in revenue generating or product development roles. And this is why revenue US might do this year, but operating expansion is going to go up fourly, giving a significant impact

on profitability going forward. This problem has already arrived, Richard. From your perspective, do you think that the sell off and Facebook shares and sort of the sympathy sell off and other tex shares has gone too far? Great question. I'm a little bit more cautious on Facebook because of this deterioration in um operating performance in you know, this year. In general, I have been a little bit more cautious on these stocks simply because they have run very far.

Evaluations are now assuming an awful lot, which is why from an investment perspective, you know, I've been preferring perhaps those in China, particularly by Do, which is arguably one of the cheapest artifice intelligence investments you can make, or even ten cent, because in the Chinese market there's still some distance to go. Richard, Wins has been greater cash out with you are ready a free mobile fander joining

us on the phone from dubai yea Well. Facebook shares are declining in a pre trade activity, and the question is our trainer is gonna come in and buy this dip? Would you? John? Would I buy the dip. Yeah, the like minor, minor, tiny bit like the move. I would buy about one. Yeah, it's enough of a dip for you. I thought it was interesting that credit held up so well. Yeah, well let's let's find out what Brian. Thanks Brian Levitt,

Oppenheimer Funds Senior investment strategist joining US. Now, Brian, are you are you recommending that your clients go in and buy the slight or you know, perhaps it'll be a massive one hell off yesterday? Yeah, I think that. I mean I always advise investors to kind of turn down the volume on days, like on days like Thanks Brian. Brian Levit joining US Investment Strategy. There's there's um, you know, there's a conference of factors weighing on the market right now.

I don't think that this is the end of this long term bull market. It's uh, you know, we're dealing with uncertainty around trade, uncertainty with regulation and the technology sector, uncertainty with around monetary policy, and we haven't had that in a while. So was a pretty benign year, and a correction was to be expected, and you know, typically these corrections calm. We had one in February they test bottoms. It takes some time to clear. This wasn't a correction, right,

what's that This doesn't count as a correction? Still right? Well, not this one, but I think the one in February count as a correction. And UM and so for long term investors, UM, I suspect this cycle has room to run. For the traders, I'll let them decide whether they're you know, buying these bottoms. You know this one point eight percent to client. But the long term investors should be more cautious once the yield curve inverts and credit spreads out.

And we're not seeing that a lot of conversations about the lack of volatility at the index level, but below the index, Brian, we saw this continued rotation from value to growth, from growth to value. If we continue to see tech come under pressure in the United States with calls for regulation and calls for new taxes, where do

you see the leadership coming from in this market. Well, I still think it's going to be an environment where you want to own the sectors that are exposed to global growth, and you know technology is going to be a part of that. UM. Although I agree regulation could weigh on part of the part of the sector. I think it's an industrials. I think it's UM materials, it's it's the type of names that are going to benefit

from a decent growth environment around the world. UM some pressure on the US dollar and UM, but A I don't think that we're heading to an environment where the true value oriented names become the big out performers. I think you would need US significant catalyst for that. I think some suspected that the tax bill could be that, but we realize that the stimulus on the fiscal side is somewhat being offset or is being offset by monetary tightening.

And if we just think about the G twenty communicate that comes out letter this week is a PR statement for global stability. The PR for global stability is not too great at the moment. Reports here in the United States that the President is said to be planning terrorists of up to sixty billion dollars fresh terrorists on Chinese imports. How is the PR around this global synchronized growth story. Well, I think it's I think that we need to watch and see, UM what could disrupt it? UM. The these

we've been saying for some time. The only thing that will curtail this cycle is a policy mistake somewhere in the world, whether that's on the monetary side in the US, Europe, or China, or whether that's through some sort of beginning of a trade battle around the world. I think that could change a calculus on this. So UM, you know we're we're longer in this cycle. I don't believe it ends UM barring a major mistake. If we see something that's too forceful on the monetary side or the trade side,

then we need to adjust our expectations. So, Brian, given that, what are you recommending that clients do with their money, in other words, how much allocation stocks, bunds. Well, we've we've continued to believe that equities are the asset class

of choice. I I will like equities in this environment until I see a significantly flat or yield curve not not seventy five basis points significantly flat or um and I see either an incredibly weak dollar which brings forward the said or an incredibly strong dollar, which signals the flight to quality. I don't believe we're there yet. So for investors looking for growth UM to grow their assets, we continue to think equities of the asset class of choice.

We favor the US cyclical names that are benefiting from improving growth around the world. We favor the emerging markets. UM. The backdrop for the emerging markets, barring too tight or too significant of a trade battle, UM is quite good. On the bond side, it's harder, although you know, yields on investment grade are are UM. At least on treasuries are better than they've been, which still like floating rate. And I would say look to the emerging markets to

sovereign and corporate bonds. Real yields look quite attractive. Brian Lovitt, thank you so much for joining us. Brian Levitt of Oppenheimer Funds, the senior investment strategist. They're sounding very sanguine. The White House is said to be planning to impose tarists worth as much as sixty billion dollars on Chinese products as an outcome one outcome of an investigation by the US Trade Representative Robert Lightheiser. Those tarroists could come as soon as this week. I want to bring in

Dinah Labor. She is a nod Economics chief economist. Diana is great to have you with us on the program. Sixty billion dollars worth of haterrorist Does that move the dial and does that move us any closer to the risk that things could get a bit ugly for international trade? Yes, it does. And even though over the course of this year China will try to mitigate the damage and will engage in damage control, certainly before the November elections in the US, further down the line, we are looking at

a full blown trade war. Really, how do we get there? Look over the last twenty years, ever since China entered the World Trade Organization in two thousand one, the globalized economy as we have it has been all about incorporating China. But it was on the premise that the Chinese were converging to the Western liberal free market model. Maybe not the politics, but certainly they can mix. And they have now stated very clearly that they have no intention to

do so. They are going to pursue their own model capitalism with Chinese characteristics. And as it is, this clash between these two very different systems is not working out. The global financial crisis was a result of that. The years of week growth since nearly ten years now have been a result of that. So there's no way unless one or the other system converges that we can live in the world of today. So, Diana, how much does that reduce global growth for which time period are you

asking me? Are we talking about the next ten years or are we look when what happened this year? When? When? When does it start to matter? It will start to matter already because trade war is one of the key risks for financial markets this year. But in terms of growth, actually two thousand and eighteen could well turn out to

be an okay year. China itself is likely to surprise on the upside in the first half of the year because outside of if you'd like, the headwinds from the external side, they have been doing a remarkable job on getting consumer spending going there. So there's been a genuine rebalancing in the economy that has some way to go. We can talk about the rebalancing of the Chinese economy shortly.

I want to find out whether there is an approach from the rest of the world that could force China's hand to open up at a speed that they would not be comfortable with. Is there anything the United States, Europe and much of the developed world can do and he leave us they can pull to really ramp up the pressure on China. Well, actually, what Trump is doing

now is ramping up the pressure on China. But the thing is that if you actually talk to the Chinese, and if you think to Leo her speech Davos, he argued that the world will be surprised by China's opening up this year. So what they have in mind, and they will be drumming or beating the drum really loudly on this one, is opening up with respect to getting foreign money in and allowing greater access with presumably fewer

restrictions on foreign investment. That's kay. So they want money to come in, and they wanted to come into their banking sector and everywhere else. How much do you expect them to really follow through with this protection of intellectual property and just sort of other measures that would make it palatable for foreign investment. On paper, they will probably

go quite far. In practice and reality, I remain a bit more skeptical because when I look at everything else that's going on in the corn me in particular, let's say, at the build up of this great Internet firewall and the requirements for service to be located in China and all of that, doesn't you know, certainly leave me with a particular sense of comfort. So what's interesting is that, yes, they will sort of open up on paper more, but will foreign money go in. What they certainly won't be

doing is relaxing the controls on outflows. Danna, you frame this as almost an economic battle of civilizations, But I just wonder whether we'll see a financial crisis in China before we actually see a massive trade war and the clash that you're kind of describing. Isn't it more likely that China has a significant economic downturn at some point in the next decade where they themselves have to take a look at their own system and question the longevity

of it. There has already actually been a very substantial growth slow down in China. If we look at the raised China was growing before the fine anential crisis, it's now half of those rates, even on their official numbers, on the numbers that I've calculated, since two thousand five, growth has certainly more than half. So they're definitely dealing with having to find a new model. And I'd say the next couple of years that make or break, and

I would put probability on make and on break. But what has happened in the last couple of years, give them gives them a little bit more leeway than, let's say, I thought they would have if you had talked to me as your colleagues did, let's say a year ago. Well, Diana, I want to talk about what you said with respect to this big a big financial markets risk. Talk about

the transmission mechanism. When do you markets start to care and reflect this And are the specific sectors that we're going to see fall out a bed as trade war talks continue. Well, actually, if we are looking at a type of event that is going to become answer to what happened during the global financial crisis, I it's something

which undermines the structure of the global economy. No, we're not talking just about the twenty centfol in equity prices, which you know is negative but doesn't have the same profound impact. What we need to look at is geo political risk over the next three to five years. I would say that will be the source Noline cares. We've had plenty of geopolitical risk. What you probably Italian election, what's going on in Washington? They were they might not

care until they'll have to. So there isn't China's financial system implosion that's unlikely to be a source of global financial risk in the next two to three years. By implosion, I mean you know that the system unraveling. If I have to look at what could be the source of a real shakeout that undermines the structure, it is geopolitical risk and it is very much related to what China has in mind. So where's the flash point where in the world Asia? Look, say, so what happens paid the picture?

It was a dark and stormy night. What happens? Um? That's one area where I have made it a rule not to not to not to be on record. Unfortunately, you're concerned about the flash point between North Korea? Are You're concerned about the economic dominance in China in the region and the testing of that dominance by America. I'm concerned as to what China has in mind in terms

of establishing its leading role in Asia. Yes, economically, But I also just say, I was born in Bulgarian and I lived under communism, So um, yes, I probably have outdated fears and worries. Actually maybe not. So just moving on, is the noise in Washington, d C. Just that is that sort of absolutely irrelevant when it comes to sort of moving the needle at of geopolitical risks. No, not

at all. I mean, Washington is really keen on and we're likely to see aggressive action because the only thing that stopped Trump last year was the expectation that the Chinese might help with North Korea. But since then Trump realized that even if they wanted to, actually China can't do much at this stage. And in fact, this is one geopolitical risk that I expect to receive North Korea, in particular after the meeting, which both sides have an

incentive to present a positive outcome from Tonatu Lever. She is an ODO Economics chief economist, and she joins us here in New York. Danna, thank you very much. This is Bloomberg Surveillance. I'm pim Fox along with my Holligan co host Lisa Abramwitz. Shares of Facebook. Right now, they are down a little bit more than two dollars and eight cents, down a little bit more than one and

a half percent. Here to tell us about the company, about the stock, and about the controversy surrounding personal information is James chalk Mark. He is an equity analyst for Monas Crespy and Heart and Company. He joins us here in our eleven three oh Studios. James, let's look at the investment thesis first. The other headlines we know the Federal Trade Commission investigating the use of and the access to personal data. What's the investment thesis from a stock perspective, right?

I think you have to look at this both short term and long term. In the short term, it's going to be painful and it's going to be choppy. I mean, there's no if sans robuts about it, because the company is going to be the skategoat of regulators as they cracked down on it and to make an example of not just the Facebook but of big cap tech. But as you look at the long grew term, I think that's where you do see a continued silver lining here where they're able to really have unmatched scale with the

exception of Google. UH. And when you look at the new regulations on privacy taking place overseas, it actually helps them by threatening UH or limiting new entrance to the market and making the incumbents increasingly the establishment. So longer term, I think that they're going to be just fine, but in the short term it's definitely choppy waters. All right. So long term, you've got a company that's doing over forty billion in sales and puts nearly twenty billion of

that to the bottom line. Correct, Okay. Does it matter how Facebook responds to this controversy in order to keep the advertisers who are filling their coffers with that forty billion dollars worth of money. Absolutely, I mean it matters in the sense that what is the pace of dollars flowing to Facebook. It's not going to change if dollars flow to Facebook, because there's really no choice because you only have Google and Facebook that have uh the kind

of scale to reach a worldwide audience. You know, there's there's no exceptions there. But the pace is certainly in question because if there is any curtailment in engagement, any fears around it, uh, you know, privacy concerns that cause uh dips in content uh kind of generation on the platform, uh and consumption of third party content, and that will sway the pace of ad dollars moving towards the company. Does it bring into question the current management skills at Facebook,

whether it is Cheryl Sandberg or Mark Zuckerber. Yeah, I don't really see it as a skills in uh um, you know, in the in the traditional sense. It's more, um, how do they respond in a way that appeases at least some factions of the company, of the of the

constituencies that are scrutinizing the company. And unfortunately, I think that they face a catch twenty two right now, which is why they've been so slow and responding responding, because they have, uh, in a in a very uncanny way, managed uh to uh receive scrutiny from not only both sides of the political spectrum, but both sides of the Atlantic Uh. So there's really little that they can do or say I think that can remedy the current kind

of concerns around the business. All right, let me just push back a second here, because I specifically referencing Alex Stamos, he's the chief information security officer for Facebook. In an article in The New York Times, he is described as the person that urged more disclosure over Russian activity on Facebook. According to the story, he got a lot of pushback from those that are described as being more interested in how much money is made than whether privacy is protected.

He scheduled to leave the company in August. That can't be a good management image. Yeah, I mean, look, the the the issue is around perceptions. There's a there's an issue of perception around the lack of candor uh from Facebook. There's an issue of perception around uh their willingness or proactively uh not sharing information. And then there's uh perception issues around uh them arguing semantics where they're you know, arguing the traditional definition of data breach. You know, it's

like arguing what the definition of is is? You know what I mean? So I think transparency is their friend and over transparency is their best friend right now? Uh this you mentioned Google as the other, as one or the other, because of course there's Twitter, there are other social media platforms. Uh. There's a report that Google's head of their YouTube operation is looking to farm out oversight two Wikipedia for the veracity and the truthfulness of the

videos that are posted on YouTube. Do you have any thoughts about that? Yeah? I think that's a smart move because Wikipedia naturally comes with the checks and balances. Uh. You know there's a corek instituent group of people that um, you know that that police Wikipedia. Obviously there are discrepancies here and there. But I think that that self policing from Wikipedia is really second to none. But how do you know who the people are behind those self policing activities?

And indeed, according to the people at Wikipedia, they only found out about this effort on the part of Google and YouTube because of a discussion at south By Southwest by the CEO who runs YouTube. Right. Well, I mean, I mean, I guess what I'm getting at here is the quality of the management and the experience of the management.

If you were talking about this in companies such as the oil industry, or the airline industry or the chemical you know what, wouldn't you get a lot more consternation on the part of investors that say, wait a minute, this is not the this is not top notch management. Or maybe it is. I think it's it's it's not the talent of the management as much as it is um kind of the uncharted territory, you know, for all

of them. Uh, And I think that they're uh, you know, era on the side of being defensive and reactive rather than proactive, uh in in trying to stay in front of the story. Because in every case that we've seen, you know, the the questionable content on YouTube and now all the Facebook's issues. It's been completely reactive in the in the companies quite frankly, are not um recognizing the concer earns and debate that's happening in the public sphere.

And I think, uh, you know, what I was just talking about before, uh you know, I was on with you was the fact that a lot of these management teams and CEOs haven't uh you know, been uh you know, candid with uh real interviews and trying to answer the tough questions and and trying to uh you know, stay or or engage in uh discussions that are off script, and unfortunately that may come in the form of uh Senate hearings. Well, well that's where our next question is

gonna be. Because the invitation on the part of the U S Election Commission to testify being made public for the heads of Twitter, Google as well as a Facebook. Uh, that becomes a public airing of grievance. And as you just described, it as about perception rather than a bad fact, particularly uh when you're being asked questions by people who may or may not have a spe cific agenda, right exactly.

And I think actually it could be a blessing in disguise, because if they are forthright uh, in in that public sphere, I think that they can win a lot of uh, you know, points from the public and as well as regulators in in in the based off of the degree of candor that they exhibit. Uh. So you know, we'll kind of see what happens here. I mean a lot of I talk about perceptions because what Facebook is facing

right now, uh is nothing new. Companies have used Facebook in in this way, in the way that you know we're seeing with Cambridge Analytica, Right, But those are companies versus foreign powers, right, I mean, I mean there is it worth Maybe it's not worth making the distinction, but don't you think it's a distinction between whether it's the Russian government or Russian state actors versus companies trying to

get you to buy a product. Yeah, But at the end that that they boils down to privacy though, uh and and and and and who and how uh Uh companies or foreign agents are able to utilize uh profiles in a way to develop psychological profiles of people. And obviously businesses want to influence as well as I mean you if if you want to you know change behavior. Um, you know Facebook's the best way to do it. Thanks. We gotta we gotta run, but I want to thank

you very much. James chalk Mark equity analyst at Amas Crespy and Heart. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Rady up.